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EX-32.2 - EX-32.2 - PC CONNECTION INCcnxn-20200331ex3222439ba.htm
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EX-31.2 - EX-31.2 - PC CONNECTION INCcnxn-20200331ex31269139a.htm
EX-31.1 - EX-31.1 - PC CONNECTION INCcnxn-20200331ex311f98eec.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from                     to                    

Commission file number 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

02-0513618

(State or other jurisdiction of

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

incorporation or organization)

 

 

 

 

 

730 MILFORD ROAD,

 

MERRIMACK, NEW HAMPSHIRE

03054

(Address of principal executive offices)

(Zip Code)

 

 

 

 

 

 

(603) 683-2000

 

 

(Registrant's telephone number, including area code)

 


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

 

Securities registered pursuant to Section 12(b) of the Act:

C

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

CNXN

Nasdaq Global Select Market

 

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

Yes      No  

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

Yes      No  

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

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer

 

Smaller reporting company 

 

 

 

Emerging growth company 

 

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

 

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

Yes      No  

The number of shares outstanding of the issuer’s common stock as of  April 27, 2020 was 26,107,451.

 

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1. 

 

 

 

 

 

Condensed Consolidated Balance Sheets–March 31, 2020 and December 31, 2019

1

 

 

 

 

Condensed Consolidated Statements of Income–Three Months Ended March 31, 2020 and 2019

2

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2020 and 2019

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

ITEM 2.

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

11

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

ITEM 4.

Controls and Procedures

21

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

ITEM 1A.

Risk Factors

22

 

 

 

ITEM 2 

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

ITEM 6.

Exhibits

23

 

 

 

SIGNATURES 

24

 

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

 

 

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,323

 

$

90,060

Accounts receivable, net

 

 

485,316

 

 

549,626

Inventories, net

 

 

136,985

 

 

124,666

Income taxes receivable

 

 

1,388

 

 

1,388

Prepaid expenses and other current assets

 

 

13,971

 

 

10,671

Total current assets

 

 

748,983

 

 

776,411

Property and equipment, net

 

 

65,754

 

 

64,226

Right-of-use assets

 

 

15,776

 

 

13,842

Goodwill

 

 

73,602

 

 

73,602

Intangible assets, net

 

 

8,002

 

 

8,307

Other assets

 

 

1,075

 

 

947

Total Assets

 

$

913,192

 

$

937,335

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

219,917

 

$

235,641

Accrued payroll

 

 

20,479

 

 

28,050

Accrued expenses and other liabilities

 

 

36,913

 

 

45,232

Total current liabilities

 

 

277,309

 

 

308,923

Deferred income taxes

 

 

20,170

 

 

20,170

Noncurrent operating lease liabilities

 

 

12,551

 

 

10,330

Other liabilities

 

 

600

 

 

600

Total Liabilities

 

 

310,630

 

 

340,023

Stockholders’ Equity:

 

 

 

 

 

 

Common stock

 

 

289

 

 

288

Additional paid-in capital

 

 

118,620

 

 

118,045

Retained earnings

 

 

529,590

 

 

514,694

Treasury stock, at cost

 

 

(45,937)

 

 

(35,715)

Total Stockholders’ Equity

 

 

602,562

 

 

597,312

Total Liabilities and Stockholders’ Equity

 

$

913,192

 

$

937,335

 

 

See notes to unaudited condensed consolidated financial statements.

1

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

    

Net sales

 

$

711,850

 

$

632,921

 

Cost of sales

 

 

598,732

 

 

533,574

 

Gross profit

 

 

113,118

 

 

99,347

 

Selling, general and administrative expenses

 

 

92,468

 

 

81,235

 

Restructuring and other charges

 

 

 —

 

 

703

 

Income from operations

 

 

20,650

 

 

17,409

 

Interest income, net

 

 

92

 

 

198

 

Income before taxes

 

 

20,742

 

 

17,607

 

Income tax provision

 

 

(5,846)

 

 

(4,880)

 

Net income

 

$

14,896

 

$

12,727

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.57

 

$

0.48

 

Diluted

 

$

0.56

 

$

0.48

 

 

 

 

 

 

 

 

 

Shares used in computation of earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

26,236

 

 

26,359

 

Diluted

 

 

26,421

 

 

26,525

 

 

 

See notes to unaudited condensed consolidated financial statements.

2

 

 

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Additional

 

Retained

 

Treasury Stock

 

Stockholders'

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Equity

Balance at December 31, 2018

 

28,787

 

$

288

 

$

115,842

 

$

441,010

 

(2,391)

 

$

(31,237)

 

$

525,903

Stock-based compensation expense

 

 —

 

 

 —

 

 

269

 

 

 —

 

 —

 

 

 —

 

 

269

Restricted stock units vested

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Issuance of common stock under Employee Stock Purchase Plan

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 —

 

 

 —

 

 

(13)

Repurchase of common stock for treasury

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(43)

 

 

(1,294)

 

 

(1,294)

Net income

 

 —

 

 

 —

 

 

 —

 

 

12,727

 

 —

 

 

 —

 

 

12,727

Balance at March 31, 2019

 

28,790

 

$

288

 

$

116,098

 

$

453,737

 

(2,434)

 

$

(32,531)

 

$

537,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Additional

 

Retained

 

Treasury Stock

 

Stockholders'

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Equity

Balance at December 31, 2019

 

28,870

 

$

288

 

$

118,045

 

$

514,694

 

(2,526)

 

$

(35,715)

 

$

597,312

Stock-based compensation expense

 

 —

 

 

 —

 

 

624

 

 

 —

 

 —

 

 

 —

 

 

624

Restricted stock units vested

 

 4

 

 

 1

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 1

Shares withheld for taxes paid on stock awards

 

 —

 

 

 —

 

 

(49)

 

 

 —

 

 —

 

 

 —

 

 

(49)

Repurchase of common stock for treasury

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(247)

 

 

(10,222)

 

 

(10,222)

Net income

 

 —

 

 

 —

 

 

 —

 

 

14,896

 

 —

 

 

 —

 

 

14,896

Balance at March 31, 2020

 

28,874

 

$

289

 

$

118,620

 

$

529,590

 

(2,773)

 

$

(45,937)

 

$

602,562

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

3

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2020

    

2019

 

Cash Flows provided by Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

14,896

 

$

12,727

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,147

 

 

3,709

 

Provision for doubtful accounts

 

 

2,833

 

 

256

 

Stock-based compensation expense

 

 

624

 

 

269

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

61,477

 

 

13,494

 

Inventories

 

 

(12,319)

 

 

(18,470)

 

Prepaid expenses, income tax receivables and other current assets

 

 

(3,300)

 

 

3,322

 

Other non-current assets

 

 

(98)

 

 

119

 

Accounts payable

 

 

(15,499)

 

 

2,121

 

Accrued expenses and other liabilities

 

 

(7,205)

 

 

551

 

Net cash provided by operating activities

 

 

44,556

 

 

18,098

 

Cash Flows used in Investing Activities:

 

 

 

 

 

 

 

Purchases of equipment

 

 

(4,595)

 

 

(6,572)

 

Net cash used in investing activities

 

 

(4,595)

 

 

(6,572)

 

Cash Flows used in Financing Activities:

 

 

 

 

 

 

 

Purchase of treasury shares

 

 

(10,222)

 

 

(1,294)

 

Dividend payment

 

 

(8,427)

 

 

(8,452)

 

Issuance of stock under Employee Stock Purchase Plan

 

 

 —

 

 

(13)

 

Payment of payroll taxes on stock-based compensation through shares withheld

 

 

(49)

 

 

 —

 

Net cash used in financing activities

 

 

(18,698)

 

 

(9,759)

 

Increase in cash and cash equivalents

 

 

21,263

 

 

1,767

 

Cash and cash equivalents, beginning of period

 

 

90,060

 

 

91,703

 

Cash and cash equivalents, end of period

 

$

111,323

 

$

93,470

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

1,237

 

$

1,987

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Income taxes paid

 

$

369

 

$

291

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

4

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three months ended March 31, 2020 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2020.

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Adoption of Recently Issued Financial Accounting Standards

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company has adopted this standard beginning January 1, 2020 for both interim and annual reporting periods. The Company performs an annual goodwill impairment assessment in the fourth quarter of each calendar year, and more frequently if events or circumstances occur that would indicate a potential decline in fair value. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which adds an impairment model for financial instruments, including trade receivables, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected losses, which is expected to result in more timely recognition of such losses. The Company adopted this new standard beginning January 1, 2020 for both interim and annual reporting periods. The impact of the adoption of this standard was limited to the Company’s trade receivables as it does not currently have any other financial instruments that would be affected by this standard. Customers are evaluated for their credit worthiness at the time of contract inception. Based on the results of the credit assessments, the Company will extend credit under its standard payment terms or may request alternative early payment actions. In addition, the Company analyzes its aged receivables for collectability at least quarterly, and if necessary, records a reserve against those receivable it determines may not be collectable. As such, the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

5

Recently Issued Financial Accounting Standards

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and is effective immediately through December 31, 2022. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The Company expects to adopt the guidance during the allowable time period but does not believe the adoption will have a material effect on its consolidated financial statements.

 

Note 2–Revenue

 

The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended March 31, 2020 and 2019, along with the reportable segment for each category.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

91,613

 

$

79,316

 

$

28,966

 

$

199,895

Desktops

 

 

33,294

 

 

34,209

 

 

10,472

 

 

77,975

Software

 

 

36,398

 

 

26,182

 

 

7,295

 

 

69,875

Servers/Storage

 

 

25,830

 

 

16,234

 

 

11,746

 

 

53,810

Net/Com Products

 

 

21,012

 

 

24,946

 

 

9,810

 

 

55,768

Displays and Sound

 

 

23,946

 

 

23,568

 

 

11,443

 

 

58,957

Accessories

 

 

28,021

 

 

90,974

 

 

8,809

 

 

127,804

Other Hardware/Services

 

 

18,671

 

 

37,989

 

 

11,106

 

 

67,766

Total net sales

 

$

278,785

 

$

333,418

 

$

99,647

 

$

711,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

 

$

80,935

 

$

66,565

 

$

27,375

 

$

174,875

Desktops

 

 

26,784

 

 

35,969

 

 

10,887

 

 

73,640

Software

 

 

34,688

 

 

27,776

 

 

9,272

 

 

71,736

Servers/Storage

 

 

25,717

 

 

17,425

 

 

12,416

 

 

55,558

Net/Com Products

 

 

22,239

 

 

14,628

 

 

10,144

 

 

47,011

Displays and Sound

 

 

20,332

 

 

26,935

 

 

9,879

 

 

57,146

Accessories

 

 

22,053

 

 

56,515

 

 

9,645

 

 

88,213

Other Hardware/Services

 

 

20,184

 

 

29,822

 

 

14,736

 

 

64,742

Total net sales

 

$

252,932

 

$

275,635

 

$

104,354

 

$

632,921

 

Contract Balances

 

The following table provides information about contract liabilities from arrangements with customers as of March 31, 2020 and December 31, 2019.

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

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

 

$

2,532

 

$

5,942

 

6

Changes in the contract liability balances during the three months ended March 31, 2020 are as follows (in thousands):

 

 

 

 

 

 

2020

Balances at December 31, 2019

$

5,942

Cash received in advance and not recognized as revenue

 

4,852

Amounts recognized as revenue as performance obligations satisfied

 

(8,262)

Balances at March 31, 2020

$

2,532

 

 

Note 3–Earnings Per Share

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 ,

 

 

    

2020

    

2019

 

Numerator:

 

 

 

 

 

 

 

Net income

 

$

14,896

 

$

12,727

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

 

26,236

 

 

26,359

 

Dilutive effect of unvested employee stock awards

 

 

185

 

 

166

 

Denominator for diluted earnings per share

 

 

26,421

 

 

26,525

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.57

 

$

0.48

 

Diluted

 

$

0.56

 

$

0.48

 

 

For the three months ended March 31, 2020 and 2019, we had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

 

 

 

 

 

k 

Note 4—Leases

 

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset as of March 31, 2020 was $4,353 and a corresponding lease liability of $4,353 associated with related party leases.

 

7

As of March 31, 2020, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

Three months ended March 31, 2019

 

Related Parties

 

Others

 

Total

 

Related Parties

 

Others

 

Total

Lease Cost

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Capitalized operating lease cost

$

379

 

$

784

 

$

1,163

 

$

379

 

$

831

 

$

1,210

Short-term lease cost

 

41

 

 

 2

 

 

43

 

 

41

 

 

 2

 

 

43

Total lease cost

$

420

 

$

786

 

$

1,206

 

$

420

 

$

833

 

$

1,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Information

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows

$

379

 

$

781

 

$

1,160

 

$

379

 

$

884

 

$

1,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term (in years):

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Capitalized operating leases

 

3.65

 

 

6.29

 

 

5.60

 

 

4.59

 

 

10.55

 

 

8.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized operating leases

 

3.92%

 

 

3.92%

 

 

3.92%

 

 

3.92%

 

 

3.92%

 

 

3.92%

 

As of March 31, 2020, future lease payments over the remaining term of capitalized operating leases were as follows:

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31, 

    

 

Related Parties

    

 

Others

    

 

Total

2020, excluding the three months ended March 31, 2020

 

$

1,006

 

$

2,489

 

$

3,495

2021

 

 

1,253

 

 

3,091

 

 

4,344

2022

 

 

1,253

 

 

2,111

 

 

3,364

2023

 

 

1,149

 

 

1,675

 

 

2,824

2024

 

 

 —

 

 

1,699

 

 

1,699

2025

 

 

 —

 

 

1,594

 

 

1,594

Thereafter

 

 

 —

 

 

888

 

 

888

 

 

$

4,661

 

$

13,547

 

$

18,208

 

 

 

 

 

 

 

 

 

 

Imputed interest

 

 

 

 

 

 

 

 

(1,595)

Lease liability balance at March 31, 2020

 

 

 

 

 

 

 

$

16,613

 

As of March 31, 2020, the ROU asset had a balance of $15,776. The long-term lease liability was $12,551 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $4,062.

 

Note 5–Segment Information

 

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

 

Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. We report these charges to the operating segments as “Allocations.” Certain

8

headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below. 

   

Segment information applicable to our reportable operating segments for the three months ended March 31, 2020 and 2019 is shown below:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31 ,

 

    

2020

    

2019

Net sales:

 

 

 

 

 

 

Business Solutions

 

$

278,785

 

$

252,932

Enterprise Solutions

 

 

333,418

 

 

275,635

Public Sector Solutions

 

 

99,647

 

 

104,354

Total net sales

 

$

711,850

 

$

632,921

Operating income (loss):

 

 

 

 

 

 

Business Solutions

 

$

11,301

 

$

8,765

Enterprise Solutions

 

 

16,722

 

 

15,473

Public Sector Solutions

 

 

(3,322)

 

 

(3,066)

Headquarters/Other

 

 

(4,051)

 

 

(3,763)

Total operating income

 

 

20,650

 

 

17,409

Interest income, net

 

 

92

 

 

198

Income before taxes

 

$

20,742

 

$

17,607

Selected operating expense:

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

Business Solutions

 

$

159

 

$

150

Enterprise Solutions

 

 

681

 

 

639

Public Sector Solutions

 

 

15

 

 

21

Headquarters/Other

 

 

2,292

 

 

2,899

Total depreciation and amortization

 

$

3,147

 

$

3,709

Total assets:

 

 

 

 

 

 

Business Solutions

 

$

319,909

 

$

280,889

Enterprise Solutions

 

 

536,672

 

 

484,497

Public Sector Solutions

 

 

52,285

 

 

55,536

Headquarters/Other

 

 

4,326

 

 

7,527

Total assets

 

$

913,192

 

$

828,449

The assets of our three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment, right-of-use assets, and intercompany balance, net. As of March 31, 2020 and 2019, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $7,024 and $11,201, respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segment-by-segment basis.

Note 6–Commitments and Contingencies

 

We are subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business. In the opinion of management, the outcome of such matters is not expected to have a material, adverse effect on our financial position, results of operations, and/or cash flows.

 

We are subject to audits by states on sales and income taxes, employment matters, and other assessments.  Additional liabilities for these and other audits could be assessed, and such outcomes could have a material, adverse impact on our financial position, results of operations, and/or cash flows.

 

9

Note 7–Bank Borrowings

 

We have a $50,000 credit facility collateralized by our account receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate (“LIBOR”) (0.99% at March 31, 2020), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at March, 31 2020). The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility to trailing twelve months Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. We had no outstanding bank borrowings at March 31, 2020 or 2019, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility. 

 

 

 

 

 

10

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

 

Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.

 

We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors, including the effects of the novel coronavirus (COVID-19) on our business, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

 

OVERVIEW

 

We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by third-party service providers. We operate through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.

 

We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

 

As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our

11

customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

 

The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.

 

To support future growth, we are expanding our IT solutions business, which requires the addition of highly-skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.

 

Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.

 

Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.

 

EFFECTS OF COVID-19

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries. On March 11, 2020, the WHO characterized COVID-19 as a global pandemic.

 

National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home. Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country. We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We have also evaluated the potential impact of the pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.

 

The COVID-19 pandemic has resulted in material adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers. Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.

 

12

The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.

 

In addition, the COVID-19 pandemic has caused, and may continue to cause, disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations. In our opinion, customers who operate within the hospitality, airline, and retail industries, and in particular those within our Business Solutions Segment, are likely to be most adversely affected. It is possible we could experience a decrease in orders as a result of the pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future. We may also experience delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether. As a result, we have increased our reserve against uncollectable amounts, which resulted in a significant increase in our operating expenses in the first quarter.

 

See the important information in Item 1A. Risk Factors below, under the caption “The continued spread of COVID-19 and the imposition of related health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.”

 

RESULTS OF OPERATIONS

 

The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2020

    

2019

    

 

Net sales (in millions)

 

$

711.9

 

$

632.9

 

 

Gross margin

 

 

15.9