We strive to identify the unique needs of our corporate, government, healthcare, educational, and small business customers, and have designed our business processes to enable our customers to effectively manage their IT systems. We provide value by offering our customers efficient design, integration, deployment, and support of their IT environments. As of December 31, 2018,2021, we employed 823727 sales representatives, whose average tenure exceeded sixnine years. Sales representatives are responsible for managing enterprise, commercial, and public sector accounts, as specialization and a deep understanding of unique customer environments are more important than ever. These sales representatives focus on current and prospective customers and are supported by an increasing number of engineering, technical, and administrative staff.staff through our Technology Solutions Group and Technical Sales Organization. Our Industry Solutions Group, or ISG, provides our sales team and customers with insights and guidance customized to the unique needs of our vertical markets, including healthcare, retail, finance, and manufacturing. We believe that increasing our salesforce productivity is important to our future success, and we have increased our headcount and investments in this areaour sales and sales support teams accordingly.
In September 2016, we launched “Connection®,” uniting all of our subsidiaries into one cohesive brand, reflecting the promise of our trademark blue arc and our mission to connect people with technology that enhances growth, elevates productivity, and empowers innovation. MoreDirect, our enterprise team, became Connection® Enterprise Solutions; PC Connection Sales Corp, our SMB-focused team, became Connection® Business Solutions; and GovConnection, our public sector team, became Connection® Public Sector Solutions.
We market our products and services through our websites: www.connection.com, www.connection.com/enterprise www.connection.com/, www.connection.com/publicsector, and www.macconnection.com. Our websites provide extensive product information, customized pricing, rich content, and a digital platform for online orders.
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Additional financial information regarding our business segments and geographic data about our customers and assets is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II, and in Note 14 to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and accordingly, we file reports, proxy and information statements, and other information with the Securities and Exchange Commission, or the SEC. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains such reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We maintain a corporate website with the address www.connection.com. We are not including the information contained in our websitewebsites as part of, or incorporating by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practical after we electronically file these materials with, or otherwise furnish them to, the SEC.
MARKET AND COMPETITION
In the fiscal year ended December 31, 2018,2021, we generated approximately 38%38.0% of our sales from small- to medium-sized customer accounts, 43%43.2% from medium-to-large corporate accounts (Fortune 1000), and 19%18.8% from government and educational institutions. The overall IT market that we serve is estimated to be approximately $200 billion.
The largest segment of this market is served by local and regional “value added resellers”Value-Added Resellers”, or VARs, many of whom we believe are transitioning from the hardware and software products business to higher-margin IT services. We have transitioned from an end-user or desktop-centric computing supplier to a network or enterprise-wide IT solutions supplier. We have also partnered with third-party technology and telecommunications service providers. We now offer our customers access to the same services and technical expertise as local and regional VARs, but with a more extensive product selection at generally lower prices.
Intense competition for customers has led manufacturers of our IT products to use all available channels, including solutions providers, to distribute their products. Certain of these manufacturers who have traditionally used resellers to distribute their products have, from time to time, established their own direct marketing operations, including sales through the Internet. Nonetheless, we believe that these manufacturers will continue to provide us and other third-party solutions providers favorable product allocations and marketing support.
We believe new entrants to the IT Solutions channel must overcome a number of obstacles, including:
| the substantial time and resources required to build a customer base of meaningful size and profitability for cost-effective operation; |
| the high costs of developing the information systems and operating infrastructure required to successfully compete as a national solutions provider; |
| the advantages enjoyed by larger and more established competitors in terms of purchasing and operating efficiencies; |
| the difficulty of building relationships with vendors to achieve favorable product allocations and attractive pricing terms; and |
| the difficulty of identifying and recruiting management personnel with significant direct marketing experience in the industry. |
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BUSINESS STRATEGIES
We believe we become our customers’ IT provider of choice by providingcalming the confusion of IT and solving complex business challenges with innovative IT solutions which meet their needs of increased productivity, mobility, virtualization, and security in a continually evolving IT environment. We provide enhanced value by assisting themour customers in cost-effectively maximizing business opportunities provided by new technologies and advanced service solutions. The key elements of our business strategies include:
| Providing consistent customer service before, during, and after the sale. We believe that we have earned a reputation for providing superior customer service by consistently focusing on our customers’ needs. Empathy for the challenges technology presenting to people is at the heart of our culture and serves as a foundation for long-lasting and rewarding partnerships with organizations of every size and industry. We have dedicated our resources to developing strong, long-term relationships with our customers by accurately assessing their IT needs, and providing scalable, high-quality solutions and services through our knowledgeable, well-trained personnel. Through operational excellence, we have efficient delivery programs that provide a quality buying experience for our |
| Offering a broad product selection at competitive prices. We offer a broad range of IT products and solutions, including personal computers and related peripheral products, servers, storage, managed services, cloud solutions, and networking infrastructure, at costs that allow our customers to be more productive while maximizing their IT budgets. Our advanced solution offerings include network, server, storage, and mission-critical onsite installation and support using proprietary cloud-based service management software. We offer products and enhanced service capabilities with aggressive price and performance standards, all with the convenience of one-stop shopping for technology solutions. |
| Simplifying technology product procurement for corporate customers. We offer Internet-based procurementoptions to eliminate complexity and enhance customer value, as well as lower the cost of procurement for our customers. We specialize in Internet-based solutions and provide electronic integration between our customers and suppliers. |
| Offering targeted IT solutions. Our customers seek solutions to increasingly complex IT infrastructure demands. To better address their business needs, we have focused our solution service capabilities on |
| Maintaining a strong brand name and customer awareness. Since our founding in 1982, we have built a strong brand name and customer awareness. We have been named to the Fortune 1000 and the CRN Solution Provider 500 for each of the last |
| Maintaining long-standing vendor relationships. Our close partnerships with leading technology manufacturers and vendors provide our team with access to the latest product offerings, training assets, and support resources. We have a history of strong relationships with vendors, and were among the first national solutions providers qualified by manufacturers to market computer systems to end users. By working closely with our vendors to provide an efficient channel for the advertising and distribution of their products and |
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| solutions, we expect to expand market share and generate opportunities for optimizing partner incentive programs. We promote communication and collaboration with our partner community at every level of our organization, from Sales and Product Management to leadership. We host a Partner Advisory Council that meets annually to share feedback and explore strategies to promote greater engagement with partners and better serve our mutual customers. |
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GROWTH STRATEGIES
Our growth strategies are designed to increase revenues by maximizing operational efficiencies while offering innovative products and value added service offerings, increasing penetration of our existing customers, and expanding our customer base. Our six key elements of growth are:
| Expanding hardware and software offerings. We offer our customers an extensive range of IT hardware and software products, and in response to customer demand, we continually evaluate and add new products as they become available. We work closely with vendors to identify and source first-to-market product offerings at aggressive prices. |
| Expanding IT solution services offerings. We strive to accelerate solution and service growth by providing creative solutions to the increasingly complex hardware and software needs of our customers. Our Converged Data Center, Networking, Mobility, Security, Cloud Solutions, Lifecycle, and Software services practice groups consist of industry-certified and product-certified engineers, as well as highly specialized third-party providers. Our investment in these seven practice areas is |
| Targeting customer segments. Through increased targeted marketing, we seek to expand the number of our active customers and generate additional sales to existing customers by providing more value-added services and solutions. We have also developed |
| Increasing productivity of our sales representatives. We believe that higher sales productivity is the key to leveraging our expense structure and driving future profitability improvements. We invest significant resources in training new sales representatives and providing ongoing training to experienced personnel. Our training and evaluation programs are focused towards assisting our sales personnel in understanding and anticipating clients’ IT needs, with the goal of fostering loyal customer relationships. We also provide our sales representatives with technical support on more complex sales opportunities through our expanding group of technical solution specialists. |
| Migrating to cloud-based solutions for our customers. Cloud computing is a key driver of new IT spending as our customers seek scalable, cost-effective solutions. We plan to expand our cloud-based solution sales and assist our customers in navigating the complex and growing field of cloud-solution offerings. This focus on cloud includes investing in the training and certification resources required to help our customers adopt and optimize cloud technologies. In 2021, we secured Microsoft Azure Expert Managed Service Provider status as well as Google Cloud premier partner status—two exclusive designations that require an intensive auditing process and a proven record of delivering exceptional customer service and in-depth technical expertise around core cloud competencies. |
| Pursuing strategic acquisitions and alliances. We seek acquisitions and alliances that add new customers, strengthen our product and solution offerings, add management talent, and produce operating results which are accretive to our core business earnings. |
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SERVICE AND SUPPORT
Since our founding in 1982, our primary objective has been to provide products and services that meet the demands and needs of customers and to supplement those products with up-to-date product information and excellent customer service and support. We believe that offering our customers superior value, through a combination of product knowledge, consistent and reliable service and support, and leading products at competitive prices, differentiates us from other national solutions providers and provides the foundation for developing a broad and loyal customer base.
We invest in training programs for our service and support personnel, with an emphasis on putting customer needs and service first. Supplementing our salesforce, our Technology Solutions Group and Technical Sales Organization offer in-depth technical support across a wide range of advanced technology solutions. These teams of engineers and solution architects design end-to-end IT solutions tailored to our customers’ unique environments and serve as technology consultants. Our TIDC ensures a superior customer experience, with seamless configuration, deployment, and support services. Product support technicians assist customers with questions concerning compatibility, installation, and more difficult questions relating to product use. The product support technicians authorize customers to return defective or incompatible products to either the manufacturer or to us for warranty service. In-house TIDC technicians perform both warranty and non-warranty repair on most major systems and hardware products.
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Using our customized information system, we transmit our customer orders either to our distribution centerTIDC or to our drop‑shipdrop-ship suppliers, depending on product availability, for processing immediately after a customer receives credit approval. At our distribution center, we also perform custom configuration services, which typically includes custom imaging, the installation and integration of additional components, and other technology enhancements. Our customers may select the method of delivery that best meets their needs and is most cost effective, ranging from expedited overnight delivery for urgently needed items to ground freight.
Our inventory stocking strategy is based on economics and the general availability of the product. We will stock product where there is an economic advantage to do so, or the product is in constrained supply. We also will stock product to support customer rollouts, including product that is running through our configuration and integration services prior to shipment.
MARKETING AND SALES
We sell our products through our direct marketing channels to (i) SMBs including small office/home office customers, (ii) government and educational institutions, and (iii) medium-to-large corporate accounts. We strive to be the primary supplier of IT products and solutions to our existing and prospective customers by providing exemplary customer service. We use multiple marketing approaches to reach existing and prospective customers, including:
| outbound telemarketing and field sales; |
| digital, web, and print media advertising; and |
| targeted marketing programs to specific customer populations. |
All of our marketing approaches emphasize our broad product and service offerings, fast delivery, customer support, competitive pricing, and our wide range of service solutions.
Sales Channels. We believe that our ability to establish and maintain long-term customer relationships and to encourage repeat purchases is largely dependent on the strength of our sales personnel and programs. Because our customers’ primary contact with us is through our sales representatives, we are committed to maintaining a qualified, knowledgeable, and motivated sales staff with its principal focus on customer service.
Outbound Telemarketing and Field Sales. We seek to build loyal relationships with potential high-volume customers by assigning them to individual account managers. We believe that customers respond favorably to one-on-one relationships with personalized, well-trained account managers. Once established, these one-on-one relationships are
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maintained and enhanced through frequent telecommunications and targeted electronic communications, as well as other marketing materials designed to meet each customer’s specific IT needs. We pay most of our account managers a base annual salary plus incentive compensation. Incentive compensation is tied generally to gross profit dollars produced by the individual account manager. Account managers historically have significantly increased productivity after approximately twelve months of training and experience.
E-commerce Sales. (www.connection.com, www.connection.com/enterprise, www.connection.com/publicsector,andwww.macconnection.com) We provide product descriptions and prices for generally all products online. Our Connection website also provides updated information for more than 425,000460,000 items. We offer, and continuously update, selected product offerings and other special buys. We believe our websites are important sales sources and communication tools for improving customer service.
Our MoreDirect subsidiary’sEnterprise Solutions Segment’s business process and operations are primarily Web-based. Most of its corporate customers utilize a customized Web page to quickly search, source, and track IT products. MoreDirect’sOur Enterprise Solution business website (www.connection.com/enterprise)enterprise) aggregates the current available inventories of its largest IT suppliers into a single online source for its corporate customers. Its custom designed Internet-based system, TRAXX®MarkITplace®, provides corporate buyers with comparative pricing from several suppliers as well as special pricing arranged through the manufacturer.
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The Internet supports three key business initiatives for us:
| Customer choice — We have built our business on the premise that our customers should be able to choose how they interact with |
| Lowering transactions costs — Our website tools include robust product search features and Internet Business Accounts (customized Web pages), which allow customers to quickly and easily find information about products of interest to them. If customers still have questions, they may call our account managers. Such phone calls are typically shorter and have higher close rates than calls from customers who have not first visited our websites. |
| Leveraging the time of experienced sales representatives — Our investments in technology-based sales and service programs allow our sales representatives more time to build and maintain relationships with our customers and help them to solve their business problems. |
Business Segments. We conduct our business operations through three business segments: Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Business Solutions Segment. Our principal target markets in this segment are small-to-medium-sized business customers. We use a combination of outbound telemarketing, including some on-site sales solicitation by business development managers, and Internet sales through customized Internet Business Accounts, to reach these customers.
Enterprise Solutions Segment. Through our custom designed Web-based system, we are able to offer our larger corporate customers an efficient and effective method of sourcing, evaluating, purchasing, and tracking a wide variety of IT products and services. Our strategy is to be the primary single source procurement portal for our large corporate customers.
Public Sector Solutions Segment. We use a combination of outbound telemarketing, including some on-site sales solicitation by business development managers, and Internet sales through customized Internet Business Accounts, to reach these customers. We target each of the four distinct market sectors within this segment—federal government, higher educational institutions, school grades K-12, and state and local governments.
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The following table sets forth the relative distribution of net sales by business segment:
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| Years Ended December 31, |
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| 2018 |
| 2017 |
| 2016 |
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Sales Segment |
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Enterprise Solutions |
| 43 | % | 39 | % | 38 | % |
Business Solutions |
| 38 |
| 40 |
| 40 |
|
Public Sector Solutions |
| 19 |
| 21 |
| 22 |
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Total |
| 100 | % | 100 | % | 100 | % |
| | | | | | | |
| | Years Ended December 31, |
| ||||
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| 2021 |
| 2020 |
| 2019 |
|
Sales Segment | | | | | | | |
Enterprise Solutions | | 43 | % | 43 | % | 42 | % |
Business Solutions | | 38 | | 37 | | 38 | |
Public Sector Solutions | | 19 | | 20 | | 20 | |
Total | | 100 | % | 100 | % | 100 | % |
Our ISG works across all business segments to service the unique needs of healthcare, retail, finance, and manufacturing customers. Within each of these vertical markets, our ISG experts offer technology solutions and guidance backed by real-world experience. Our ISG combines extensive knowledge of the latest technologies, brands, and trends with industry experience that reassures our customers that we understand their businesses and their technology challenges. Our brand, and each of Connection’sour business segments, is supported by targeted marketing campaigns across a variety of media:
Digital. We utilize a series of digital programs, in conjunction with advanced data analytics, to identify prospective customers and generate new leads within our existing customer base. These programs include website, email, blog, social media, electronic catalogs, webinars, and video/multimedia promotions.
Print. Connection produces a variety of print media, including direct mail pieces and Connected, a quarterly publication that provides informative articles on the latest technologies and industry trends. We distribute specialty catalogs to education, healthcare, and government customers and prospective customers on a periodic basis. The
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Company’s MacConnection® brand publishes an eponymous catalog for the Apple market. These publications showcase the depth of our in-house expertise in the marketplace and extend Connection’s brand to a wide audience of IT decision makers.
Specialty Marketing. In addition to our digital and print marketing efforts, Connection maintainswe maintain a strong presence at industry tradeshows and conventions across the country, including a number of healthcare and education IT conferences. ConnectionWe also hostshost a series of Technology Summits each year, with a focus on building stronger relationships with our customers and reinforcing our reputation as a trusted source of expertise. Wherever possible we developed and hosted digital equivalents events throughout the year.
Customers. We maintain an extensive database of customers and prospects. However, no single customer accounted for more than 3%4% of our consolidated revenue in 2018.2021. While no single agency of the federal government comprised more than 3%4% of total sales,consolidated revenue in 2021, aggregate salesrevenue to the federal government were 5.4% 7.8%was 3.9%, 4.6%, and 7.5%6.9% in 2018, 2017,2021, 2020, and 2016,2019, respectively. The loss of any single customer would not have a material adverse effect on any of our business segments. In addition, weThe majority of our backlog historically has been and continues to be open cancelable purchase orders. We do not have individual orders in our backlog that are material to our business, and as a result, we typically ship products within hoursdo not believe that backlog as of receiptany particular dates is an indication of orders.future results.
PRODUCTS AND MERCHANDISING
We continuously focus on expanding the breadth of our product and service offerings. We currently offer our customers over 425,000460,000 information technology products designed for business applications from more than 1,6002,500 vendors, including hardware and peripherals, accessories, networking products, and software. We select the products we
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sell based upon their technology and effectiveness, market demand, product features, quality, price, margins, and warranties. The following table sets forth our percentage of net sales (in dollars) for major product categories:
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| PERCENTAGE OF |
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| NET SALES |
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| Years Ended December 31, |
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| 2018 (1) |
| 2017 (2) |
| 2016 (2) |
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Notebooks/Mobility |
| 26 | % | 22 | % | 23 | % |
Accessories |
| 13 |
| 10 |
| 11 |
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Software |
| 12 |
| 23 |
| 20 |
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Desktops |
| 11 |
| 11 |
| 10 |
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Servers/Storage |
| 11 |
| 9 |
| 10 |
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Displays and sound |
| 9 |
| 8 |
| 8 |
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Net/Com Product |
| 8 |
| 7 |
| 8 |
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Other Hardware/Services |
| 10 |
| 10 |
| 10 |
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Total |
| 100 | % | 100 | % | 100 | % |
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| | | | | | | |
| | PERCENTAGE OF |
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| | NET SALES | | ||||
| | Years Ended December 31, |
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| 2021 |
| 2020 |
| 2019 |
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Notebooks/Mobility |
| 38 | % | 32 | % | 29 | % |
Desktops | | 9 | | 10 | | 12 | |
Software | | 10 | | 11 | | 12 | |
Servers/Storage | | 7 | | 8 | | 8 | |
Net/Com Product |
| 7 |
| 8 |
| 8 | |
Displays and sound | | 10 | | 8 | | 9 | |
Accessories |
| 12 |
| 14 |
| 13 | |
Other Hardware/Services |
| 7 |
| 9 |
| 9 | |
Total | | 100 | % | 100 | % | 100 | % |
We offer a 30-day right of return generally limited to defective merchandise. Returns of non-defective products are subject to restocking fees. Substantially all of the products marketed by us are warranted by the manufacturer. We generally accept returns directly from the customer and then either credit the customer’s account or ship the customer a replacement or similar product from our inventory.
PURCHASING AND VENDOR RELATIONS
Product purchases from Ingram Micro, Inc., or Ingram, our largest supplier,TD Synnex Corporation and Dell Inc. accounted for approximately 22%23%, 23% and 12% respectively, of our total product purchases in both 2018 and 2017 and 21% in 2016. Purchases2021. Product purchases from Ingram Micro, Inc., TD Synnex Corporation or Synnex, comprisedand HP Inc. accounted for approximately 21%, 15% and 12%, 12%, and 13% respectively, of our total product purchases in 2018, 2017,2020. Product purchases from Ingram Micro, Inc., TD Synnex Corporation and 2016, respectively. Purchases from Tech Data comprised of 10%, 11% and 8% in 2018, 2017, and 2016, respectively. Purchases from Hewlett-Packard
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Company, or HP Inc. accounted for approximately 7%21%, 14% and 8% respectively, of our total product purchases in 2018, 11% in 2017, and 9% in 2016.2019. No other singular vendor supplied more than 10% of our total product purchases in 2018, 2017, or 2016.2021, 2020 and 2019. We believe that, while we may experience some short-term disruption if products from Ingram Micro, Inc., TD Synnex Corporation, HP and/Inc., Dell Inc., or Tech Dataany of these vendors become unavailable to us, alternative sources for these products obtained directly from Ingram, Synnex, HP and Tech Data are available.
Products manufactured by HP Inc. collectively represented approximately 18%15% of our net sales in 20182021, 18% in 2020, and approximately 20%19% in both 2017 and 2016.2019. We believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on our results of operations and cash flows.
Many product suppliers reimburse us for advertisements or other cooperative marketing programs in our catalogs and otherthrough various marketing vehicles. Reimbursements may be in the form of discounts, advertising allowances, and/or rebates. We also receive allowances from certain vendors based upon the volume of our purchases or sales of the vendors’ products by us. Some of our vendors offer limited price protection in the form of rebates or credits against future purchases. We may also participate in end-of-life product and other special purchases which may not be eligible for price protection.
We believe that we have excellent relationships with our vendors. We generally pay vendors within stated terms, or earlier when favorable cash discounts are offered. We believe our high volume of purchases enables us to obtain product pricing and terms that are competitive with those available to other national IT solutions providers. Although brand names and individual product offerings are important to our business, we believe that competitive products are available in substantially all of the merchandise categories offered by us.
DISTRIBUTION
We fulfill orders from customers both from products we hold in inventory and through drop shipping arrangements with manufacturers and distributors. At our 283,000 square foot technology integration and distribution complexTIDC in Wilmington, Ohio, we receive and ship inventory, configure and integrate technology solutions, provide depot maintenance and services, and process
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returned products. The TIDC features a state-of-the-art ISO 9001:2015-certified Configuration Lab that completed more than 500,000 custom configurations in 2021—including personal computing devices, servers, mobile devices, and networking hardware. Our technicians maintain extensive certifications and authorizations from all major manufacturers, with more than 90% of the team holding one or more CompTIA certifications. Through the TIDC, we are able to offer customers turnkey solutions for all of their IT needs, including hardware configuration, imaging and provisioning, asset management, remote management, white glove enrollment services, kitting, custom packaging, and depot repair services.
We also place product orders directly with manufacturers and/or distribution companies for drop shipment directly to our customers. Order status with distributors is tracked online, and in all circumstances, a confirmation of shipment from manufacturers and/or distribution companies is received prior to initial recording of the transaction. At the end of each financial reporting period, revenue is adjusted to reflect the anticipated receipt of products by the customers in the period. Products drop shipped by suppliers were 80%72%, 77%76%, and 75%80%, of net sales in 2018, 2017,2021, 2020, and 2016,2019, respectively. In future years, we expect that products drop shipped from suppliers may increase, both in dollars and as a percentage of net sales, as we seek to lower our overall inventory and distribution costs while maintaining excellent customer service.
Certain of our larger customers occasionally request special staged delivery arrangements under which either we or our distribution partners set aside and temporarily hold inventory on our customer’s behalf. Such orders are firm delivery orders, and customers generally pay under normal credit terms, regardless of delivery. Revenue on such transactions is not recorded until shipment to their final destination as requested by the customer. Inventory held for such staged delivery requests aggregated $46.1 million and $32.0 million at December 31, 2018 and 2017, respectively.
MANAGEMENT INFORMATION SYSTEMS
Our subsidiaries utilize management information systems which have been significantly customized for our use. These systems permit centralized management of key functions, including order taking and processing, inventory and accounts receivable management, purchasing, sales, and distribution, and the preparation of daily operating control reports on key aspects of the business. We also operate advanced telecommunications equipment to support our sales and customer service operations. Key elements of the telecommunications systems are integrated with our computer systems to provide timely customer information to sales and service representatives, and to facilitate the preparation of operating and performance data.
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Our success is dependent in large part on the accuracy and proper use of our information systems, including our telephone systems to manage our inventory and accounts receivable collections, to purchase, sell, and ship our products efficiently and on a timely basis, and to maintain cost-efficient operations. We expect to continue upgrading our information systems in the future to more effectively manage our operations and customer database.
Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality. In October 2017, we beganOur successfully implemented ERP system, which was the result of a multi-year initiativeplanning and implementation process, enables us to upgrade our IT infrastructure,operate more effectively and have incurred $16.3 million of capital expenditures through December 31, 2018. We expect additional related capital expenditures to range from $6.0 to $7.0 million over the next six to nine months, when we expect to have completed the initiative. For further discussion see “Liquidity and Capital Resources” of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.efficiently.
COMPETITION
The direct marketing and sale of IT-related products is highly competitive. We compete with other national solutions providers of IT products, including CDW Corporation and Insight Enterprises, Inc., who are the current leaders in the space. We also compete with:
| certain product manufacturers that sell directly to customers as well as some of our own suppliers, such as Apple, Dell, HP, and Lenovo; |
| software publishers, such as Microsoft, VMware, Adobe, and Symantec; |
| distributors that sell directly to certain customers; |
| local and regional VARs; |
| various franchisers, office supply superstores, and national computer retailers; and |
| e-tailers, such as Amazon Web Services, with more extensive commercial online networks. |
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Additional competition may arise if other new methods of distribution emerge in the future. We compete not only for customers, but also for favorable product allocations and cooperative advertising support from product manufacturers. Several of our competitors are larger than we are and have substantially greater financial resources. These and other factors related to our competitive position are discussed more fully in the “Overview” of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Item 1A, “Risk Factors—Substantial competition could reduce our market share and may negatively affect our business” of this Annual Report on Form 10-K.
We believe that price, product selection and availability, solutions capabilities, and service and support are the most important competitive factors in our industry.
INTELLECTUAL PROPERTY RIGHTS
Our trademarks include, among others, Connection®, PC Connection®, GovConnection®, MacConnection®, we solve IT®, Everything Overnight®, The Connection™, HealthConnectionTM, Mobile Connection®, Cloud Connection®, ServiceConnectionTM, ProConnection™, Education Connection®, MoreDirect A PC Connection Company®, TRAXX®, WebSPOC®, Softmart®, GlobalServeTM, ®, Raccoon CharacterTM, ®, and their related logos and all iterations thereof. We intend to use and protect these and our other marks, as we deem necessary. We believe our trademarks have significant value and are an important factor in the marketing of our products. We do not maintain a traditional research and development group, but we work closely with computer product manufacturers and other technology developers to stay abreast of the latest developments in computer technology, with respect to the products we both sell and use.
REGULATORY MATTERS
Our Public Sector Solutions segment is heavily regulated and, as a result, our need for compliance awareness and business and employee support is significant. Specifically, our Public Sector Solutions segment is governed by various laws and regulations, including but not limited to laws and regulations relating to: the formation, administration, and performance of contracts; the security and control of information and information systems; international trade compliance; human trafficking; and the mandatory disclosure of “credible evidence” of a violation of certain criminal laws receipt of significant overpayments, or violations of the civil False Claims Act. In addition, U.S. government contractors are generally subject to other federal and state laws and regulations, including:
We focus on the following key areas in hiring and developing our employees:
| ● | The Federal Acquisition Regulation, or FAR, agency supplements to the FAR, and related regulations, which regulate the formation, administration, and performance of U.S. federal government contracts; |
| ● | The False Claims Act, which allows the government and whistleblowers filing on behalf of the government to pursue treble damages, civil penalties and sanctions for the provision of false or fraudulent claims to the U.S. federal government; |
| ● | The Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders; |
| ● | The Procurement Integrity Act, which regulates access to competitor bid and proposal information, as well as certain internal government procurement sensitive information, and regulates our ability to provide compensation to certain former government procurement officials; |
| ● | Laws and regulations restricting the ability of employees of the U.S. government to accept gifts or gratuities from a contractor; |
| ● | Post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the U.S. government and deploy former employees of the U.S. government; |
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| ● | Laws, regulations, and executive orders requiring the safeguarding of and restricting the use and dissemination of information classified for national security purposes or determined to be “controlled unclassified information,” “covered defense information,” or “for official use only”; |
| ● | Laws and regulations relating to the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work; |
| ● | Laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a U.S. government contract; |
| ● | Laws, regulations, and executive orders governing organizational conflicts of interest that may prevent us from bidding for or restrict our ability to compete for certain U.S. government contracts because of the work that we currently perform for the U.S. government; |
| ● | Laws, regulations, and executive orders that mandate compliance with requirements to protect the government from risks related to our supply chain; |
| ● | Laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a government contract; and |
| ● | The Cost Accounting Standards and the Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts and require consistency of accounting practices over time. |
Our Public Sector Solutions is also subject to oversight by the U.S. Office of Federal Contract Compliance Programs, or the OFCCP, for federal contract and affirmative action compliance, including the following areas:
| ● | affirmative action plans; |
| ● | applicant tracking; |
| ● | compliance training; |
| ● | customized affirmative action databases and forms; |
| ● | glass ceiling and compensation audits; |
| ● | desk and on-site audits; |
| ● | conciliation agreements; |
| ● | disability accessibility for applicants and employees; |
| ● | diversity initiatives; |
| ● | equal employment opportunity compliance; |
| ● | employment eligibility verification (known as “E-Verify”); |
| ● | internal affirmative action audits; |
| ● | internet recruiting and hiring processes; |
| ● | OFCCP administrative enforcement actions; |
| ● | record-keeping requirements; and |
| ● | Sarbanes-Oxley Act of 2002 compliance. |
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The U.S. federal government routinely revises its procurement practices and adopts new contract statutes, rules and regulations. The U.S. federal government has a broad range of tools available to enforce its procurement law and policies. These include debarring or suspending a particular contractor, certain of its operations and/ or individual employees from future government business. Individuals, on behalf of the federal government, may also bring qui tam suits against us for any alleged fraud related to payments under a U.S. federal government contract or program.
WORK FORCEMoreover, The U.S. federal government generally has the ability to terminate contracts, in whole or in part, with little or no prior notice, for convenience or for default based upon performance. In the event of termination of a contract for convenience, a contractor is normally able to recover costs already incurred on the contract and profit on those costs up to the amount authorized under the contract, but not the remaining profit that would have been earned had the contract been completed. Such a termination could also result in the cancellation of future work on a related contract. A termination resulting from our default could expose us to various liabilities, including excess re-procurement costs, and could have a material effect on our ability to compete for future contracts.
HUMAN CAPITAL
Our culture is reflected through our employees, who are driven to serve our customers, our partners, our communities and all of our stakeholders. We provide our employees with diverse experiences, training, and engagement opportunities to build a stronger team. Our culture—and the employees who share that culture with our customers and communities—are essential to our success and our ability to attract and retain top talent. Our Connection Cares initiative, launched in 2021, builds on the company’s long history of inclusivity and social responsibility with working groups focused on key areas: Employee Recognition, Charitable Giving, Sustainability, and Diversity and Inclusion. Employees volunteer within these groups to share their ideas, conduct company-wide campaigns, and make a positive impact within our team and our wider community. These activities, and the formal structure to support them, help ensure we are able to offer the work environment and corporate culture that today’s workforce demands.
We focus on the following key areas in hiring and developing our employees:
| ● | Training and Development. We focus on skills enhancement, leadership development, innovation excellence and professional growth throughout our employees’ careers. Our leadership program provides leadership trainings to our high-potential emerging leaders. |
| ● | Total Rewards. We provide market competitive compensation aligned with company performance. We further align our sales representatives’ compensation to their individual performance by providing excellent commission opportunities. We provide a comprehensive benefits package to our employees, including healthcare, retirement plans with Company’s match, tuition assistance, inclusive parental leave policies, adoption assistance, paid time off, paid volunteer hours and philanthropic match programs based upon eligibility and location. |
| ● | Oversight and Management. Our Board of Directors understands the importance of our inclusive, performance-driven culture to our ongoing success and is actively engaged with our President and Chief Executive Officer and our Vice President of Human Resources across a broad range of human capital management topics. |
As of December 31, 2018,2021, we employed 2,5132,542 persons (full-time equivalent), of whom 1,1531,045 (including 330318 management and support personnel) were engaged in sales-related activities, 556497 were engaged in providing IT services and customer service and support, 526674 were engaged in purchasing, marketing, and distribution-related activities, 82103 were engaged in the operation and development of management information systems, and 196223 were engaged in administrative and finance functions. We considerhave good relations with our employee relations to be good.employees. Our employees are not represented by a labor union, and we have never experienced a labor related work stoppage.
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AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act, and accordingly, we file reports, proxy and information statements, and other information with the Securities and Exchange Commission, or the SEC. The SEC maintains a website (http://www.sec.gov) that contains such reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website address is www.connection.com and our investor relations website is located at https://ir.connection.com/. We are not including the information contained in our website as part of, or incorporating by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practical after we electronically file these materials with, or otherwise furnish them to, the SEC.
In addition, we routinely post on the “Investor Relations” section of our website news releases, announcements, and other statements about our business, some of which may contain information that may be deemed material to investors. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the “Investor Relations” section of our corporate website. The contents of our corporate website are not, however, a part of this Annual Report on Form 10-K.
We cannot assure investorsYou should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Annual Report on Form 10-K and our other public filings with the SEC. The risks described below are not the only risks facing our Company. The occurrence of any of the following risks, or of additional risks and uncertainties not presently known to us or that we currently believe to be immaterial, could cause our assumptionsbusiness, prospects, operating results, and expectations will provefinancial condition to have been correct. Importantsuffer materially. The risks below also include forward-looking statements, and important factors could cause our actual results to differ materially from those indicated or implied by these forward-looking statements. Such factors that could cause or contributeSee “Cautionary Note Concerning Forward-Looking Statements.”
Risks Related to such differences include those factors discussed below. 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. If any of the following risks actually occur, our business, financial condition, or results of operations would likely suffer.Business, Operations and Industry
Instability in economic conditions in the financial markets may adversely affect our business and reduce our operating results.
Our business has been affected by changes in economic conditions that are outside of our control, including reductions in business investment, loss of consumer confidence, and fiscal uncertainty at both federal and state government levels. Reductions in federal government spending may result in significant reductions in program funding. Uncertainty also exists regarding expected economic conditions both globally and in the United States, and future delays or reductions in IT spending could have a material adverse effect on demand for our products and consequently on our financial results.
Despite the recent increase in general economic optimism, there is always a risk that heightened economic expectations may not be realized. Economic instability may arise, and it is difficult to predict to what extent our business may be adversely affected. However, if IT spending should again decline, we are likely to experience an adverse impact, which may be material on our business and our results of operations.
We have experienced variability in sales and may not be able to maintain profitable operations.
Several factors have caused our results of operations to fluctuate and we expect some of these fluctuations to continue. Causes of these fluctuations include:
| shifts in customer demand that affect our distribution models, including demand for total solutions; |
| loss of customers to competitors; |
| industry shipments of new products or upgrades; |
| changes in overall demand and timing of product shipments related to economic markets and to government spending; |
| supply constraints; |
● | changes in vendor distribution of products; |
| changes in our product offerings and in merchandise returns; |
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| changes in distribution models as a result of cloud and software-as-a-service, or SaaS; and |
| adverse weather conditions that affect response, distribution, or |
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Our results also may vary based on our ability to manage personnel levels in response to fluctuations in revenue. We base personnel levels and other operating expenditures on sales forecasts. If our revenues do not meet anticipated levels in the future, we may not be able to reduce our staffing levels and operating expenses in a timely manner to avoid significant losses from operations.
Substantial competition could reduce our market share and may negatively affect our business.
The direct marketing industry and the computer products retail business, in particular, are highly competitive. We compete with other national solutions providers of hardware and software and computer related products, including CDW Corporation and Insight Enterprises, Inc., who are the current leaders in the space. Certain hardware and software vendors, such as Apple, Dell, Lenovo, and HP, who provide products to us, also sell their products directly to end users through their own direct salesforce, catalogs, stores, and via the Internet. We also compete with computer retail stores and websites, who are increasingly selling to business customers and may become a significant competitor.competitor, including e-tailers, such as Amazon Web Services, with more extensive commercial online networks. We compete not only for customers, but also for advertising support from IT product manufacturers. Some of our competitors have larger customer bases and greater financial, marketing, and other resources than we do. In addition, some of our competitors offer a wider range of products and services than we do and may be able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current and potential competitors also have greater name recognition, engage in more extensive promotional activities, and adopt pricing policies that are more aggressive than ours. We expect competition to increase as retailers and solution providers who have not traditionally sold computers and related products enter the industry.
In addition, product resellers and national solutions providers are combining operations or acquiring or merging with other resellers and national solutions providers to increase efficiency. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and services. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share. We may not be able to continue to compete effectively against our current or future competitors. If we encounter new competition or fail to compete effectively against our competitors, our business market share, results of operations or cash flows may be harmed.adversely impacted.
We face and will continue to face significant price competition.competition, which could result in a reduction of our profit margins.
Generally, pricing is very aggressive in our industry, and we expect pricing pressures to escalate should economic conditions deteriorate.deteriorate or inflationary pressures increase in excess of the amounts our customers are willing to pay. An increase in price competition could result in a reduction of our profit margins. We may not be able to offset the effects of price reductions with an increase in the number of customers, higher sales, cost reductions, or otherwise. Such pricing pressures could result in an erosion of our market share, reduced sales, and reduced operating margins, any of which could have a material adverse effect on our business.
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The spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows.
The COVID-19 pandemic has caused material 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 as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.
We rely on third-party suppliers and manufacturers. This outbreak has resulted in the extended shutdown of certain businesses, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. Any disruption of our suppliers and their contract manufacturers will likely impact our sales and operating results. 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. We have experienced, and may continue to experience, a decrease in orders as a result of the COVID-19 pandemic. We have also experienced, and may continue to experience, delays in collecting amounts owed to us.
This widespread health crisis has adversely affected the global economy, and may result in a sustained economic downturn that could impact demand for our products going forward.
The future impact of the outbreak is highly uncertain and cannot be predicted, and there is no assurance that the outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact will depend on future developments, including actions taken to contain COVID-19.
The interruption of the flow of products from suppliers could disrupt our supply chain.
Our business depends on the timely supply of products in order to meet the demands of our customers. Manufacturing interruptions or delays, including as a result of the financial instability or bankruptcy of manufacturers, significant labor disputes such as strikes, natural disasters, political or social unrest, pandemics (such as the COVID-19 pandemic) or other public health crises, or other adverse occurrences affecting any of our suppliers’ facilities, could disrupt our supply chain. We could experience product constraints due to the failure of suppliers to accurately forecast customer demand, or to manufacture sufficient quantities of product to meet customer demand (including as a result of shortages of product components), among other reasons. Additionally, the relocation of key distributors utilized in our purchasing model could increase our need for, and the cost of, working capital and have an adverse effect on our business, results of operations or cash flows
Our supply chain is also exposed to risks related to international operations. While we purchase our products primarily in the markets we serve (for example, products for US customers are sourced in the US), our vendor partners manufacture or purchase a significant portion of the products we sell outside of the US, primarily in Asia. Political, social or economic instability in Asia, or in other regions in which our vendor partners purchase or manufacture the products we sell, could cause disruptions in trade, including exports to the US. Other events related to international activities that could cause disruptions to our supply chain include:
| ● | the imposition of additional trade law provisions or regulations, the adoption or expansion of trade restrictions, including new or expanded economic sanctions in response to the ongoing conflict between Russia and Ukraine; |
| ● | the imposition of additional duties, tariffs and other charges on imports and exports, including any resulting retaliatory tariffs or charges and any reductions in the production of products subject to such tariffs and charges; |
| ● | foreign currency fluctuations; and |
| ● | restrictions on the transfer of funds. |
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We cannot predict whether the countries in which the products we sell, or any components of those products, are purchased or manufactured will be subject to new or additional trade restrictions or sanctions imposed by the United States or foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including new or increased tariffs or quotas, embargoes, sanctions, safeguards and customs restrictions against the products we sell, could increase the cost or reduce the supply of product available to us and adversely affect our business, results of operations or cash flows. In addition, our supply chain and our cost of goods also may be negatively impacted by unanticipated price increases due to factors such as inflation, including wage inflation, or to supply restrictions beyond our control or the control of our suppliers.
Instability in economic conditions and government spending may adversely affect our business and reduce our operating results.
Our business has been affected by changes in economic conditions that are outside of our control, including reductions in business investment, loss of consumer confidence, and fiscal uncertainty at both federal and state government levels. An adverse change in government spending policies (such as budget cuts or limitations or temporary shutdowns of government operations), shifts in budget priorities or reductions in revenue levels, could cause our Public Sector Solutions customers to reduce or delay their purchases or to terminate or not renew their contracts with us, which could adversely affect our business, results of operations or cash flows. Uncertainty also exists regarding expected economic conditions both globally and in the United States, and future delays or reductions in IT spending could have a material adverse effect on demand for our products and consequently on our financial results.
Economic instability may arise, and it is difficult to predict to what extent our business may be adversely affected. However, if IT spending should again decline, we are likely to experience an adverse impact, which may be material on our business and our results of operations.
We acquire a majority of our products for resale from a limited number of vendors. The loss of any one of these vendors could have a material adverse effect on our business.
We acquire a majority of our products for resale from a limited number of vendors. The loss of any one of these vendors could have a material adverse effect on our business. We acquire products for resale both directly from manufacturers and increasingly indirectly through distributors and other sources. Although we purchase from a diverse vendor base, product purchases from Ingram Micro, Inc., TD Synnex Corporation and Dell Inc. accounted for approximately 23%, 23% and 12% respectively, of our total product purchases in 2021. No other singular vendor supplied more than 10% of our total product purchases in the year 2021. If we are unable to acquire products, or if we experienced a change in business relationship with any of these vendors, we could experience a short-term disruption in the availability of products, and such disruption could have a material adverse effect on our results of operations and cash flows.
Products manufactured by HP Inc. collectively represented approximately 15% of our net sales in 2021. We believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on our results of operations and cash flows.
Substantially all of our contracts and arrangements with our vendors that supply significant quantities of products are terminable by such vendors or us without notice or upon short notice. Most of our product vendors provide us with trade credit, of which the net amount outstanding at December 31, 2021 was $281.8 million. Termination, interruption, or contraction of relationships with our vendors, including a reduction in the level of trade credit provided to us, could have a material adverse effect on our financial position.
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Some product manufacturers either do not permit us to sell the full line of their products or limit the number of product units available to national solutions providers such as us. An element of our business strategy is to continue increasing our participation in first-to-market purchase opportunities. The availability of certain desired products, especially in the direct marketing channel, has been constrained in the past due to these limits imposed by product manufacturers. We could experience a material adverse effect to our business if we are unable to source first-to-market purchases or similar opportunities, or if significant availability constraints reoccur.
Virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models.
Our customers can access, through a cloud-based platform, business-critical solutions without the significant initial capital investment required for dedicated infrastructure. Growing demand for the development of cloud-based solutions may reduce demand for some of our existing hardware products. If the transition to an environment characterized by cloud-based computing and software being delivered as a service progresses,progress, we will likely increase investments in this area before knowing whether our sales forecasts will accurately reflect customer demand for these products, services, and solutions. We may not be able to effectively compete using these virtual distribution models. Our inability to compete effectively with current or future virtual distribution model competitors, or adapt to a cloud-based environment, could have a material adverse effect on our business.
The methods of distributing IT products are changing, and such changes may negatively impact us and our business.
The manner in which IT hardware and software is distributed and sold is changing, and new methods of distribution and sale have emerged, including distribution through cloud-based and SaaS solutions. In addition, hardware and software manufacturers have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain manufacturers have instituted programs for the direct sales of large order quantities of hardware and software to certain major corporate accounts. These types of programs may continue to be developed and used by various manufacturers. Some of our vendors, including Apple, Dell, HP, and Lenovo, currently sell some of their products directly to end users and have stated their intentions to increase the level of such direct sales. In addition, manufacturers may attempt to increase the volume of software products distributed electronically to end users. An increase in the volume of products sold through or used by consumers of any of these competitive programs, or our inability to effectively adapt our business to increased electronic distribution of products and services to end users could have a material adverse effect on our results of operations.
We depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers.
Many of our customers elect to have their purchases shipped by an interstate common carrier, such as United Parcel Service, Inc., or UPS, or FedEx Corporation. A strike or other interruption in service, including, among other things, widespread illness due to the COVID-19 pandemic and inclement weather experienced could adversely affect our ability to market or deliver products to customers on a timely basis.
We may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers.
Shipping costs are a significant expense in the operation of our business. Increases in postal or shipping rates could significantly impact the cost of shipping customer orders and mailing our catalogs. Postage prices and shipping rates increase periodically, and we have no control over future increases. We have a long-term contract with UPS, and believe that we have negotiated favorable shipping rates with our carriers. While we generally invoice customers for shipping and handling charges, we may not be able to pass on to our customers the full cost, including any future increases in the cost, of commercial delivery services, which would adversely affect our business.
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We may experience a reduction in the incentive programs offered to us by our vendors.
Some product manufacturers and distributors provide us with incentives such as supplier reimbursements, payment discounts, price protection, rebates, and other similar arrangements. The increasingly competitive technology reseller market has already resulted in the following:
| reduction or elimination of some of these incentive programs; |
| more restrictive price protection and other terms; and |
| reduced advertising allowances and incentives. |
Many product suppliers provide us with advertising allowances, and in exchange, we feature their products on our website and in our catalogs and other marketing vehicles. These vendor allowances, to the extent that they represent specific reimbursements of incremental and identifiable costs, are offset against SG&A expenses. Advertising allowances that cannot be associated with a specific program funded by an individual vendor or that exceed the fair value of advertising expense associated with that program are classified as offsets to cost of sales or inventory. In the past, we have experienced a decrease in the level of vendor consideration available to us from certain manufacturers. The level of such consideration we receive from some manufacturers may decline in the future. Such a decline could decrease our gross profit and have a material adverse effect on our earnings and cash flows.
Should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles.
We test goodwill for impairment each year and more frequently if potential impairment indicators arise. Although the fair value of our Business Solutions and Enterprise Solutions reporting units substantially exceeded their carrying value at our annual impairment test, should the financial performance of a reporting unit not meet expectations due to the economy or otherwise, we would likely adjust downward expected future operating results and cash flows. Such adjustment may result in a determination that the carrying value of goodwill and other intangibles for a reporting unit exceeds its fair value. This determination may in turn require that we record a significant non-cash charge to earnings to reduce the $73.6 million aggregate carrying amount of goodwill held by our Business Solutions and Enterprise Solutions reporting units, resulting in a negative effect on our results of operations.
We are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry.
The market for IT products is characterized by rapid technological change and the frequent introduction of new products and product enhancements. Our success depends in large part on our ability to identify and market products that meet the needs of customers in that marketplace. In order to satisfy customer demand and to obtain favorable purchasing discounts, we have and may continue to carry increased inventory levels of certain products. By doing so, we are subject to the increased risk of inventory obsolescence. Also, in order to implement our business strategy, we intend to continue, among other things, placing larger than typical inventory stocking orders of selected products and increasing our participation in first-to-market purchase opportunities. We may also, from time to time, make large inventory purchases of certain end-of-life products, which would increase the risk of inventory obsolescence. In addition, we sometimes acquire special purchase products without return privileges. For these and other reasons, we may not be able to avoid losses related to obsolete inventory. Manufacturers have limited return rights and have taken steps to reduce their inventory exposure by supporting “configure-to-order” programs authorizing distributors and resellers to assemble computer hardware under the manufacturers’ brands. These actions reduce the costs to manufacturers and shift the burden of inventory risk to resellers like us, which could negatively impact our business.
We are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected.
We extend credit to our customers for a significant portion of our net sales, typically on 30-day payment terms. We are subject to the risk that our customers may not pay for the products they have purchased, or may pay at a slower rate
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than we have historically experienced. This risk is heightened during periods of global or industry-specific economic downturn or uncertainty, during periods of rising interest rates or, in the case of public sector customers, during periods of budget constraints. Significant failures of customers to timely pay all amounts due to us could adversely affect our business, results of operations or cash flows.
We are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business.
Our future performance will depend to a significant extent upon the efforts and abilities of our senior executives and other key management personnel. The current environment for qualified management personnel in the computer products industry is very competitive, and the loss of service of one or more of these persons could have an adverse effect on our business. Our success and plans for future growth will also depend on our ability to hire, train, and retain skilled personnel in all areas of our business, especially sales representatives and technical support personnel. We may not be able to attract, train, and retain sufficient qualified personnel to achieve our business objectives.
Natural disasters, terrorism, and other circumstances could materially adversely affect our business.
Natural disasters, terrorism, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a negative effect on the Company, its suppliers, logistics providers, manufacturing vendors, and customers. Our business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, or political instability in particular economies and markets, such as may result in Europe or other geographies as a result of the ongoing conflict between Russia and Ukraine, and other hostile acts, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to deliver services or products to our customers, or to receive products from our suppliers, and create delays and inefficiencies in our supply chain. In the event of a natural disaster or other business interruption, significant recovery time and substantial expenditures could be required to resume operations and our financial condition, results of operations, and cash flows could be materially adversely affected.
Risks Related to Our Technology, Data and Intellectual Property
Cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.
Our business is heavily dependent upon information technology networks and systems. We have experienced attacks and attempted attacks that have generally been in the form of active intrusion attempts from the internet, passive vulnerability mapping from the internet, and internal malware and or phishing attempts delivered through user actions. Future internal or external attacks on our networks and systems could disrupt our normal operations centers and impede our ability to provide critical products and services to our customers and clients, subjecting us to liability under our contracts and damaging our reputation
Our business also involves the use, storage and transmission of proprietary information and sensitive or confidential data, including personal information about our employees, our clients and customers of our clients. While we take measures to protect the security of, and prevent unauthorized access to, our systems and personal and proprietary information, the security controls for our systems, as well as other security practices we follow, may not prevent improper access to, or disclosure of, personally identifiable or proprietary information. Furthermore, the evolving nature of threats to data security, in light of new and sophisticated methods used by criminals and cyberterrorists, including computer viruses, malware, phishing, misrepresentation, social engineering, and forgery make it increasingly challenging to anticipate and adequately mitigate these risks. The risk of cyber incidents could also be increased by cyberwarfare in connection with the ongoing conflict between Russia and Ukraine, including potential proliferation of malware from the conflict into systems unrelated to the conflict.
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Breaches in security could expose us, our supply chain, our customers or other individuals to significant disruptions, a risk of public disclosure, loss or misuse of this information. Security breaches could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, as well as the loss of existing or potential customers and damage to our brand and reputation. Moreover, media or other reports of perceived vulnerabilities in our network security or perceived lack of security within our environment, even if inaccurate, could adversely impact our reputation and materially impact our business. The cost and operational consequences of implementing further data protection measures could be significant. Such breaches, costs and consequences could adversely affect our business, results of operations, or cash flows.
Our business could be materially adversely affected by system failures, interruption, integration issues, or security lapses of our information technology systems or those of our third-party providers.
Our ability to effectively manage our business depends significantly on our information systems and infrastructure as well as, in certain instances those of our business partners and third-party providers. The failure of our current systems to operate effectively or to integrate with other systems, including integration of upgrades to better meet the changing needs of our customers, could result in transaction errors, processing inefficiencies, and the loss of sales and customers. In addition, cybersecurity threats are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to company or customer data, denial of service attacks, the processing of fraudulent transactions, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. In our case, these attacks and attempted attacks have generally been in the form of active intrusion attempts from the internet, passive vulnerability mapping from the internet, and internal malware and or phishing attempts delivered through user actions. Although we have in place various processes, procedures, and controls to monitor and mitigate these threats, these measures may not be sufficient to prevent a material security threat or mitigate these risks for our customers. If any of these events were to materialize, they could lead to disruption of our operations or loss of sensitive information as well as subject us to regulatory actions, litigation, or damage to our reputation, and could have a material adverse effect on our financial position, results of operations, and cash flows. Similar risks exist with respect to our business partners and third-party providers. As a result, we are subject to the risk that the activities of our business partners and third-party providers may adversely affect our business even if an attack or breach does not directly impact our systems.
We rely on the continued development of electronic commerce and Internet infrastructure development.
We continue to have increasing levels of sales made through our e-commerce sites. The on-line experience for our clients continues to improve, but the competitive nature of the e-commerce channel also continues to increase. Growth of our overall sales is dependent on customers continuing to expand their on-line purchases in addition to traditional channels to purchase products and services. We cannot accurately predict the rate at which on-line purchases will expand.
Our success in growing our Internet business will depend in large part upon our development of an increasingly sophisticated e-commerce experience and infrastructure. Increasing customer sophistication requires that we provide additional website features and functionality in order to be competitive in the marketplace and maintain market share. We will continue to iterate our website features, but we cannot predict future trends and required functionality or our adoption rate for customer preferences. As the number of on-line users continues to grow, such growth may impact the performance of our existing Internet infrastructure, which would adversely impact our business.
We could experience Internet and other system failures which would interfere with our ability to process orders.
We depend on the accuracy and proper use of our management information systems, including our telephone system. Many of our key functions depend on the quality and effective utilization of the information generated by our management information systems, including:
| our ability to purchase, sell, and ship products efficiently and on a timely basis; |
| our ability to manage inventory and accounts receivable collection; and |
| our ability to maintain operations. |
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Our management information systems require continual upgrades to most effectively manage our operations and customer database. Although we maintain some redundant systems, with full data backup, a significant component of our computer and telecommunications hardware is located in a single facility in New Hampshire, and a substantial interruption in our management information systems or in our telephone communication systems, including those resulting from extreme weather and natural disasters, as well as power loss, telecommunications failure, or similar events, would substantially hinder our ability to process customer orders and thus could have a material adverse effect on our business.
Privacy concerns with respect to list development and maintenance may materially adversely affect our business.
Should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill
We mail catalogs and other intangibles.promotional materials to names in our customer database and to potential customers whose names we obtain from rented or exchanged mailing lists. Public concern regarding the protection of personal information has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny. Legislation enacted limiting or prohibiting the use of rented or exchanged mailing lists could negatively affect our business.
Risks Related to Regulatory and Legal Matters
We test goodwill for impairment each yearare exposed to risks from legal proceedings and more frequently if potential impairment indicators arise. Although the fair value of our Business Solutions and Enterprise Solutions reporting units substantially exceeded their carrying value at our annual impairment test, should the financial performance of a reporting unit not meet expectations due to the economy or otherwise, we would likely adjust downward expected future operating results and cash flows. Such adjustmentaudits, which may result in a determinationsubstantial costs and expenses or interruption of our normal business operations.
We are party to various legal proceedings that arise in the carrying valueordinary course of goodwillour business, which include commercial, employment, tort and other intangibles forlitigation.
We are subject to intellectual property infringement claims against us in the ordinary course of our business, either because of the products and services we sell or the business systems and processes we use to sell such products and services, in the form of cease-and-desist letters, licensing inquiries, lawsuits and other communications and demands. In our industry, such intellectual property claims have become more frequent as the complexity of technological products and the intensity of competition in our industry have increased. Increasingly, many of these assertions are brought by non-practicing entities whose principal business model is to secure patent licensing revenue, but we may also be subject to demands from inventors, competitors or other patent holders who may seek licensing revenue, lost profits and/or an injunction preventing us from engaging in certain activities, including selling certain products or services.
We also are subject to proceedings, investigations and audits by federal, state, international, national, provincial and local authorities, including as a reporting unit exceeds its fair value. This determination may in turn requireresult of our sales to governmental entities. We also are subject to audits by various vendor partners and large customers, including government agencies, relating to purchases and sales under various contracts. In addition, we are subject to indemnification claims under various contracts.
Current and future litigation, infringement claims, governmental proceedings and investigations, audits or indemnification claims that we record a significant non-cash chargeface may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. In addition, these matters could lead to earnings to reduceincreased costs or interruptions of our normal business operations. Litigation, infringement claims, governmental proceedings and investigations, audits or indemnification claims involve uncertainties and the $73.6 million aggregate carrying amounteventual outcome of goodwill held byany such matter could adversely affect our Business Solutions and Enterprise Solutions reporting units, resulting in a negative effect on ourbusiness, results of operations.operations or cash flows.
The failure to comply with our public sector contracts could result in, among other things, fines or liabilities.
Revenues from the Public Sector Solutions segment are derived from sales to federal, state, and local government departments and agencies, as well as to educational institutions, through various contracts and open market sales. Government contracting is a highly regulated area. Noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment, or ineligibility from doing business with the government. Our current arrangements with these government agencies allow them to cancel orders with little or no
21
notice and do not require them to purchase products from us in the future. The effect of any of these possible actions by any government department or agency could adversely affect our financial position, results of operations, and cash flows.
We acquire a majority of our products for resale from a limited number of vendors. The loss of any one of these vendors could have a material adverse effect on our business.
We acquire products for resale both directly from manufacturers and increasingly indirectly through distributors and other sources. The five vendors supplying the greatest amount of goods to us constituted 59% of our total product purchases in the year ended December 31, 2018 and 61% and 59% in 2017 and 2016, respectively. Among these five suppliers, product purchases from Ingram, our largest supplier, accounted for approximately 22% of our total product purchases in both 2018 and 2017 and 21% in 2016. Purchases from Synnex comprised 12%, 12%, and 13% of our total product purchases in 2018, 2017, and 2016, respectively. Purchases from Tech Data comprised of 10% of our total product purchases in 2018 and 11% and 8% in 2017 and 2016, respectively. Purchases from HP accounted for approximately 7% of our total product purchases in 2018 and 11% and 9% in 2017 and 2016, respectively. No other vendor supplied more than 10% of our total product purchases in 2018, 2017, or 2016. If we were unable to acquire products from Ingram, Synnex, HP or Tech Data, we could experience a short-term disruption in the availability of products, and such disruption could have a material adverse effect on our results of operations and cash flows.
Products manufactured by HP represented approximately 18% of our net sales in 2018 and approximately 20% in both 2017 and 2016. We believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on our results of operations and cash flows.
Substantially all of our contracts and arrangements with our vendors that supply significant quantities of products are terminable by such vendors or us without notice or upon short notice. Most of our product vendors provide us with trade credit, of which the net amount outstanding at December 31, 2018 was $201.6 million. Termination, interruption,
13
or contraction of relationships with our vendors, including a reduction in the level of trade credit provided to us, could have a material adverse effect on our financial position.
Some product manufacturers either do not permit us to sell the full line of their products or limit the number of product units available to national solutions providers such as us. An element of our business strategy is to continue increasing our participation in first-to-market purchase opportunities. The availability of certain desired products, especially in the direct marketing channel, has been constrained in the past. We could experience a material adverse effect to our business if we are unable to source first-to-market purchases or similar opportunities, or if significant availability constraints reoccur.
We are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry.
The market for IT products is characterized by rapid technological change and the frequent introduction of new products and product enhancements. Our success depends in large part on our ability to identify and market products that meet the needs of customers in that marketplace. In order to satisfy customer demand and to obtain favorable purchasing discounts, we have and may continue to carry increased inventory levels of certain products. By so doing, we are subject to the increased risk of inventory obsolescence. Also, in order to implement our business strategy, we intend to continue, among other things, placing larger than typical inventory stocking orders of selected products and increasing our participation in first-to-market purchase opportunities. We may also, from time to time, make large inventory purchases of certain end‑of‑life products, which would increase the risk of inventory obsolescence. In addition, we sometimes acquire special purchase products without return privileges. For these and other reasons, we may not be able to avoid losses related to obsolete inventory. Manufacturers have limited return rights and have taken steps to reduce their inventory exposure by supporting “configure‑to-order” programs authorizing distributors and resellers to assemble computer hardware under the manufacturers’ brands. These actions reduce the costs to manufacturers and shift the burden of inventory risk to resellers like us, which could negatively impact our business.
We are dependent on key personnel.
Our future performance will depend to a significant extent upon the efforts and abilities of our senior executives and other key management personnel. The current environment for qualified management personnel in the computer products industry is very competitive, and the loss of service of one or more of these persons could have an adverse effect on our business. Our success and plans for future growth will also depend on our ability to hire, train, and retain skilled personnel in all areas of our business, especially sales representatives and technical support personnel. We may not be able to attract, train, and retain sufficient qualified personnel to achieve our business objectives.
The methods of distributing IT products are changing, and such changes may negatively impact us and our business.
The manner in which IT hardware and software is distributed and sold is changing, and new methods of distribution and sale have emerged, including distribution through cloud-based and SaaS solutions. In addition, hardware and software manufacturers have sold, and may intensify their efforts to sell, their products directly to end users. From time to time, certain manufacturers have instituted programs for the direct sales of large order quantities of hardware and software to certain major corporate accounts. These types of programs may continue to be developed and used by various manufacturers. Some of our vendors, including Apple, Dell, HP, and Lenovo, currently sell some of their products directly to end users and have stated their intentions to increase the level of such direct sales. In addition, manufacturers may attempt to increase the volume of software products distributed electronically to end users. An increase in the volume of products sold through or used by consumers of any of these competitive programs, or our inability to effectively adapt our business to increased electronic distribution of products and services to end users could have a material adverse effect on our results of operations.
14
We depend heavily on third-party shippers to deliver our products to customers.
Many of our customers elect to have their purchases shipped by an interstate common carrier, such as UPS or FedEx Corporation. A strike or other interruption in service by these shippers could adversely affect our ability to market or deliver products to customers on a timely basis.
Natural disasters, terrorism, and other circumstances could materially adversely affect our business.
Natural disasters, terrorism, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a negative effect on the Company, its suppliers, logistics providers, manufacturing vendors, and customers. Our business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to deliver services or products to our customers, or to receive products from our suppliers, and create delays and inefficiencies in our supply chain. In the event of a natural disaster or other business interruption, significant recovery time and substantial expenditures could be required to resume operations and our financial condition, results of operations, and cash flows could be materially adversely affected.
We may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers.
Shipping costs are a significant expense in the operation of our business. Increases in postal or shipping rates could significantly impact the cost of shipping customer orders and mailing our catalogs. Postage prices and shipping rates increase periodically, and we have no control over future increases. We have a long-term contract with UPS, and believe that we have negotiated favorable shipping rates with our carriers. While we generally invoice customers for shipping and handling charges, we may not be able to pass on to our customers the full cost, including any future increases in the cost, of commercial delivery services, which would adversely affect our business.
We rely on the continued development of electronic commerce and Internet infrastructure development.
We continue to have increasing levels of sales made through our e-commerce sites. The on-line experience for our clients continues to improve, but the competitive nature of the e-commerce channel also continues to increase. Growth of our overall sales is dependent on customers continuing to expand their on-line purchases in addition to traditional channels to purchase products and services. We cannot accurately predict the rate at which on-line purchases will expand.
Our success in growing our Internet business will depend in large part upon our development of an increasingly sophisticated e-commerce experience and infrastructure. Increasing customer sophistication requires that we provide additional website features and functionality in order to be competitive in the marketplace and maintain market share. We will continue to iterate our website features, but we cannot predict future trends and required functionality or our adoption rate for customer preferences. As the number of on-line users continues to grow, such growth may impact the performance of our existing Internet infrastructure.
We face uncertainties relating to unclaimed property and the collection of state sales and use tax.
We collect and remit sales and use taxes in states in which we have either voluntarily registered or have a physical presence. Various states have sought to impose on direct marketers the burden of collecting state sales and use taxes on the sales of products shipped to their residents. Many states have adopted rules that require companies and their affiliates to register in those states as a condition of doing business with those state agencies. Our three sales companies are registered in substantially all states, however, if a state were to determine that our earlier contacts with that state exceeded the constitutionally permitted contacts, the state could assess a tax liability relating to our prior year sales. Various states have from time-to-timetime to time initiated unclaimed property audits of our company escheatment practices. A multi-state unclaimed property audit continues
Risks Related to Our Common Stock
Our common stock price may be volatile and may decline regardless of our operating performance, and holders of our common stock could lose a significant portion of their investment.
The market price for our common stock may be volatile. Our stockholders may not be able to resell their shares of common stock at or above the price at which they purchased such shares, due to fluctuations in process,the market price of our common stock, which may be caused by a number of factors, many of which we cannot control, including the risk factors described in this Annual Report on Form 10-K and total accruals for unclaimed property aggregated $1.0 million at December 31, 2018.
the following:
| • | changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of securities analysts to maintain coverage of our common stock; |
| • | downgrades by any securities analysts who follow our common stock; |
| • | future sales of our common stock by our officers, directors and significant stockholders; |
| • | market conditions or trends in our industry or the economy as a whole; |
| • | investors’ perceptions of our prospects; |
| • | announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and |
| • | changes in key personnel. |
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Privacy concerns with respect to list development and maintenance may materially adversely affect our business.
We mail catalogs and other promotional materials to namesequity securities of many companies, including companies in our customer databaseindustry. In the past, securities class action litigation has followed periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and to potential customers whose namesour resources and the attention of management could be diverted from our business.
In the future, we obtain from rentedmay also issue our securities in connection with investments or exchanged mailing lists. Public concern regarding the protectionacquisitions. The number of personal information has subjected the rentalshares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock and use of customer mailing lists and other customer information to increased scrutiny. Legislation enacted limiting or prohibiting the use of rented or exchanged mailing lists could negatively affectdepress our business.stock price.
We are controlled by twoone principal stockholders.
stockholder.
Patricia Gallup, and David Hall, our two principal stockholders,stockholder, beneficially ownowned or control,controlled, in the aggregate, approximately 56% of the outstanding shares of our common stock as of December 31, 2018.2021. Because of theirher beneficial stock ownership, these stockholdersthe stockholder can continue to elect the members of the Board of Directors and decide all matters requiring stockholder approval at a meeting or by a written consent in lieu of a meeting. Similarly, such stockholdersstockholder can control decisions to adopt, amend, or repeal our charter and our bylaws, or take other actions requiring the vote or consent of our stockholders and prevent a takeover of us by one or more third parties, or sell or otherwise transfer their stock to a third party, which could deprive our stockholders of a control premium that might otherwise be realized by themher in connection
22
with an acquisition of our Company. Such control may result in decisions that are not in the best interest of our unaffiliated public stockholders. In connection with our initial public offering, the principal stockholders placed substantially all shares of common stock beneficially owned by them into a voting trust, pursuant to which they are required to agree as to the manner of voting such shares in order for the shares to be voted. Such provisions could discourage bids for our common stock at a premium as well as have a negative impact on the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
We lease our corporate headquarters located at 730 Milford Road, Merrimack, New Hampshire 03054-4631, from an affiliated company, G&H Post, which is related to us through common ownership. The lease term ended in November 2018, and the Company is currently in the process of negotiating an amendment to extend the lease term. We expect that an extension to the lease will be available at market terms. In addition to the rent payable under the facility lease, we are required to pay real estate taxes, insurance, and common area maintenance charges. The lease has been recorded as an operating leasea right-of-use asset in the financial statements.
We also lease an office facility adjacent to our corporate headquarters from the same affiliated company, G&H Post. The lease term ended in July 2018, but the CompanyThis facility is currently in the process of negotiating an amendment to extend the lease term. We expect that an extension to the lease will be available at market terms.used by our Public Sector Segment. The lease requires us to pay our proportionate share of real estate taxes and common area maintenance charges as either additional rent or directly to third parties and also to pay insurance premiums for the leased property. The lease has been recorded as an operating leasea right-of-use asset in the financial statements.
In August 2014, we entered into a ten-yearWe lease for a facility in Wilmington, Ohio, which houses our distribution and order fulfillment operations.operations and services all three of our business segments. We also operate sales and support offices throughout the United States and lease facilities at these locations. These leased facilities are utilized by all three of our business segments. Leasehold improvements associated with these properties are amortized over the terms of the leases or their useful lives, whichever is shorter. We believe that our physical properties will be sufficient to support our anticipated needs through the next twelve months and beyond.
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We are subject to audits by states on sales and income taxes, unclaimed property, employment matters, and other assessments. While management believes that known and estimated liabilities have been adequately provided for, it is too early to determine the ultimate outcome of such audits, as formal assessments have not been finalized. Additional liabilities for this and other audits could be assessed, and such outcomes could have a material, negative impact on our financial position, results of operations, and cash flows.
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, theThe outcome of such matters is not expected to have a material effect on our business, financial position, results of operations, or cash flows.
In December 2018, we executed a favorable $3.0 million cash resolution of a contract dispute that arose in 2017. The cash payment was received on January 4, 2019, and the gain, net of costs incurred of $0.7 million, is included in “Other Income” in the consolidated statements of income for the year ended December 31, 2018. The cash received is unrelated to the existing contract. We included the $3.0 million owed to us in “Other Assets” as of December 31, 2018.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of PC Connection
Our executive officers and their ages as of February 7, 2019 are as follows:
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Patricia Gallup is our co-founder and has served as Chair of our Board of Directors since September 1994, and as Chief Administrative Officer since August 2011. Ms. Gallup has served as a member of our executive management team since 1982.
Timothy McGrath has served as our Chief Executive Officer since August 2011, and as President since May 2010. Mr. McGrath has served as a member of our executive management team since he joined the Company in 2005.
Stephen Sarno has served as our Chief Financial Officer and as a member of our executive management team since he joined the Company in the spring of 2018. Prior to joining Connection, Mr. Sarno served as Chief Financial Officer of Wyless, Inc., a privately held international provider of wireless data communication services, beginning in January 2015, and as Chief Accounting Officer of Exa Corporation, a publicly-traded global developer and distributor of computer-aided engineering software, beginning in October 2012.
1723
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock commenced trading on March 3, 1998, on the Nasdaq Global Select Market and trades today under the symbol “CNXN”. As of February 4, 2019,March 11, 2022, there were 26,395,68326,260,139 shares of our common stock outstanding, held by approximately 4741 stockholders of record. This figure does not include an estimate of the number of beneficial holders whose shares are held of record by brokerage firms.
Dividends
In 2018,2021, we declared a special cash dividend of $1.00 per share. The total cash payment of $26.2 million was made on December 3, 2021 to stockholders of record at the close of business on November 18, 2021. In 2020, we declared a special cash dividend of $0.32 per share. The total cash payment of $8.5$8.4 million was made on January 11, 201929, 2021 to stockholders of record at the close of business on December 28, 2018. In 2017, we declared a special cash dividend of $0.34 per share. The total cash payment of $9.1 million was made on January 12, 2018 to stockholders of record at the close of business on December 29, 2017. We have no current plans to pay additional cash dividends on our common stock in the foreseeable future,2021. The declaration and declarationpayment of any future cash dividends is at the discretion of our Board of Directors and will depend upon our financial position, strategic plans, and general business conditions. conditions and any other factors deemed relevant by our Board of Directors.
Share Repurchase Authorization
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended December 31, 2021.
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ISSUER PURCHASES OF EQUITY SECURITIES | | ||||||||||
| | | | | | | Total Number of | | Approximate Dollar Value | | |
| | | | | | Shares Purchased as | | of Shares that May Yet Be | | ||
| | Total Number | | | | Part of Publicly | | Purchased Under the Plans | | ||
| | of Shares | | Average Price Paid | | Announced Plans or | | or Programs | | ||
Period |
| Purchased |
| Per Share |
| Programs |
| (in thousands) (1) | | ||
10/01/21-10/31/21 | | — | | $ | — | | — | | $ | 12,692 | |
11/01/21-11/30/21 | | — | | | — | | — | | $ | 12,692 | |
12/01/21-12/31/21 | | — | | | — | | — | | $ | 12,692 | |
| | — | | $ | — | | — | | | | |
(1) In 2001, our Board of Directors authorized the spending of up to $15.0 million to repurchase shares of our common stock. In 2014, our Board approved a newan amendment to the share repurchase program authorizing up to an additional $15.0 million in share repurchases, for a total authorized repurchase amount of $30.0 million. We consider block repurchases directly from larger stockholders, as well as open market purchases, in carrying out our ongoing stock repurchase program.
In 2018, we repurchased 0.5 million shares for $15.4 million under the Board-approved repurchase programs. As of December 31, 2018, we have repurchased an aggregate of 2.2 million shares for $27.6 million under our Board-approved repurchase programs.
On December 17, 2018, we announced that our Board approved a newan amendment to the share repurchase program authorizing up to $25.0 million in additional share repurchases. There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on or offAs of December 31, 2021, we have repurchased an exchange, or in privately negotiated transactions. We intend to complete the remaining 2001 and 2014aggregate of 2.6 million shares for $42.3 million under our Board-approved repurchase programs before repurchasing shares under the new program. The timing and amount of any share repurchases will be based on market conditions and other factors.programs. At December 31, 2018,2021, the maximum approximate dollar value of shares that may yet be purchased under Board-authorized programs is $27.4was $12.7 million.
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
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The following stock performance graph compares our annual percentage change in cumulative total stockholder return on shares of our common stock forover the period from January 1, 2013 through December 31, 2018past five years with the cumulative total return for (i)of companies comprising the Nasdaq Stock MarketNASDAQ Composite Index and (ii) the NasdaqNASDAQ US Benchmark Retail Trade Stocks (Peer Group) forTR Index. This presentation assumes that $100 was invested in shares of the period starting January 1, 2013 and
18
endingrelevant issuers on December 31, 2018. This graph assumes the investment of $100 on January 1, 2013 in our common stock and in each of the two Nasdaq indices,2016, and that dividends are reinvested.received were immediately invested in additional shares of our common stock. The graph plots the value of the initial $100 investment at one-year intervals for the fiscal years shown. The NASDAQ US Benchmark Retail TR Index replaces the CRSP NASDAQ Retail Trade Index in this analysis and going forward, as the CRSP Index data is no longer accessible. The CRSP index has been included with data through 2020.
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| Base Period |
| Years Ended |
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Company Name / Index |
| 13-Dec |
| 14-Dec |
| 15-Dec |
| 16-Dec |
| 17-Dec |
| 18-Dec |
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PC Connection, Inc. |
| 100.00 |
| 100.53 |
| 94.38 |
| 118.53 |
| 112.02 |
| 128.47 |
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Nasdaq Stock Market-Composite |
| 100.00 |
| 114.75 |
| 122.74 |
| 133.62 |
| 173.22 |
| 168.30 |
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Nasdaq Retail Trade (Peer Index) |
| 100.00 |
| 110.60 |
| 115.17 |
| 116.49 |
| 123.92 |
| 124.49 |
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| | Base Period | | Years Ended |
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Company Name / Index |
| Dec-16 |
| Dec-17 |
| Dec-18 |
| Dec-19 |
| Dec-20 |
| Dec-21 |
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PC Connection, Inc. |
| 100.00 |
| 94.51 | | 108.39 | | 182.17 | | 173.48 | | 162.67 | |
Nasdaq Stock Market-Composite |
| 100.00 |
| 129.64 | | 125.96 | | 172.18 | | 249.51 | | 304.85 | |
Nasdaq US Benchmark Retail TR Index |
| 100.00 |
| 124.68 | | 133.27 | | 167.14 | | 235.98 | | 280.54 | |
Nasdaq Retail Trade Index | | 100.00 | | 106.38 | | 106.87 | | 128.58 | | 152.43 | | - | |
Item 6. [Reserved]
1925
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this Annual Report on Form 10-K.
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| 2017 (2) |
| 2016 (2) |
| 2015 |
| 2014 |
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Consolidated Statement of Operations Data: |
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Net sales |
| $ | 2,699,489 |
| $ | 2,911,883 |
| $ | 2,692,592 |
| $ | 2,573,973 |
| $ | 2,463,339 |
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Cost of sales |
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| 2,288,403 |
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| 2,529,807 |
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| 2,321,435 |
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| 2,232,954 |
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| 2,139,950 |
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Gross profit |
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| 411,086 |
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| 382,076 |
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| 371,157 |
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| 341,019 |
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| 323,389 |
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Selling, general and administrative expenses |
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| 324,433 |
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| 300,913 |
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| 287,231 |
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| 262,465 |
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| 251,935 |
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Restructuring and other charges |
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| 967 |
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| 3,636 |
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| 3,406 |
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Income from operations |
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| 85,686 |
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| 77,527 |
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| 80,520 |
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| 78,554 |
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| 71,454 |
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Other income (expense), net |
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| 2,978 |
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| 98 |
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Income before taxes |
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| 88,664 |
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| 77,625 |
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| 80,453 |
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| 78,467 |
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| 71,368 |
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Income tax provision |
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| (24,072) |
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Net income |
| $ | 64,592 |
| $ | 54,857 |
| $ | 48,111 |
| $ | 46,827 |
| $ | 42,681 |
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Basic earnings per share |
| $ | 2.42 |
| $ | 2.05 |
| $ | 1.81 |
| $ | 1.77 |
| $ | 1.63 |
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Diluted earnings per share |
| $ | 2.41 |
| $ | 2.04 |
| $ | 1.80 |
| $ | 1.76 |
| $ | 1.61 |
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| 2017 |
| 2016 |
| 2015 |
| 2014 |
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Consolidated Balance Sheet Data: |
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Working capital |
| $ | 409,380 |
| $ | 368,080 |
| $ | 328,917 |
| $ | 330,848 |
| $ | 293,449 |
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Total assets |
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| 805,355 |
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| 747,851 |
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| 686,134 |
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| 639,074 |
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| 539,960 |
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Total stockholders’ equity |
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| 525,903 |
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| 482,252 |
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| 433,442 |
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| 392,451 |
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| 354,008 |
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Cash dividends declared per share |
| $ | 0.32 |
| $ | 0.34 |
| $ | 0.34 |
| $ | 0.40 |
| $ | 0.40 |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our management’s discussionThe following Management’s Discussion and analysisAnalysis of our financial conditionFinancial Condition and Results of Operations (“MD&A”) is intended to promote understanding of the results of operations includeand financial conditions. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section discusses the results of operations for the year ended December 31, 2021 and year-to-year comparison between the year ended December 31, 2021 and the year ended December 31, 2020. Discussion of the year ended December 31, 2020 and the year-to-year comparison between the year ended December 31, 2020 and the year ended December 31, 2019 can be found in Part II, Item 7 “Management’s Discussions and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020. Our MD&A also includes the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See “Cautionary Note Concerning Forward-Looking Statements” and “Item 1A. Risk Factors.”
OVERVIEW
We are a national solutions provider ofFortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology. Our dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide 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, solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We alsoOur Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center, or TIDC, with ISO 9001:2015 certified technical configuration lab offer end-to-end services involvingrelated to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. We operateOur GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through three sales segments,our network of incountry suppliers in over 150 countries.
The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which serve primarily: (a)provide IT solutions and services to small- to medium-sized businesses, or SMBs, enterprise, and public sector markets.
Financial results for each of our segments are included in our Business Solutions segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Enterprise Solutions segment, through our MoreDirect subsidiary, and (c) federal, state, and local government and educational institutions, in our Public Sector Solutions segment, through our GovConnection subsidiary.
the financial statements attached hereto. We generate sales primarily through (i)outbound telemarketing and field sales contacts by account managerssales representatives focused on the business, education,educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We seekoffer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, and VMware, and we partner with more than 2,500 suppliers. We are able to recruit, retain, and increaseleverage our state-of-the art logistic capabilities to rapidly ship product to customers, typically 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.same day the order is received.
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, sold or 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 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
26
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 decline.be negatively impacted.
21
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
As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future. However, global supply chain disruptions have limited our ability to acquire products in a timely manner and we anticipate these global supply chain challenges will persistent through the first half of 2022. In October 2017,response to the delays we beganare experiencing in acquiring products, we increased our inventory levels during the year ended December 31, 2021 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. Relatedly, we also experienced an increase in our backlog as supply global supply chain challenges delayed our ability to fulfil customer orders. We continue to monitor the effects on our customers, suppliers, and the economy as a two-year initiativewhole and will continue to upgradeadjust our IT infrastructurebusiness practices, as necessary, to respond to the changing demand for, which we expectand supply of, our related capital investments to range from $6.0 to $7.0 million over the next six to nine months, when we expect to have completed the initiative. products.
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:
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| Years Ended December 31, |
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| 2018 |
|
| 2017 (1) |
|
| 2016 (1) |
|
Net sales (in millions) |
| $ | 2,699.5 |
| $ | 2,911.9 |
| $ | 2,692.6 |
|
Gross margin |
|
| 15.2 | % |
| 13.1 | % |
| 13.8 | % |
Selling, general and administrative expenses |
|
| 12.0 |
|
| 10.3 |
|
| 10.7 |
|
Income from operations |
|
| 3.2 |
|
| 2.7 |
|
| 3.0 |
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| | | | | | | | | | |
| | Years Ended December 31, |
| |||||||
| | | 2021 | | | 2020 |
| | 2019 | |
Net sales (in millions) | | $ | 2,892.6 | | $ | 2,590.3 | | $ | 2,820.0 | |
Gross margin | | | 16.1 | % | | 16.2 | % | | 16.0 | % |
Selling, general and administrative expenses | |
| 12.7 | |
| 13.3 | |
| 12.0 | |
Income from operations | |
| 3.3 | |
| 2.8 | |
| 4.0 | |
Net sales of $2,699.5$2,892.6 million in 20182021 reflected a decreasean increase of $212.4$302.3 million compared to 2017, primarily as a result of the adoption of new revenue recognition guidance under ASC 606,2020, which was not applied todriven by higher net sales reported in prior years. The primary impactacross all of the new guidance was an increase in certain revenue transactions reported on a net basis. Had the year been reported under previous revenue recognition guidance, net sales would have been $3,104.2 million, reflecting an increase of 6.6% compared to the prior year. Gross profit dollars increased year-over-year by $29.0 million due to higher invoice selling margins realized on increased sales of software and higher margin advanced solution sales.our business segments. The increase in SG&A expenses, both in dollars and as a percentage of net sales was primarily relateddriven by the growing hybrid work trend resulting in higher demand for mobility products. Additionally, we saw revenue growth in our manufacturing and healthcare vertical markets compared to incremental2020. Gross profit increased year-over-year by $45.8 million, primarily due to the increase of net sales. SG&A expenses increased year-over-year by $22.3 million, driven primarily by increased personnel costs, includingcost of $21.2 million associated with the increased variable compensation associated with due to the
27
higher levels of gross profitsprofit and increased investments in solution selling. SG&A expenses as a percentage of net sales was 12.0% for the year-ended December 31, 2018, which reflects an increase of 12 basis points resulting from the factors previously noted, and an increase of 156 basis points related to the adoption of new revenue guidance under ASC 606.employee benefit costs. Operating income in 2018 increased year-over-year both in dollars and as a percentage of net sales by $8.2$24.4 million and 50 basis points, respectively, primarily as a result of the gross profits increasing at a higher rate than the SG&A expenses.increase in net sales.
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Sales Distribution
The following table sets forth our percentage of net sales by sales segment and product mix:
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| Years Ended December 31, |
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| 2018 (1) |
| 2017 (2) |
| 2016 (2) |
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| | Years Ended December 31, |
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| | 2021 |
| 2020 |
| 2019 |
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Sales Segment |
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| | | | | | | |
Enterprise Solutions |
| 43 | % | 39 | % | 38 | % | | 43 | % | 43 | % | 42 | % |
Business Solutions |
| 38 |
| 40 |
| 40 |
| | 38 |
| 37 |
| 38 | |
Public Sector Solutions |
| 19 |
| 21 |
| 22 |
| | 19 |
| 20 |
| 20 | |
Total |
| 100 | % | 100 | % | 100 | % | | 100 | % | 100 | % | 100 | % |
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Product Mix |
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| | | | | | | |
Notebooks/Mobility |
| 26 | % | 22 | % | 23 | % | | 38 | % | 32 | % | 29 | % |
Desktops | | 9 | | 10 | | 12 | | |||||||
Software | | 10 | | 11 | | 12 | | |||||||
Servers/Storage | | 7 | | 8 | | 8 | | |||||||
Net/Com Product | | 7 |
| 8 |
| 8 | | |||||||
Displays and sound | | 10 |
| 8 |
| 9 | | |||||||
Accessories |
| 13 |
| 10 |
| 11 |
| | 12 |
| 14 |
| 13 | |
Software |
| 12 |
| 23 |
| 20 |
| |||||||
Desktops |
| 11 |
| 11 |
| 10 |
| |||||||
Servers/Storage |
| 11 |
| 9 |
| 10 |
| |||||||
Displays and sound |
| 9 |
| 8 |
| 8 |
| |||||||
Net/Com Product |
| 8 |
| 7 |
| 8 |
| |||||||
Other Hardware/Services |
| 10 |
| 10 |
| 10 |
| | 7 |
| 9 |
| 9 | |
Total |
| 100 | % | 100 | % | 100 | % | | 100 | % | 100 | % | 100 | % |
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Gross Profit Margins
The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three years:
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| Years Ended December 31, |
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| 2018 |
| 2017 |
| 2016 |
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Sales Segment |
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Business Solutions |
| 18.0 | % | 15.3 | % | 15.8 | % |
Enterprise Solutions |
| 13.9 |
| 12.3 |
| 12.8 |
|
Public Sector Solutions |
| 12.7 |
| 10.5 |
| 11.7 |
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Total Company |
| 15.2 | % | 13.1 | % | 13.8 | % |
| | | | | | | |
| | Years Ended December 31, |
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| | 2021 |
| 2020 |
| 2019 |
|
Sales Segment | | | | | | | |
Enterprise Solutions | | 14.5 | % | 14.5 | % | 14.4 | % |
Business Solutions | | 19.2 |
| 19.4 |
| 19.1 | |
Public Sector Solutions | | 13.3 |
| 13.8 |
| 13.6 | |
Total Company | | 16.1 | % | 16.2 | % | 16.0 | % |
Cost of Sales
Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances.
2328
Operating Expenses
The following table reflects our moremost significant operating expenses for the last three years (in millions of dollars):
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| 2018 |
| 2017 (1) |
| 2016 (1) |
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| | Years Ended December 31, |
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($ in millions) | | 2021 |
| 2020 |
| 2019 |
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Personnel costs |
| $ | 249.2 |
| $ | 232.0 |
| $ | 224.4 |
| | $ | 277.8 | | $ | 256.6 | | $ | 257.8 | |
Advertising, net |
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| 16.2 |
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| 14.4 |
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| 16.1 |
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Advertising | |
| 15.8 | |
| 14.0 | |
| 19.4 | | ||||||||||
Service contracts/subscriptions | | | 17.3 | |
| 15.0 | |
| 12.9 | | ||||||||||
Professional fees | |
| 16.4 | |
| 19.4 | |
| 10.6 | | ||||||||||
Depreciation and amortization | |
| 12.2 | |
| 13.6 | |
| 13.3 | | ||||||||||
Facilities operations |
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| 16.9 |
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| 15.0 |
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| 14.0 |
| |
| 8.3 | |
| 8.5 | |
| 8.5 | |
Professional fees |
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| 8.6 |
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| 8.8 |
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| 7.7 |
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Credit card fees |
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| 6.9 |
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| 7.2 |
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| 6.9 |
| |
| 7.0 | |
| 6.8 | |
| 6.6 | |
Depreciation and amortization |
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| 14.1 |
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| 11.8 |
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| 10.5 |
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Other, net |
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| 12.5 |
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| 11.7 |
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| 7.6 |
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Other | |
| 13.3 | |
| 11.8 | |
| 9.5 | | ||||||||||
Total SG&A expense |
| $ | 324.4 |
| $ | 300.9 |
| $ | 287.2 |
| | $ | 368.1 | | $ | 345.7 | | $ | 338.6 | |
As a percentage of net sales |
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| 12.0 | % |
| 10.3 | % |
| 10.7 | % | | | 12.7 | % | | 13.3 | % | | 12.0 | % |
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Personnel costs increased in 2018 compared to 2017 primarily due to increased variable compensation associated with higher gross profits and changes in the stock price and increases in other employee-related expenses. Depreciation and amortization increased in 2018 and 2017 due to investments in our IT infrastructure and the amortization of intangible assets added in 2016 with our two acquisitions.
Personnel costs increased in 2017 compared to 2016 primarily due to investments in solutions sales personnel, increased variable compensation associated with higher gross profits, and the inclusion of the pro-rated personnel costs of Softmart and GlobalServe beginning on their respective May and October 2016 acquisition dates.
Restructuring and other charges
During 2018, we began separately presenting Restructuring and other charges.There were no restructuring related costs incurred for the year ended December 31, 2021. In the years ended December 31 2018, 2017,2020 and 2016,2019, we undertook a wide range of actions across the Companybusiness to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred restructuring and related costs of $1.0 million $0.9 million, and $3.4$0.7 million for the years ended December 31, 2018, 20172020 and 2016,2019, respectively.
24
YEAR-OVER-YEAR COMPARISONS
Year Ended December 31, 20182021 Compared to Year Ended December 31, 20172020
Net sales decreased increased by 7.3%11.7% to $2,699.5$2,892.6 million in 20182021 from $2,911.8$2,590.3 million in 2017.2020. Changes in net sales and gross profit by operating segment are shown in the following table (dollars in millions):
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| 2017 |
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| Amount |
| Net Sales |
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Sales: |
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| | 2021 | | 2020 | | |
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| | | |
| % of |
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| % of |
| % |
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| | Amount | | Net Sales | | Amount | | Net Sales | | Change |
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Net Sales: | | | | | | | | | | | | | | |||||||||||||
Enterprise Solutions | | $ | 1,249.5 | | 43.2 | % | $ | 1,115.6 | | 43.1 | % | 12.0 | % | |||||||||||||
Business Solutions |
| $ | 1,027.9 |
| 38.1 | % | $ | 1,158.6 |
| 39.8 | % | (11.3) | % | |
| 1,098.5 |
| 38.0 | |
| 966.0 |
| 37.3 |
| 13.7 | |
Enterprise Solutions |
|
| 1,165.1 |
| 43.2 |
|
| 1,131.8 |
| 38.9 |
| 2.9 |
| |||||||||||||
Public Sector Solutions |
|
| 506.5 |
| 18.8 |
|
| 621.4 |
| 21.3 |
| (18.5) |
| |
| 544.6 |
| 18.8 | |
| 508.7 |
| 19.6 |
| 7.1 | |
Total |
| $ | 2,699.5 |
| 100.0 | % | $ | 2,911.8 |
| 100.0 | % | (7.3) | % | | $ | 2,892.6 | | 100.0 | % | $ | 2,590.3 | | 100.0 | % | 11.7 | % |
Gross Profit: |
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| | | | | | | | | | | | | |
Enterprise Solutions | | $ | 180.6 | | 14.5 | % | $ | 161.7 | | 14.5 | % | 11.7 | % | |||||||||||||
Business Solutions |
| $ | 184.9 |
| 18.0 | % | $ | 177.8 |
| 15.3 | % | 4.0 | % | |
| 211.4 |
| 19.2 | |
| 187.0 |
| 19.4 |
| 13.0 | |
Enterprise Solutions |
|
| 161.6 |
| 13.9 |
|
| 139.0 |
| 12.3 |
| 16.3 |
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Public Sector Solutions |
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| 64.6 |
| 12.8 |
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| 65.3 |
| 10.5 |
| (1.1) |
| |
| 72.6 |
| 13.3 | |
| 70.1 |
| 13.8 |
| 3.5 | |
Total |
| $ | 411.1 |
| 15.2 | % | $ | 382.1 |
| 13.1 | % | 7.6 | % | | $ | 464.6 | | 16.1 | % | $ | 418.8 | | 16.2 | % | 10.9 | % |
| ● |
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29
| ● | Net |
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| ● |
| Net sales of |
Gross profit for 2021 increased year-over-year in dollars but gross margin slightly decreased, as explained below:
| ● | Gross profit for the Enterprise Solutions segment increased $18.9 million, or 11.7% year-over-year. This increase is primarily due to the |
Gross profit for 2018 increased year-over-year both in dollars and as a percentage of net sales (gross margin), as explained below:
| ● |
| Gross profit for the Business Solutions segment increased |
25
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| ● |
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| Gross profit for the Public Sector Solutions segment increased |
Selling, general and administrative expenses in 2018 increased both in dollars and as a percentage of net sales compared to the prior year. SG&A expenses attributable to our three operating segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions):
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| Years Ended December 31, |
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| 2018 |
| 2017 |
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| % of Net |
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| % of Net |
| % |
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| Amount |
| Sales |
| Amount (1) |
| Sales (1) |
| Change |
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Business Solutions |
| $ | 144.7 |
| 14.1 | % | $ | 136.7 |
| 11.8 | % | 5.9 | % |
Enterprise Solutions |
|
| 99.9 |
| 8.6 |
|
| 88.2 |
| 7.8 |
| 13.3 |
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Public Sector Solutions |
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| 66.7 |
| 13.2 |
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| 64.0 |
| 10.3 |
| 4.2 |
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Headquarters/Other, unallocated |
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| 13.1 |
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| 12.0 |
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| 9.2 |
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Total |
| $ | 324.4 |
| 12.0 | % | $ | 300.9 |
| 10.3 | % | 7.8 | % |
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26
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Income from operations increased by $8.2 million to $85.7 millionSG&A in 2018 compared to 2017. Income from operations as a percentage of net sales was 3.2% in 2018 compared to 2.7% in 2017. The increase in operating income resulted primarily from gross profits increasing at a higher rate than SG&A costs. The increase in operating income as a percentage of net sales resulted primarily from the increase in gross margin.
Restructuring and other charges. During 2018, we began presenting restructuring and other charges separately from SG&A expenses. These costs incurred in 2018, 2017, and 2016 were as follows:
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| Years Ended December 31, | |||||||
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| 2018 |
| 2017 |
| 2016 | |||
Employee separations |
| $ | 967.0 |
| $ | 639.6 |
| $ | 1,766.2 |
Acquisition costs |
|
| — |
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| — |
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| 569.9 |
Relocation expenses |
|
| — |
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| 83.5 |
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| 290.5 |
Re-branding costs |
|
| — |
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| — |
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| 595.5 |
Employee compensation |
|
| — |
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| 2,800.0 |
|
| — |
Other |
|
| — |
|
| 112.7 |
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| 184.0 |
Total restructuring and other charges |
| $ | 967.0 |
| $ | 3,635.8 |
| $ | 3,406.1 |
The net restructuring charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.
The net restructuring and other charges recorded in 2017 were primarily driven by a reduction in workforce at our Headquarters segment, along with costs related to the Softmart business, which was acquired in 2016, including expenses to retain certain key personnel brought over in the acquisition. Also in 2017, we incurred additional expense of $2.7 million related to a one-time cash bonus paid to all non-executive employees at the end of the year.
The net restructuring and other charges recorded in 2016 were primarily driven by a reduction in workforce after the Softmart acquisition and other employee severance expenses incurred throughout the business. We also incurred costs associated with the acquisitions and IT transitions of Softmart and GlobalServe, along with other costs associated with a company-wide rebranding campaign.
Income taxes. Our effective tax rate was 27.1% for the year-ended December 31, 2018, compared to 29.3% for the year-ended December 31, 2017. In December 2017, the U.S. Tax Cuts and Jobs Act was enacted, which among other changes, reduced the federal corporate income tax rate. This rate reduction, which took effect on January 1, 2018, required the revaluation of our net deferred tax liability. The revaluation resulted in the recording of an income tax benefit of $7.7 million for the fourth quarter of 2017. We expect our corporate income tax rate for 2019 to range from 27% to 29%.
27
Net income increased by $9.7 million to $64.6 million in 2018, from $54.9 million in 2017, which resulted from the increase in operating income combined with a lower effective tax rate in the current year.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net sales increased by 8.1% to $2,911.8 million in 2017 from $2,692.6 million in 2016. Changes in net sales and gross profit by operating segment are shown in the following table (dollars in millions):
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| Net Sales |
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Sales: |
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Business Solutions |
| $ | 1,158.6 |
| 39.8 | % | $ | 1,091.2 |
| 40.5 | % | 6.2 | % |
Enterprise Solutions |
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| 1,131.8 |
| 38.9 |
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| 1,012.0 |
| 37.6 |
| 11.8 |
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Public Sector Solutions |
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| 621.4 |
| 21.3 |
|
| 589.4 |
| 21.9 |
| 5.4 |
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Total |
| $ | 2,911.8 |
| 100.0 | % | $ | 2,692.6 |
| 100.0 | % | 8.1 | % |
Gross Profit: |
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Business Solutions |
| $ | 177.8 |
| 15.3 | % | $ | 172.4 |
| 15.8 | % | 3.2 | % |
Enterprise Solutions |
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| 139.0 |
| 12.3 |
|
| 129.6 |
| 12.8 |
| 7.3 |
|
Public Sector Solutions |
|
| 65.3 |
| 10.5 |
|
| 69.2 |
| 11.7 |
| (5.7) |
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Total |
| $ | 382.1 |
| 13.1 | % | $ | 371.2 |
| 13.8 | % | 2.9 | % |
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Gross profit for 2017 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:
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28
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Selling, general and administrative expenses in 20172021 increased in dollars but decreased as a percentage of net sales compared to the prior year. SG&A expenses attributable to our three operating segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions):
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| 2016 |
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| % of Net |
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| % |
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| Amount (1) |
| Sales (1) |
| Amount (1) |
| Sales (1) |
| Change |
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| | Years Ended December 31, | | |
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| | 2021 | | 2020 | | |
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| | | |
| % of Net |
| | |
| % of Net |
| % |
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| | | | | | | | | | | | | | |||||||||||||
| | Amount | | Sales | | Amount | | Sales | | Change |
| |||||||||||||||
Enterprise Solutions | | $ | 106.0 |
| 8.5 | % | $ | 102.2 |
| 9.2 | % | 3.7 | % | |||||||||||||
Business Solutions |
| $ | 136.7 |
| 11.8 | % | $ | 130.3 |
| 11.9 | % | 4.9 | % | | | 167.6 | | 15.3 | | | 154.5 | | 16.0 | | 8.5 | |
Enterprise Solutions |
|
| 88.2 |
| 7.8 |
|
| 86.6 |
| 8.6 |
| 1.8 |
| |||||||||||||
Public Sector Solutions |
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| 64.0 |
| 10.3 |
|
| 60.6 |
| 10.3 |
| 5.6 |
| |
| 77.5 |
| 14.2 | |
| 72.8 |
| 14.3 |
| 6.5 | |
Headquarters/Other, unallocated |
|
| 12.0 |
|
|
|
| 9.7 |
|
|
| 23.7 |
| |
| 17.0 | | | |
| 16.2 | | |
| 4.9 | |
Total |
| $ | 300.9 |
| 10.3 | % | $ | 287.2 |
| 10.7 | % | 4.8 | % | | $ | 368.1 | | 12.7 | % | $ | 345.7 | | 13.3 | % | 6.5 | % |
| ● |
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|
| ● |
| SG&A expenses for the Business Solutions segment increased in dollars but decreased as a percentage of net sales. The |
30
| million, including the higher variable compensation expenses resulting from the higher gross profit for the year ended December 31, 2021. The year-over-year increase in SG&A was also attributable to increased personnel costs and advertising costs in the amount of |
| ● |
| SG&A expenses for the |
| year-over-year SG&A increase. SG&A expenses as a percentage of net sales were 14.2 % for the Public Sector Solutions segment |
| ● |
| SG&A expenses for the Headquarters/Other group increased by $0.8 million primarily due to an increase in |
Income from operations decreased by $3.0 for the year ended December 31, 2021 increased to $96.5 million, to $77.5 million in 2017, compared to 2016.$72.1 million for the same period in the prior year, primarily due to the increases in net sales and gross profit, along with an increase in SG&A expense year-over-year. Income from operations as a percentage of net sales was 2.7% in 2017,increased to 3.3% for the year ended December 31, 2021, compared to 3.0%2.8% of net sales for the same period in 2016. The decrease in operating income resultedthe prior year, primarily fromdue to the increase in net sales and lower SG&A costs. The decrease in operating incomeexpenses as a percentage of net sales resulted primarily from the decrease in gross margin.year-over-year.
29
Restructuring and other chargesincurred in 2017 and 2016 are reflected in the table below. There were no such charges incurred in 2015.
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| Years Ended December 31, | ||||
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| 2017 |
| 2016 | ||
Employee separations |
| $ | 639.6 |
| $ | 1,766.2 |
Acquisition costs |
|
| — |
|
| 569.9 |
Relocation expenses |
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| 83.5 |
|
| 290.5 |
Re-branding costs |
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| — |
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| 595.5 |
Employee compensation |
|
| 2,800.0 |
|
| — |
Other |
|
| 112.7 |
|
| 184.0 |
Total restructuring and other charges |
| $ | 3,635.8 |
| $ | 3,406.1 |
The net restructuring and related charges recorded in 2017 were primarily driven by a reduction in workforce at our Headquarters segment. We also incurred relocation expenses related to the Softmart business, which was acquired in 2016, and expenses to retain certain key personnel brought over in the acquisition. Also in 2017, we incurred additional expense of $2.7 million related to a one-tie cash bonus paid to all non-executive employees at the end of the year.
The net restructuring and related charges recorded in 2016 were primarily driven by a reduction in workforce after the Softmart acquisition and other employee severance expenses incurred throughout the business. We also incurred costs associated with the acquisitions and IT transitions of Softmart and GlobalServe, along with other costs associated with a company-wide rebranding campaign.
Income taxes. Our effective tax rate was 29.3%27.6% for the year-ended December 31, 2021, compared to 23.8% for the year ended December 31, 2017, compared to 40.2%2020. Our provision for income taxes for the year ended December 31, 2016. In December 2017, the U.S. Tax Cuts2021 was $26.6 million, which included $0.3 million of discrete items mainly related to research and Jobs Act was enacted, which among other changes, reduced the federal corporate incomedevelopment tax rate. This rate reduction, which took effect on January 1, 2018, required the revaluation of our net deferred tax liability. The revaluation resultedcredits recognized in the recordingyear ended December 31, 2021. Our provision for income taxes for the year ended December 31, 2020 was $17.4 million, which included $2.9 million of andiscrete items mainly related to research and development tax credits recognized in the year ended December 31, 2020. The non-taxable life insurance gain reduced our effective tax rate by 0.3% for the year ended December 31, 2020.
Net income tax benefit of $7.7 increased by $14.1 million to $69.9 million for the fourth quarter of 2017.
Net income increased by $6.7 million to $54.9year ended December 31, 2021, from $55.8 million in 2017,the prior year, which resulted from $48.1 million in 2016, as the decreaseincrease in operating income was more than offset byin the decrease in income tax described above.current year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have historically used and expect to use in the future those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, repurchases of common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.
We believe that funds generated from operations, together with available credit under our bank line of credit, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. We expectmonths and beyond. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our capital needs for the next twelve months to consist primarilycustomers enhanced functionality.
31
We expect to meet our cash requirements for 20192022 and beyond through a combination of cash on hand, cash generated from operations, and borrowings on our bank line of credit, as follows:
| ● |
| Cash on Hand. At December 31, |
30
| ● |
| Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate a positive cash flow. |
| ● |
| Credit Facilities. As of December 31, |
Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, our cash flows from operations may be substantially affected. See also related risks listed under “Item 1A. Risk Factors.”
Summary Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the last three years (in millions of dollars):
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| 2016 |
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| | 2021 |
| 2020 |
| 2019 |
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Net cash provided by operating activities |
| $ | 86.8 |
| $ | 19.3 |
| $ | 33.6 |
| | $ | 57.8 | | $ | 36.1 | | $ | 36.6 | |
Net cash used in investing activities |
|
| (21.2) |
|
| (11.8) |
|
| (54.9) |
| |
| (8.7) | |
| (11.0) | |
| (25.7) | |
Net cash used in financing activities |
|
| (23.9) |
|
| (6.7) |
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| (9.7) |
| |
| (36.4) | |
| (19.5) | |
| (12.5) | |
Increase (decrease) in cash and cash equivalents |
| $ | 41.7 |
| $ | 0.8 |
| $ | (31.0) |
| | $ | 12.7 | | $ | 5.6 | | $ | (1.6) | |
Cash provided by operating activities increased $67.5 was $57.8 million in 2018.for the year ended December 31, 2021. Cash flow provided by operations induring the year ended December 31, 2021, resulted primarily from net income, before depreciationadding back other non-cash charges and amortization, a decreaseincreases in accounts payable and accrued expenses, which increased by $32.5 million for the year ended December 31, 2021, and was driven primarily by the timing of payments. These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in inventory of $65.7 million for the year ended December 31, 2021, primarily driven by the increase of inventory purchases for customer requested future rollouts and concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. Operating cash flow for the year ended December 31, 2020 resulted primarily from cash provided by net income prior to non-cash charges of $55.8 million and increases in account payables and accrued expenses of $43.1 million primarily due to the timing of payments. Those inflow of cash from operating activities were partially offset by increases in account receivable of $63.6 million for the year ended December 31, 2020.
In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable and an increase toplus days of supply in inventory minus days of purchases outstanding in accounts payable, partially offset by an increase in inventory. Accounts receivable decreased by $14.8 million frombased on a rolling three-month average. Components of our cash conversion cycle are as follows:
| | | | | | |
| | December 31, | ||||
(in days) | | 2021 | | 2020 | ||
Days of sales outstanding (DSO)(1) | | | 65 | | | 75 |
Days of supply in inventory (DIO)(2) | | | 28 | | | 23 |
Days of purchases outstanding (DPO)(3) | | | (38) | | | (44) |
32
Cash conversion cycle | | | 55 | | | 54 |
(1) Represents the prior year, which was net of a $14.6 million adjustment to reflect the cumulative impactrolling three-month average of the adoptionbalance of accounts receivable, net at the end of the new revenue recognition guidance under ASC 606. Daysperiod, divided by average daily net sales outstanding increased to 52for the same three-month period. Also incorporates components of other miscellaneous receivables.
(2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period.
(3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period.
The cash conversion cycle was 55 days at December 31, 2018, compared2021, which is increased in comparison to 48the cash conversion cycle 54 days at December 31, 2017. Excluding the impact of the adoption of ASC 606, days sales outstanding would have been decreased to 45 days at December 31, 2018. Accounts payable increased by $5.7 million from the prior year, which was net of a $0.1 million adjustment to reflect the cumulative impact of the adoption of the new revenue recognition guidance under ASC 606. Inventory increased from the prior year by $23.3 million, which was net of a $10.9 million adjustment to reflect the cumulative impact of the adoption of the new revenue recognition guidance under ASC 606. The remaining increase was the result of higher levels of inventory on-hand related to future backlog and an increase in shipments shipped but not received by our customers as of December 31, 2018 compared to December 31, 2017. Inventory turns, which measures the number of times inventory was sold and replaced during the year, decreased to 21 in 2018 compared to 24 in 2017. Excluding the impact from the adoption of ASC 606, inventory turns would have increased to 25 turns in 2018. Operating cash flow in 2017 resulted primarily from net income before depreciation and amortization and an increase in accounts payable, offset partially by an increase in accounts receivable and inventory. Operating cash flow in 2016 was primarily generated by net income before depreciation and amortization and a decrease in inventory, offset by an increase in accounts receivable.2020.
At December 31, 2018, we had $201.6 million in outstanding accounts payable. Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be financed by cash flows from operations or short-term borrowings under the line of credit. We believe we will be able to meet our obligations under our accounts payable with cash flows from operations and our existing line of credit.
31
Cash used in investing activities increased $9.4 for the year ended December 31, 2021 consisted of $10.3 million in 2018 compared to 2017. Cash used in investing activities represented $21.2 million in 2018,of purchases of property and equipment. These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure. In addition, in 2017 we began investments in an ongoing upgrade of our internal IT systems, which we expect to complete over the next six to nine months. Cash used to purchase property and equipment less proceeds from the sale of equipment amounted to $11.8 million in 2017, compared to $11.9 million in 2016. Thesefor capital expenditures were primarily related to capitalized internally-developed software in connection with investments in our IT infrastructure. The acquisitions of Softmart and GlobalServe represented a net use of cash of $31.9 million and $11.1 million, respectively, for the year ended December 31, 2016.2021 was partially offset by $1.5 million of cash proceeds from life insurance. Cash used in investing activities for the prior year consisted of $11.0 million purchases of property and equipment.
Cash used in financing activitiesincreased $17.2for the year ended December 31, 2021 compared to the prior year and consisted primarily of $34.6 million in 2018 compared to 2017. Financing usesspecial dividend payments. In the prior year period, financing activities consisted primarily of cash in 2018 included a $9.1$8.4 million payment of a special $0.34$0.32 per share dividend declared in December 2017 and paid in January 2018, and $15.4$10.2 million for the purchase of treasuretreasury shares. These outflows were partially offset by $1.2 million for the issuance of stock under the employee stock purchase plan. Financing uses of cash in 2017 included dividends of $9.0 million declared in December 2016 and paid in January 2017, and in 2016 included dividends of $10.6 million declared in December 2015 and paid in January 2016. Cash provided by financing activities in 2015 primarily related to proceeds of $0.9 million from the issuance of stock under our employee stock purchase plan. In January 2019, the Company paid a dividend of $8.5 million which was declared in December 2018.
Debt Instruments, Contractual Agreements, and Related Covenants
Below is a summary of certain provisions of our credit facilities and other contractual obligations. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors Affecting Sources of Liquidity” below. For more information about our obligations, commitments, and contingencies, see our consolidated financial statements and the accompanying notes included in this annual report.
Bank Line of Credit. Our bank line of credit extends until February 2022March 2025 and is collateralized by our accounts receivable. Our borrowing capacity is up to $50.0 million at the greatest of (i) the prime rate (3.25% at December 31, 2021), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in1.00% per annum, provided that the absence of LIBOR, the prime rate (5.50%shall at December 31, 2018). The one-month LIBOR rate at December 31, 2018 was 2.51%.no time be less than 0% per annum. In addition, we have the option to increase the facility by an additional $30.0 million to meet additional borrowing requirements. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” We did not have any borrowings under the credit facility at December 31, 2018.2021.
In FebruaryDecember of 2017,2021, we renewedentered into an amendment to our credit facility extendingto, among other things, extend the expirationmaturity date to February 10, 2022,March 31, 2025, at which time any amounts outstanding become due. The credit facility was renewed with substantially the same termsSee “Part II – Item 9b. Other Information – Third Amendment to Third Amended and conditions as with the preceding agreement.Restated Credit and Security Agreement” for additional information.
Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the line of credit are classified as current. At December 31, 2018,2021, the entire $50.0 million facility was available for borrowing.
Contractual Obligations. The following table sets forth information with respect to our long-term obligations payable in cash as of December 31, 2018 (in thousands):
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| Payments Due By Period |
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| Less Than |
| 1 – 3 |
| 3 – 5 |
| More Than |
| |
| �� | Total |
| 1 Year |
| Years |
| Years |
| 5 Years |
| ||
Contractual Obligations: |
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Operating lease obligations (1) |
| $ | 19,654 |
| 5,035 |
| 11,255 |
| 3,364 |
| — |
| |
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|
3233
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2018, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $0.9 million of unrecognized tax benefits, including interest and penalties, have been excluded from the contractual obligations table above. See Note 10 to the Consolidated Financial Statements for a discussion on income taxes.
Operating Leases. We lease facilities from our principal stockholders and facilities from third parties under non-cancelable operating leases. Certain leases require us to pay real estate taxes, insurance, and common area maintenance charges.
Off-Balance Sheet Arrangements. We do not have any other off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to manage costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.
Bank Line of Credit. Our bank line of credit extends until February 2022March 2025 and is collateralized by our accounts receivable. As of December 31, 2018,2021, the entire $50.0 million facility was available for borrowing. Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, and other distributions, investments, and liens) with which we and all of our subsidiaries must comply. Any failure to comply with these covenants would constitute a default and could prevent us from borrowing additional funds under this line of credit. This credit facility contains two financial tests:
| ● |
| The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated Adjusted EBITDA for the trailing four quarters) must not be more than 2.0 to 1.0. |
| ● |
| Minimum Consolidated Net Worth must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016. Such amount was calculated at December 31, |
Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets. In addition, market volatility, inflation and interest rate fluctuations may increase our cost of financing or restrict our access to potential sources of future liquidity.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A “criticalcritical accounting policy”policy has been defined as one that is both important to the portrayal of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Further, “critical accounting policies” are those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.
We believe that our accounting policies described below fitmeet the definition of “criticalcritical accounting policies.” policies and estimates.
33
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time. We account for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently
34
remitted to governmental authorities. We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.
Nature of Products and Services
Information technology (“IT”)IT products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which is generally upon delivery to the customer. We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing.
We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer.
Licenses for on-premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We are the principal in these transactions and recognize revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable.
For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services. We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions. We recognize revenue for security software net of the related cost of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We do not exercise control over these products or services and therefore are an agent in these transactions. We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements. Amounts recognized on a net basis included in net sales for such software sales transactions were $396.7 million for the year ended December 31, 2018. We did not net software sales prior to adoption the new revenue recognition standard in 2018.
We use our own engineering personnel to assist in projects involving the design and installation of systems and networks, and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as we perform the underlying services and satisfy our performance obligations. We evaluate such engagements to determine whether we are the principal or the agent in each transaction. For those transactions in which we do not control the service, we act as an agent and recognize the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.
Similarly, we recognize revenue from agency sales transactions on a net sales basis. In agency sales transactions, we facilitate product sales by equipment and software manufacturers directly to our customers and receive agency, or
34
referral, fees for such transactions. We do not take title to the products or assume any maintenance or return obligations in these transactions; title is passed directly from the supplier to our customer. Amounts recognized on a net basis included in net sales for such third-party services and agency sales transactions were $46.8$50.0 million, $38.3$47.8 million, and $30.2$51.0 million for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Certain software sales include on-premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk support, and other support services transferred over the underlying contract period. On-premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these items separately. We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.
35
Certain of our larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under enterprise agreements, (“EAs”).or EAs. Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most EAs, our vendors will transfer the license and bill the customer directly, paying resellers, such as us, an agency fee or commission on these sales. We record these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature of each item. Our vendors typically dictate how the EA will be sold to the customer.
We also offer extended service plans, (“ESP”)or ESP, on IT products, both as part of the initial arrangement and separately from the IT products. We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service and do not provide any service after the sale. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.
All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.
Significant JudgmentsCritical Accounting Estimates
Our contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether we are the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
We estimate the standalone selling price, (“SSP”)or SSP, for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.
We provide our customers with a limited thirty-day right of return, which is generally limited to defective merchandise.merchandise, and gives rise to variable consideration. Revenue is recognized at delivery andbased on the most likely amount to which we are expected to be entitled. The estimated variable consideration is included in the transaction price to the extent it is probable that a reserve for sales returnssignificant reversal of cumulative revenue recognized will not occur once the uncertainty is recorded.resolved. We make estimates of product returns based on significant historical experience andexperience. We record our sales return reservesreserve as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses.expenses and as a reduction of cost of sales and an associated right of return asset. At December 31, 2018,2021, we recorded sales reserves of $3.4$4.2 million and $0.2 million as components of accounts receivable and accrued expenses, respectively. At December 31, 2017,2020, we recorded sales reserves of $3.3$4.0 million and $0.2$0.3 million as components of accounts receivable and accrued expenses, respectively.
We regularly evaluate the adequacy of our estimates for product returns. Future market conditions and product transitions may require us to take action to change such programs and related estimates. When the variables used to estimate these reserves change, or if actual results differ significantly from the estimates, we would be required to increase or reduce revenue to reflect the impact.
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Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and customers’ current creditworthiness. Our allowance for credit losses is generally computed by (1) applying specific percentage reserves on accounts that are past due, and (2) specifically reserving for customers known to be in financial difficulty. Therefore, if the financial condition of certain of our customers were to deteriorate, or if we noted there was a
36
lengthening of the timing of the settlement of receivables that was symptomatic of a general deterioration in the ability of our customers to pay, we would have to increase our allowance for doubtful accounts.credit losses. This would negatively impact our earnings. Our cash flows would be impacted to the extent that receivables could not be collected. For example, during the year ended December 31, 2021, we experienced delays in collecting amounts owed to us, and in some cases, we may be unable to collect amounts owed to us altogether. As a result of these delays and other considerations, we recorded bad debt expenses for reserve for credit losses for $3.3 million for the year ended December 31, 2021. During the year ended December 31, 2020, we recorded $3.3 million bad debt expenses for reserve for credit losses.
In addition to accounts receivable from customers, we record receivables from our vendors/suppliers for cooperative advertising, price protection, supplier reimbursements, rebates, and other similar arrangements. A portion of such receivables is estimated based on information available from our vendors at discrete points in time. While such estimates have historically approximated actual cash received, a change in estimates could give rise to a reduction in the receivable. This could negatively impact our earnings and our cash flows.
Our trade receivables are charged off in the period in which they are deemed uncollectible. Recoveries of trade receivables previously charged are recorded when received. Write offs of customer and vendor receivables totaled $3.9 million in 2021 and $0.1 million in 2020.
Considerable judgmentestimate is used in assessing the ultimate realization of customer receivables and vendor/supplier receivables, including reviewing the financial stability of a customer, vendor information, and gauging current market conditions. If our evaluations are incorrect, we may incur additional charges in the future on our consolidated statements of income. Our trade receivables are charged off in the period in which they are deemed uncollectible. Recoveries of trade receivables previously charged are recorded when received. Write offs of customer and vendor receivables totaled $1.3 million in 2018 and $1.2 million in 2017.
Vendor AllowancesInventories
We receive allowances from merchandise vendors for price protections, discounts, product rebates, and other programs. These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales or inventory, as applicable. We also receive vendor co-op advertising funding for our marketing activities and other programs. Vendors have the ability to place advertisements in the catalogs or fund other advertising activities for which we receive advertising allowances. These vendor allowances, to the extent that they represent specific reimbursements of incremental and identifiable costs, are offset against SG&A expense on the consolidated statements of income. Advertising allowances that cannot be associated with a specific program funded by an individual vendor or that exceed the fair value of advertising expense associated with that program are classified as offsets to cost of sales. Our vendor partners generally consolidate their funding of advertising and other marketing programs, and as a result, we classify substantially all vendor allowances as a reduction of cost of inventory purchases rather than a reduction of advertising expense.
Inventories
Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or net realizable value, whichever is lower. Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete, slow moving, and non-saleable inventory, based primarily on management’s forecast of customer demand for those products in inventory.
Estimate is used to determine the quarterly inventory allowance provision. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors. The IT industry is characterized by rapid technological change and new product development that could result in increased obsolescence of inventory on hand. Increased obsolescence or decreased customer demand beyond management’s expectations could require additional provisions, which could negatively impact our earnings. OurWe recorded obsolescence charges have ranged between $3.6of $2.7 million, $1.7 million, and $7.0$3.4 million per annum.for the years ended 2021, 2020 and 2019, respectively. Historically, there have been no unusual charges precipitated by specific technological or forecast issues.
Value of Goodwill and Long-Lived Assets, Including Intangibles
We carry a variety of long-lived assets on our consolidated balance sheet. Thesesheet, which are all currently classified as held for use. These include property and equipment, identifiable intangibles, an internet domain name, which is an indefinite-lived intangible asset not subject to amortization, and goodwill. An impairment review is undertaken on (1) an annual basis for goodwill and an indefinite-lived intangible; and (2) on an event-driven basis for all
36
long-lived assets when facts and circumstances suggest that cash flows from such assets may be diminished. We have historically reviewed the carrying value of all these assets based partly on our projections of anticipated cash flows. These projections are, in part, dependent upon anticipated market conditions, operational performance, and legal status. Any impairment charge that is recorded negatively impacts our earnings. Cash flows are generally not impacted by an impairment charge.
We have historically completed our annual impairment test of goodwill and the indefinite-lived domain name as of the first day of the calendar year. Beginning in 2018, we performed the test as of November 30 and will continue to do so in the future. We assessed the potential impact this change might have on the outcome of the impairment analysis and on the overall consolidated results and determined that the impact, if any, would be immaterial. We made this conclusion based on the following factors: 1) the old and new testing dates are close in proximity, 2) based on historical impairment analyses performed, the goodwill and intangible assets measured are not at significant risk of impairment, and 3) we do not expect that changing the dates would produce different impairment results.
The two-step quantitative test for goodwill requires, under the first step, that we determine the fair value of the reporting unit holding goodwill and compare it to the reporting unit’s carrying value. We determine the fair value of a reporting unit by preparing a discounted cash flow analysis using projections of the reporting unit’s future operating results, as well as consideration of market valuation approaches.
Our Enterprise Solutions and Business Solutions segments hold $66.2 million and $7.4 million of goodwill, respectively. We concludedtest goodwill for impairment each year and more frequently if potential impairment indicators arise. In 2021 and 2020, we performed a “step 0” qualitative analysis. ASC 350—Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair valuesvalue of a reporting unit
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is less than its carrying amount, including goodwill. This analysis allows the two reporting unitsCompany to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a more detailed quantitative analysis would be necessary. Factors considered when performing the impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in the domain name each substantially exceededCompany’s stock price and market capitalization, and other relevant entity-specific events. Based on the respective carrying value, and accordingly, an impairmentqualitative analysis, the Company determined goodwill was not identified inimpaired for the annual test.years ended December 31, 2021 and 2020. While we believe that our estimates of fair valueconclusions are reasonable, different assumptions regarding items such as future cash flows and the volatility inherent in markets which we serve could materially affect our valuations and result in impairment charges against the carrying values of those remaining assets in our Enterprise Solutions and Business Solutions segments. However, at December 31, 2021, a 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.
Please see Note 4,3, “Goodwill and Other Intangible Assets” to the Consolidated Financial Statements included in Item 8 of Part II of this report for a discussion of the significant assumptions used in our discounted cash flowannual impairment test analysis.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
INFLATION
We have historically offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate. We do not expect inflation to have a significant impact on our business in the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We invest cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, our unsecuredbank line of credit agreement provides for borrowings which bear interest at variable rates based on the greatest of (i) the prime rate (3.25% at December 31, 2021), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, or LIBOR, plus a spread or1.00% per annum, provided that the prime rate.rate shall at no time be less than 0% per annum. We believe the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations, and cash flows should not be material. Our bank of line credit agreement exposes earnings to changes in short-term interest rates since interest rates on the underlying obligations are variable. Our average outstanding borrowings during 20182021 was minimal. Accordingly, the change in earnings resulting from a hypothetical 10% increase or decrease in interest rates is not applicable.material. Inflation generally affects us by increasing our cost of labor and research, manufacturing and development costs. We believe that inflation has not had a material effect on our financial statements included elsewhere in this Annual Report on Form 10-K. However, our operations may be subject to inflation in the future.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by this Item is included in this Report beginning at page F-1.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2018.2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in
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the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s boardBoard of directors,Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal controlscontrol over financial reporting as of December 31, 2018.2021. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based on ourits assessment, management concluded that, as of December 31, 2018,2021, the Company’s internal control over financial reporting iswas effective based on those criteria.
The Company’s Independent Registered Public Accounting Firmindependent registered public accounting firm has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2018.2021. This report appears below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholdersStockholders and the Board of Directors of PC Connection, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of PC Connection, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 2018,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2021, of the Company and our report dated February 7, 2019,March 14, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the adoption of a new accounting standard.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 7, 2019March 14, 2022
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Changes in Internal Control over Financial Reporting
No changeThere were no changes in the Company’sour internal control over financial reporting (as defined in Rule 13a – 15(f)Rules 13a-15(f) and 15d – 15(f)15d-15(f) under the Exchange Act) that occurred during the quarterfiscal year ended December 31, 2018, which has2021 that have materially affected, or isare reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Item 9B. Other information
Third Amendment to Third Amended and Restated Credit and Security Agreement.
We entered into a Third Amended and Restated Credit and Security Agreement on February 24, 2012, by and among us, the guarantors party thereto, the lenders from time to time party thereto, and Citizens Bank, N.A., or Citizens, as agent for the lenders, pursuant to which we may borrow up to $50.0 million, which amount may be increased to $80.0 million at our option in certain circumstances, or the Credit Facility. The Credit Facility includes various customary financial ratios and affirmative and negative operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions.
On December 2, 2021, we, as borrower, and GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc. and GlobalServe, Inc., as guarantors, entered into the Third Amendment to Third Amended and Restated Credit and Security Agreement with Citizens, as a lender and as agent for the lenders, or the Third Amendment. The Third Amendment, among other things, (i) extended the maturity date of the Credit Agreement from February 10, 2022 to March 31, 2025, (ii) replaced the Eurodollar Rate with the LIBOR Rate, (iii) replaced the Base Rate with the Alternate Base Rate, which is defined as a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% per annum and (c) the Adjusted LIBOR Rate in effect on such day for deposits in dollars for a one month or three month interest period plus 1.00% per annum, provided that the Alternate Base Rate shall at no time be less than 0% per annum and (iv) modified the LIBOR Rate provisions to provide for a successor benchmark using the secured overnight financing rate, or SOFR. In connection with the Third Amendment, we paid a one-time facility fee to Citizens. Capitalized terms used in this Item 9B. and not otherwise defined herein shall have the respective meanings ascribed to them in the Third Amendment. The foregoing description of the Third Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Third Amendment, which is filed as Exhibit 10.49 hereto and incorporated herein by reference.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.Not Applicable.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
TheIn addition to the information included below, the information included under the headings “Executive Officers of PC Connection” in Item 3 of Part I hereof and “Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance,Reports,” “Code of Business Conduct and Ethics Policy,” “Director Candidates,” and “Board Committees – Audit Committee” in our definitive Proxy Statement for our 20192022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2018 (the “Proxy Statement”) is incorporated herein by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof.
Information about our Executive Officers
Our executive officers and their ages as of March 14, 2022 are as follows:
| | | | |
Name | | Age | | Position |
Patricia Gallup | | 67 | | Chair and Chief Administrative Officer |
Timothy McGrath | | 63 | | President and Chief Executive Officer |
Thomas Baker | | 56 | | Senior Vice President, Chief Financial Officer and Treasurer |
Patricia Gallup is our co-founder and has served as Chair of our Board of Directors since September 1994, and as Chief Administrative Officer since August 2011. Ms. Gallup has served as a member of our executive management team since 1982.
Timothy McGrath has served as our Chief Executive Officer since August 2011, and as President since May 2010. Mr. McGrath has served as a member of our executive management team since he joined the Company in 2005.
Thomas Baker has served as our Chief Financial Officer and as a member of our executive management team since he joined the Company since March 2019. Prior to joining the Company, Mr. Baker had served as Corporate Vice President and Chief Financial Officer for the New Markets and Service Group at Applied Materials, Inc., a semiconductor capital equipment company, since 2013.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our officers, including our principal executive, financial and accounting officers, and our directors and employees. We have posted the text of our Code of Business Conduct and Ethics under the “Investor Relations” section of our website, www.connection.com. We intend to disclose on our website any amendments to, or waivers from, the Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
Item 11. Executive Compensation
The information included under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information included under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information included under the headings “Certain Relationships and Related Transactions,” “Policies and Procedures for Related Person Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information included under the heading “Principal Accounting Fees and Services” and “Pre-Approval Policies and Procedures” in the Proxy Statement is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)List of Documents Filed as Part of this Report:
(a) |
|
| (1) | Consolidated Financial Statements |
The consolidated financial statements listed below are included in this document.
Consolidated Financial Statements | Page | ||
|---|---|---|---|
F-2 | |||
| |||
F-4 | |||
F-5 | |||
| |||
F-6 | |||
F-7 | |||
|
| (2) |
| Consolidated Financial Statement Schedule: |
The following Consolidated Financial Statement Schedule, as set forth below, is filed with this report:
Schedule | Page | ||
|---|---|---|---|
S-1 |
All other schedules have been omitted because they are either not applicable or the relevant information has already been disclosed in the financial statements.
| (3) |
| The exhibits listed in the Exhibit Index in Item 15(b) below are filed as part of this Annual Report on Form 10-K. |
(b) | Exhibits |
(b)Exhibits
The exhibits listed below are filed herewith or are incorporated herein by reference to other filings.
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4345
10.24(25) | | |
10.25(25) | | |
10.26(16) | | |
10.27(25) | | |
10.28(24) | | |
10.29(1) | | |
10.30(2) | | |
10.31(14) | | |
10.32(20) | | |
10.33(12) | | |
10.34(22) | | |
10.35(3) | | |
10.36(3) | | |
10.37(3) | | |
10.38(3) | | |
10.39(6) | | |
10.40(8) | | |
10.41(13) | | |
46
10.42(17) | | |
10.43(26)* | | Employment Agreement, dated March 1, 2019, between the Registrant and Thomas Baker |
10.44(26)* | | Letter Agreement, dated February 28, 2019, between the Registrant and Stephen Sarno. |
10.45(27) | | |
10.46(30) | | |
10.47(30) | | Incentive and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker |
10.48(29) | | Form of Restricted Stock Units for 2020 Stock Incentive Plan |
10.49** | | |
21.1 | | |
23.1 | |
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31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS ** | | Inline XBRL Instance |
101.SCH ** | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL ** | | Inline XBRL Taxonomy Calculation Linkbase Document. |
| | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB ** | | Inline XBRL Taxonomy Label Linkbase Document. |
| | Inline XBRL Taxonomy Presentation Linkbase Document. |
| | Cover Page Interactive Data File (formatted as Inline XBRL |
| (1) |
| Incorporated by reference from the exhibits filed with the Company’s registration statement (333-41171) on Form S-1 filed under the Securities Act of 1933. |
| (2) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 31, 1999. |
| (3) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 30, 2001. |
| (4) |
| Incorporated by reference from exhibits filed with the Company’s proxy statement pursuant to Section 14(a), File Number 0-23827, filed on April 17, 2001. |
| (5) |
| Incorporated by reference from the exhibits filed with the Company’s registration statement (333-63272) on Form S-4 filed under the Securities Act of 1933. |
| (6) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 31, 2003. |
| (7) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 30, 2004. |
| (8) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number |
| (9) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 10, 2007. |
47
| (10) |
| Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9, 2008. |
| (11) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 12, 2008. |
| (12) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 11, 2008. |
| (13) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November 10, 2008. |
| (14) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number |
| (15) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November 10, 2010. |
| (16) |
| Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number |
| (17) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 8, 2012. |
| (18) |
| Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-23827, filed on March 4, 2013. |
| (19) |
| Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on May 29, 2013. |
| (20) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 9, 2014. |
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| (21) |
| Incorporated by reference from |
| (22) |
| Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 31, 2014. |
| (23) |
| Incorporated by reference from |
| (24) |
| Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on February 16, 2017. |
| (25) |
| Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-23827, filed on March 3, 2017. |
| (26) | Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 2, 2019. |
| (27) | Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 30, 2019. |
| (28) | Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-K, filed on February 6, 2020. |
| (29) | Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, filed on March 16, 2021. |
| (30) | Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 7, 2021. |
* Management contract or compensatory plan or arrangement.
** Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 20182021 and December 31, 2017,2020, (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, and (v) Notes to Consolidated Financial Statements.
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Attached as Exhibit 104 to this report is the Cover Page Interactive Data File (embded within the Inline XBRL document).
Item 16. Form 10-K Summary
None.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PC CONNECTION, INC. | |
Date: | | |
| By: | /s/ TIMOTHY J. MCGRATH |
| | Timothy J. McGrath |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | | Title | | Date | |||||
|---|---|---|---|---|---|---|---|---|---|
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/s/ TIMOTHY J. MCGRATH | | | | | |||||
Timothy J. McGrath | | President and Chief Executive Officer (Principal Executive Officer) | | March 14, 2022 | |||||
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/s/ THOMAS C. BAKER | | | | | |||||
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| | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |
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/s/ PATRICIA GALLUP | | | | | |||||
Patricia Gallup | | Chairman of the Board | |
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/s/ | | | | | |||||
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| | Director | |
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/s/ BARBARA DUCKETT | | | | | |||||
Barbara Duckett | | Director | |
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/s/ JACK FERGUSON | | | | | |||||
Jack Ferguson | | Director | |
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/s/ Gary Kinyon | | | | | |||||
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| | Director | |
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4750
PC CONNECTION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
|---|---|---|---|---|---|
Report of Independent Registered Public Accounting Firm (PCAOB ID No 34) | | F-2 | |||
Consolidated Balance Sheets as of December 31, | |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholdersStockholders and the Board of Directors of PC Connection, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PC Connection, Inc. and subsidiaries (the "Company") as of December 31, 20182021 and 2017,2020, the related consolidated statements of income, changes in stockholders’Stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 7, 2019March 14, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue contracts effective January 1, 2018 due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, using the modified retrospective method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue — Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
As described in Note 1 to the consolidated financial statements, the Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
| ● | Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as hardware, software and maintenance products as well as services related to the installation or implementation of products. |
| ● | Determination of stand-alone selling prices for each distinct performance obligation and for products and services. |
| ● | As a reseller, the determination if they are the principal or the agent for each performance obligation, which impacts whether the related revenue for each performance obligations is recognized on a gross or net basis. |
F-2
| ● | The timing of transfer of control for each distinct performance obligation and the identification and treatment of contract terms that may impact the timing and amount of revenue recognized. |
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
| ● | We evaluated management's significant accounting policies related to these customer agreements for reasonableness. |
| ● | We selected a sample of customer contracts and performed the following procedures: |
| ● | We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. |
| ● | We selected a sample of products and services sold and performed an evaluation of the Company’s determination of principal versus agent. |
| ● | We selected a sample of orders shipped at year end and evaluated whether revenue has been properly recognized by comparing the IT products shipped to the respective contract or customer purchase order if applicable and evidence of transfer of control. |
| ● | We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. |
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 7, 2019
March 14, 2022
We have served as the Company's auditor since 1984.1984
F-2F-3
PC CONNECTION, INC. AND SUBSIDIARIES
(amounts in thousands, except per share data)
|
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| December 31, |
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|
| 2018 |
| 2017 |
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ASSETS |
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|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 91,703 |
| $ | 49,990 |
|
Accounts receivable, net |
|
| 447,698 |
|
| 449,682 |
|
Inventories, net |
|
| 119,195 |
|
| 106,753 |
|
Income taxes receivable |
|
| 922 |
|
| 3,933 |
|
Prepaid expenses and other current assets |
|
| 9,661 |
|
| 5,737 |
|
Total current assets |
|
| 669,179 |
|
| 616,095 |
|
Property and equipment, net |
|
| 51,799 |
|
| 41,491 |
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Goodwill |
|
| 73,602 |
|
| 73,602 |
|
Intangibles assets, net |
|
| 9,564 |
|
| 11,025 |
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Other assets |
|
| 1,211 |
|
| 5,638 |
|
Total Assets |
| $ | 805,355 |
| $ | 747,851 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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Current Liabilities: |
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Accounts payable |
| $ | 201,640 |
| $ | 194,257 |
|
Accrued payroll |
|
| 24,319 |
|
| 22,662 |
|
Accrued expenses and other liabilities |
|
| 33,840 |
|
| 31,096 |
|
Total current liabilities |
|
| 259,799 |
|
| 248,015 |
|
Deferred income taxes |
|
| 17,184 |
|
| 15,696 |
|
Other liabilities |
|
| 2,469 |
|
| 1,888 |
|
Total Liabilities |
|
| 279,452 |
|
| 265,599 |
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
Common Stock, $.01 par value, 100,000 shares authorized, 28,787 and 28,709 issued, 26,396 and 26,853 outstanding at December 31, 2018 and 2017, respectively |
|
| 288 |
|
| 287 |
|
Additional paid-in capital |
|
| 115,842 |
|
| 114,154 |
|
Retained earnings |
|
| 441,010 |
|
| 383,673 |
|
Treasury stock at cost, 2,391 and 1,856 shares at December 31, 2018 and 2017, respectively |
|
| (31,237) |
|
| (15,862) |
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Total Stockholders’ Equity |
|
| 525,903 |
|
| 482,252 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 805,355 |
| $ | 747,851 |
|
| | | | | | | |
| | December 31, |
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|
| 2021 |
| 2020 |
| ||
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 108,310 | | $ | 95,655 | |
Accounts receivable, net | |
| 607,532 | |
| 611,021 | |
Inventories, net | |
| 206,555 | |
| 140,867 | |
Prepaid expenses and other current assets | |
| 10,016 | |
| 11,437 | |
Total current assets | |
| 932,413 | |
| 858,980 | |
Property and equipment, net | |
| 61,011 | |
| 61,537 | |
Right-of-use assets | | | 9,579 | | | 12,821 | |
Goodwill | |
| 73,602 | |
| 73,602 | |
Intangibles assets, net | |
| 5,868 | |
| 7,088 | |
Other assets | |
| 910 | |
| 1,345 | |
Total Assets | | $ | 1,083,383 | | $ | 1,015,373 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 281,836 | | $ | 266,846 | |
Accrued payroll | |
| 30,966 | |
| 17,828 | |
Accrued expenses and other liabilities | |
| 61,830 | |
| 57,586 | |
Total current liabilities | |
| 374,632 | |
| 342,260 | |
Deferred income taxes | |
| 19,278 | |
| 18,525 | |
Noncurrent operating lease liabilities | | | 6,789 | | | 9,631 | |
Other liabilities | |
| 211 | |
| 8,630 | |
Total Liabilities | |
| 400,910 | |
| 379,046 | |
Stockholders’ Equity: | | | | | | | |
Common Stock, $.01 par value, 100,000 shares authorized, 29,025 and 28,943 issued, 26,252 and 26,170 outstanding at December 31, 2021 and 2020, respectively | | | 290 | | | 289 | |
Additional paid-in capital | |
| 122,354 | |
| 119,891 | |
Retained earnings | |
| 605,766 | |
| 562,084 | |
Treasury stock at cost, 2,773 and 2,773 shares at December 31, 2021 and 2020, respectively | | | (45,937) | | | (45,937) | |
Total Stockholders’ Equity | |
| 682,473 | |
| 636,327 | |
Total Liabilities and Stockholders’ Equity | | $ | 1,083,383 | | $ | 1,015,373 | |
See notes to consolidated financial statements.
F-3F-4
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
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| Years Ended December 31, |
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| 2018 |
| 2017 |
| 2016 |
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Net sales |
| $ | 2,699,489 |
| $ | 2,911,883 |
| $ | 2,692,592 |
|
Cost of sales |
|
| 2,288,403 |
|
| 2,529,807 |
|
| 2,321,435 |
|
Gross profit |
|
| 411,086 |
|
| 382,076 |
|
| 371,157 |
|
Selling, general and administrative expenses |
|
| 324,433 |
|
| 300,913 |
|
| 287,231 |
|
Restructuring and other charges |
|
| 967 |
|
| 3,636 |
|
| 3,406 |
|
Income from operations |
|
| 85,686 |
|
| 77,527 |
|
| 80,520 |
|
Other income (expense), net |
|
| 2,978 |
|
| 98 |
|
| (67) |
|
Income before taxes |
|
| 88,664 |
|
| 77,625 |
|
| 80,453 |
|
Income tax provision |
|
| (24,072) |
|
| (22,768) |
|
| (32,342) |
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Net income |
| $ | 64,592 |
| $ | 54,857 |
| $ | 48,111 |
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Earnings per common share: |
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Basic |
| $ | 2.42 |
| $ | 2.05 |
| $ | 1.81 |
|
Diluted |
| $ | 2.41 |
| $ | 2.04 |
| $ | 1.80 |
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Shares used in computation of earnings per common share: |
|
|
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|
|
|
|
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|
Basic |
|
| 26,717 |
|
| 26,771 |
|
| 26,528 |
|
Diluted |
|
| 26,854 |
|
| 26,891 |
|
| 26,719 |
|
| | | | | | | | | | |
| | Years Ended December 31, |
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|
| 2021 |
| 2020 |
| 2019 |
| |||
Net sales | | $ | 2,892,595 | | $ | 2,590,290 | | $ | 2,820,034 | |
Cost of sales | |
| 2,428,016 | |
| 2,171,483 | |
| 2,368,724 | |
Gross profit | |
| 464,579 | |
| 418,807 | |
| 451,310 | |
Selling, general and administrative expenses | |
| 368,062 | |
| 345,741 | |
| 338,635 | |
Restructuring and other charges | | | — | | | 992 | | | 703 | |
Income from operations | |
| 96,517 | |
| 72,074 | |
| 111,972 | |
Other income, net | |
| 5 | |
| 1,122 | |
| 707 | |
Income before taxes | |
| 96,522 | |
| 73,196 | |
| 112,679 | |
Income tax provision | |
| (26,616) | |
| (17,431) | |
| (30,568) | |
Net income | | $ | 69,906 | | $ | 55,765 | | $ | 82,111 | |
| | | | | | | | | | |
Earnings per common share: | | | | | | | | | | |
Basic | | $ | 2.67 | | $ | 2.13 | | $ | 3.12 | |
Diluted | | $ | 2.65 | | $ | 2.12 | | $ | 3.10 | |
| | | | | | | | | | |
Shares used in computation of earnings per common share: | | | | | | | | | | |
Basic | |
| 26,196 | |
| 26,157 | |
| 26,335 | |
Diluted | |
| 26,364 | |
| 26,336 | |
| 26,505 | |
See notes to consolidated financial statements.
F-4F-5
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands)
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|
|
|
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|
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|
|
| Common Stock |
| Additional |
| Retained |
| Treasury Shares |
|
|
|
| ||||||||
|
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Total |
| |||||
Balance - December 31, 2015 |
| 28,353 |
| $ | 284 |
| $ | 109,161 |
| $ | 298,868 |
| (1,856) |
| $ | (15,862) |
| $ | 392,451 |
|
Stock options exercised |
| 11 |
|
| — |
|
| 135 |
|
| — |
| — |
|
| — |
|
| 135 |
|
Issuance of common stock under Employee Stock Purchase Plan |
| 39 |
|
| — |
|
| 961 |
|
| — |
| — |
|
| — |
|
| 961 |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 1,049 |
|
| — |
| — |
|
| — |
|
| 1,049 |
|
Restricted stock units vested |
| 62 |
|
| 1 |
|
| (1) |
|
| — |
| — |
|
| — |
|
| — |
|
Shares withheld for taxes paid on stock awards |
| — |
|
| — |
|
| (737) |
|
| — |
| — |
|
| — |
|
| (737) |
|
Tax benefit from stock-based compensation |
| — |
|
| — |
|
| 513 |
|
| — |
| — |
|
| — |
|
| 513 |
|
Dividend declaration |
| — |
|
| — |
|
| — |
|
| (9,041) |
| — |
|
| — |
|
| (9,041) |
|
Net income |
| — |
|
| — |
|
| — |
|
| 48,111 |
| — |
|
| — |
|
| 48,111 |
|
Balance - December 31, 2016 |
| 28,465 |
| $ | 285 |
| $ | 111,081 |
| $ | 337,938 |
| (1,856) |
| $ | (15,862) |
| $ | 433,442 |
|
Stock options exercised |
| 157 |
|
| 2 |
|
| 1,748 |
|
| — |
| — |
|
| — |
|
| 1,750 |
|
Issuance of common stock under Employee Stock Purchase Plan |
| 47 |
|
| — |
|
| 1,197 |
|
| — |
| — |
|
| — |
|
| 1,197 |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 741 |
|
| — |
| — |
|
| — |
|
| 741 |
|
Restricted stock units vested |
| 40 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Shares withheld for taxes paid on stock awards |
| — |
|
| — |
|
| (613) |
|
| — |
| — |
|
| — |
|
| (613) |
|
Dividend declaration |
| — |
|
| — |
|
| — |
|
| (9,122) |
| — |
|
| — |
|
| (9,122) |
|
Net income |
| — |
|
| — |
|
| — |
|
| 54,857 |
| — |
|
| — |
|
| 54,857 |
|
Balance - December 31, 2017 |
| 28,709 |
| $ | 287 |
| $ | 114,154 |
| $ | 383,673 |
| (1,856) |
| $ | (15,862) |
| $ | 482,252 |
|
Cumulative effect of adoption of ASC 606 |
| — |
|
| — |
|
| — |
|
| 1,197 |
| — |
|
| — |
|
| 1,197 |
|
Issuance of common stock under Employee Stock Purchase Plan |
| 41 |
|
| 1 |
|
| 1,246 |
|
| ��� |
| — |
|
| — |
|
| 1,247 |
|
Stock-based compensation expense |
| — |
|
| — |
|
| 1,080 |
|
| — |
| — |
|
| — |
|
| 1,080 |
|
Restricted stock units vested |
| 37 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Shares withheld for taxes paid on stock awards |
| — |
|
| — |
|
| (638) |
|
| — |
| — |
|
| — |
|
| (638) |
|
Repurchase of common stock for treasury |
| — |
|
| — |
|
| — |
|
| — |
| (535) |
|
| (15,375) |
|
| (15,375) |
|
Dividend declaration |
| — |
|
| — |
|
| — |
|
| (8,452) |
| — |
|
| — |
|
| (8,452) |
|
Net income |
| — |
|
| — |
|
| — |
|
| 64,592 |
| — |
|
| — |
|
| 64,592 |
|
Balance - December 31, 2018 |
| 28,787 |
| $ | 288 |
| $ | 115,842 |
| $ | 441,010 |
| (2,391) |
| $ | (31,237) |
| $ | 525,903 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional | | Retained | | Treasury Shares | | | |
| ||||||||
|
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Total |
| |||||
Balance - December 31, 2018 |
| 28,787 | | $ | 288 | | $ | 115,842 | | $ | 441,010 |
| (2,391) | | $ | (31,237) | | $ | 525,903 | |
Issuance of common stock under Employee Stock Purchase Plan | | 32 | | | — | | | 1,253 | | | — | | — | | | — | | | 1,253 | |
Stock-based compensation expense |
| — | |
| — | |
| 1,863 | |
| — |
| — | |
| — | |
| 1,863 | |
Restricted stock units vested |
| 51 | |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
Shares withheld for taxes paid on stock awards |
| — | |
| — | |
| (913) | |
| — |
| — | |
| — | |
| (913) | |
Repurchase of common stock for treasury |
| — | |
| — | |
| — | |
| — |
| (135) | |
| (4,478) | |
| (4,478) | |
Dividend declaration |
| — | |
| — | |
| — | |
| (8,427) |
| — | |
| — | |
| (8,427) | |
Net income |
| — | |
| — | |
| — | |
| 82,111 |
| — | |
| — | |
| 82,111 | |
Balance - December 31, 2019 |
| 28,870 | | $ | 288 | | $ | 118,045 | | $ | 514,694 |
| (2,526) | | $ | (35,715) | | $ | 597,312 | |
Issuance of common stock under Employee Stock Purchase Plan | | 12 | | | — | | | 536 | | | — | | — | | | — | | | 536 | |
Stock-based compensation expense |
| — | |
| — | |
| 2,668 | |
| — |
| — | |
| — | |
| 2,668 | |
Restricted stock units vested |
| 61 | |
| 1 | |
| (1) | |
| — |
| — | |
| — | |
| — | |
Shares withheld for taxes paid on stock awards |
| — | |
| — | |
| (1,357) | |
| — |
| — | |
| — | |
| (1,357) | |
Repurchase of common stock for treasury |
| — | |
| — | |
| — | |
| — |
| (247) | |
| (10,222) | |
| (10,222) | |
Dividend declaration |
| — | |
| — | |
| — | |
| (8,375) |
| — | |
| — | |
| (8,375) | |
Net income |
| — | |
| — | |
| — | |
| 55,765 |
| — | |
| — | |
| 55,765 | |
Balance - December 31, 2020 |
| 28,943 | | $ | 289 | | $ | 119,891 | | $ | 562,084 |
| (2,773) | | $ | (45,937) | | $ | 636,327 | |
Stock-based compensation expense |
| — | |
| — | |
| 4,231 | |
| — |
| — | |
| — | |
| 4,231 | |
Restricted stock units vested |
| 82 | |
| 1 | |
| (1) | |
| — |
| — | |
| — | |
| — | |
Shares withheld for taxes paid on stock awards |
| — | |
| — | |
| (1,767) | |
| — |
| — | |
| — | |
| (1,767) | |
Dividend declaration |
| — | |
| — | |
| — | |
| (26,224) |
| — | |
| — | |
| (26,224) | |
Net income |
| — | |
| — | |
| — | |
| 69,906 |
| — | |
| — | |
| 69,906 | |
Balance - December 31, 2021 |
| 29,025 | | $ | 290 | | $ | 122,354 | | $ | 605,766 |
| (2,773) | | $ | (45,937) | | $ | 682,473 | |
See notes to consolidated financial statements.
F-5F-6
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
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|
|
| Years Ended December 31, |
| |||||||
|
|
| 2018 |
| 2017 |
| 2016 |
| |||
Cash Flows provided by Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| $ | 64,592 |
| $ | 54,857 |
| $ | 48,111 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
| 14,063 |
|
| 11,839 |
|
| 10,453 |
|
Provision for doubtful accounts |
|
|
| 1,680 |
|
| 1,658 |
|
| 360 |
|
Stock-based compensation expense |
|
|
| 1,080 |
|
| 741 |
|
| 1,049 |
|
Deferred income taxes |
|
|
| 1,488 |
|
| (3,906) |
|
| 3,506 |
|
Loss on disposal of fixed assets |
|
|
| 51 |
|
| 24 |
|
| 92 |
|
Excess tax benefit from exercise of equity awards |
|
|
| — |
|
| — |
|
| (513) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
| 14,872 |
|
| (39,457) |
|
| (33,835) |
|
Inventories |
|
|
| (23,311) |
|
| (16,218) |
|
| 12,401 |
|
Prepaid expenses, income tax receivables and other current assets |
|
|
| (1,045) |
|
| (2,097) |
|
| (1,274) |
|
Other non-current assets |
|
|
| 2,403 |
|
| (4,265) |
|
| (321) |
|
Accounts payable |
|
|
| 5,722 |
|
| 15,807 |
|
| (3,012) |
|
Accrued expenses and other liabilities |
|
|
| 5,244 |
|
| 337 |
|
| (3,431) |
|
Net cash provided by operating activities |
|
|
| 86,839 |
|
| 19,320 |
|
| 33,586 |
|
Cash Flows used in Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment and capitalized software |
|
|
| (21,238) |
|
| (11,803) |
|
| (11,885) |
|
Cash paid for acquisitions |
|
|
| — |
|
| — |
|
| (42,990) |
|
Net cash used in investing activities |
|
|
| (21,238) |
|
| (11,803) |
|
| (54,875) |
|
Cash Flows (used in) provided by Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
|
| 859 |
|
| — |
|
| — |
|
Repayment of short-term borrowings |
|
|
| (859) |
|
| — |
|
| — |
|
Purchase of treasury shares |
|
|
| (15,375) |
|
| — |
|
| — |
|
Dividend payment |
|
|
| (9,122) |
|
| (9,041) |
|
| (10,591) |
|
Exercise of stock options |
|
|
| — |
|
| 1,750 |
|
| 135 |
|
Issuance of stock under Employee Stock Purchase Plan |
|
|
| 1,247 |
|
| 1,197 |
|
| 961 |
|
Excess tax benefit from exercise of equity awards |
|
|
| — |
|
| — |
|
| 513 |
|
Payment of payroll taxes on stock-based compensation through shares withheld |
|
|
| (638) |
|
| (613) |
|
| (737) |
|
Net cash used in financing activities |
|
|
| (23,888) |
|
| (6,707) |
|
| (9,719) |
|
Increase (decrease) in cash and cash equivalents |
|
|
| 41,713 |
|
| 810 |
|
| (31,008) |
|
Cash and cash equivalents, beginning of year |
|
|
| 49,990 |
|
| 49,180 |
|
| 80,188 |
|
Cash and cash equivalents, end of year |
|
| $ | 91,703 |
| $ | 49,990 |
| $ | 49,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures |
|
| $ | 2,422 |
| $ | 699 |
| $ | 109 |
|
Dividend declaration |
|
|
| 8,452 |
|
| 9,122 |
|
| 9,041 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
| $ | 19,945 |
| $ | 28,927 |
| $ | 29,740 |
|
| | | | | | | | | | |
| | | | | | | | | |
|
| | Years Ended December 31, | | |||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||
Cash Flows provided by Operating Activities: | | | | | | | | | | |
Net income | | $ | 69,906 | | $ | 55,765 | | $ | 82,111 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | |
| 12,202 | |
| 13,603 | |
| 13,314 | |
Adjustments to credit losses reserve | |
| 3,307 | |
| 3,316 | |
| 25 | |
Stock-based compensation expense | |
| 4,231 | |
| 2,668 | |
| 1,863 | |
Deferred income taxes | |
| 753 | |
| (1,645) | |
| 2,986 | |
Gain from life insurance | |
| — | |
| (1,061) | |
| — | |
(Gain) loss on disposal of fixed assets | |
| (36) | |
| 28 | |
| 213 | |
Changes in assets and liabilities: | | | | | | | | | | |
Accounts receivable | |
| (1,318) | |
| (63,650) | |
| (101,953) | |
Inventories | |
| (65,688) | |
| (16,201) | |
| (5,471) | |
Prepaid expenses and other current assets | |
| 1,421 | |
| 622 | |
| (1,476) | |
Other non-current assets | |
| 435 | |
| (398) | |
| 264 | |
Accounts payable | |
| 14,814 | |
| 32,515 | |
| 34,960 | |
Accrued expenses and other liabilities | |
| 17,727 | |
| 10,536 | |
| 9,767 | |
Net cash provided by operating activities | |
| 57,754 | |
| 36,098 | |
| 36,603 | |
Cash Flows used in Investing Activities: | | | | | | | | | | |
Purchases of equipment and capitalized software | | | (10,302) | | | (11,033) | | | (25,656) | |
Proceeds from sale of equipment | | | 69 | | | — | | | — | |
Proceeds from life insurance | | | 1,500 | | | — | | | — | |
Net cash used in investing activities | |
| (8,733) | |
| (11,033) | |
| (25,656) | |
Cash Flows used in Financing Activities: | | | | | | | | | | |
Purchase of treasury shares | |
| — | | | (10,222) | | | (4,478) | |
Dividend payments | |
| (34,599) | |
| (8,427) | |
| (8,452) | |
Issuance of stock under Employee Stock Purchase Plan | | | — | | | 536 | | | 1,253 | |
Payment of payroll taxes on stock-based compensation through shares withheld | |
| (1,767) | |
| (1,357) | |
| (913) | |
Net cash used in financing activities | |
| (36,366) | |
| (19,470) | |
| (12,590) | |
Increase (decrease) in cash and cash equivalents | |
| 12,655 | |
| 5,595 | |
| (1,643) | |
Cash and cash equivalents, beginning of year | |
| 95,655 | |
| 90,060 | |
| 91,703 | |
Cash and cash equivalents, end of year | | $ | 108,310 | | $ | 95,655 | | $ | 90,060 | |
| | | | | | | | | | |
Non-cash Investing and Financing Activities: | | | | | | | | | | |
Accrued capital expenditures | | $ | 334 | | $ | 442 | | $ | 1,463 | |
Dividend declarations | | | — | | | 8,375 | | | 8,427 | |
Life insurance recorded as receivable | | | — | | | 1,500 | | | — | |
Supplemental Cash Flow Information: | | | | | | | | | | |
Income taxes paid | | $ | 21,465 | | $ | 19,441 | | $ | 28,460 | |
See notes to consolidated financial statements.
F-6F-7
PC CONNECTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We arePC Connection, Inc. is a leading solutions provider ofFortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology. The Company’s dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. The Company provides 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, solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchasethe Company purchases from manufacturers, distributors, and other suppliers. WeThe Company also offeroffers comprehensive portfolio of managed services involving design, configuration, and implementation of IT solutions.professional services. These services are performed by ourthe Company’s personnel and by first-party servicethird-party providers. We operateThe Company’s GlobalServe offering ensures worldwide coverage for the Company’s multinational customers, delivering global procurement solutions through threethe Company’s network of incountry suppliers in over 150 countries.
The Company operates through 3 sales segments: (a) the
•Connection Enterprise Solutions (formerly MoreDirect)—serving large enterprise customers (Large Accounts)
•Connection Business Solutions segment, which serves small- to medium-sized businesses, through our(formerly PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) theCorp)—serving SMBs
•Connection Public Sector segment, which servesSolutions (formerly GovConnection)—serving federal, state, and local governmentalgovernment and educational institutions through our GovConnection subsidiary.
The following is a summary of ourthe Company’s significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of PC Connection, Inc. and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances are eliminated in consolidation.
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 reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period. Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances. By nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates and assumptions.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with current year presentation. Restructuring and other charges have been separated from selling, general, and administrative expenses on the Consolidated Statements of Income. These charges amount to $967, $3,636, and $3,406 for the years ending December 31, 2018, 2017, and 2016, respectively. This change in classification does not affect previously reported net income or earnings per share figures in the Consolidated Statements of Income.
Revenue Recognition
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”), which replaced existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Adoption of Recently Issued Accounting Standards within this footnote for additional information.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expectthe Company expects to receive in exchange for those products or services. We enterThe Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time. We accountThe Company accounts for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. WeThe Company generally obtainobtains oral or written purchase
F-7
authorizations from ourits customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We The Company
F-8
generally invoiceinvoices for ourits products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.
Prior to the adoption of ASC 606, revenue on product sales was recognized at the point in time when persuasive evidence of an arrangement existed, the price was fixed or determinable, delivery had occurred, and there was a reasonable assurance of collection of the sales proceeds. Service revenue was recognized over time as the services were performed. We evaluated such engagements to determine whether we or the third party assumed the general risk and reward of ownership in these transactions. This evaluation was the basis by which we determined that revenue from these transactions would be recognized on a gross or a net basis.
In multiple-element revenue arrangements, each service performed and product delivered was considered a separate deliverable and qualified as a separate unit of accounting. For material multiple element arrangements, we allocated revenue based on vendor-specific objective evidence of fair value of the underlying services and products. In the absence of vendor-specific objective evidence, we would utilize third-party evidence to allocate the selling price. If neither vendor-specific objective evidence nor third-party evidence was available, we would estimate the selling price based on market price and company specific factors.
Cost of Sales and Certain Other Costs
Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances.
Cash and Cash Equivalents
We considerThe Company considers all highly liquid short-term investments with original maturities of 90 days or less to be cash equivalents. The carrying value of our cash equivalents approximates fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance includes a fair value hierarchy that priorities the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as as follows:
| ● | Level 1: Quoted prices for identical assets or liabilities in active markets.; |
| ● | Level 2: Observable inputs other than those described as Level 1; |
| ● | Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.; |
The company’s money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. It is included as cash equivalents within the Company’s consolidated balance sheet and is categorized as a level 1 measurement.
The majority of payments due from credit card processors and banks for third-party credit card and debit card transactions process within one to five business days. All credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents. Amounts due from banks for credit card transactions classified as cash equivalents totaled $2,651$4,748 and $6,776$3,776 at December 31, 20182021 and 2017,2020, respectively.
Accounts Receivable
We performAccount receivable are recorded at the invoice amount, net of allowances. Customers are evaluated for their credit worthiness at the time of contract inception and, the Company performs ongoing credit evaluations of ourits customers and adjustadjusts credit limits based on payment history and customer creditworthiness. We maintain anBased on the results of the credit assessments, the Company will extend credit under its standard payment terms or may request alternative early payment actions. The Company determines the required allowance for estimated doubtful accounts based on our historical experienceexpected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions. Allowances can be affected by changes in the industry, customer credit issues identified. Our customers do not post collateral for open accounts receivable. We monitor collections regularlyor customer bankruptcies or expectations of any such events in a future period when reasonable and adjustsupportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance for doubtful accounts aswhen it is determined that expected credit losses may occur. We assess collectability by reviewing account receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with collectability issues, and if necessary, to recognize any changes in credit exposure.records a reserve against those receivables it determines may not be collectable. Trade receivables are written off in the period in which they are deemed uncollectible. Recoveries of trade receivables previously charged are recorded when received.
Inventories
Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment, are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or
F-9
net realizable value, whichever is lower. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.
Vendor Consideration
We receive funding from merchandise vendors for price protections, discounts, product rebates, and other programs. These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales or
F-8
inventory, as applicable. Allowances for product rebates that require certain volumes of product sales or purchases are recorded as the related milestones are probable of being met.
Advertising Costs and Vendor Consideration
Costs of producing and distributing catalogs are charged to expense in the period in which the catalogs are first circulated. Other advertising costs are expensed as incurred.
Vendors have the ability to place advertisements in our catalogs or fund other advertising activities for which we receivethe Company receives advertising consideration. This vendor consideration, to the extent that it represents specific reimbursements of incremental and identifiable costs, is offset against selling, general and administrative expenses (“SG&A&A”) expenses. Advertising consideration that cannot be associated with a specific program or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales. OurThe Company’s vendor partners generally consolidate their funding of advertising and other marketing programs, and accordingly, we classifythe Company classifies substantially all vendor consideration as a reduction of cost of sales rather than a reduction of advertising expense. Other advertising costs are expensed as incurred. Advertising expense, which is classified as a component of SG&A expenses, totaled $16,244, $14,437,$15,827, $14,021, and $16,083,$19,407 for the years ended December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is provided for financial reporting purposes over theThe estimated useful lives of the assets rangingrange from three to seven years. Computer software, including licenses and internally developed software, is capitalized and amortized over lives generally ranging from three to seventen years. Depreciation is recorded using the straight-line method. Leasehold improvements and facilities under capital leases are amortized over the terms of the related leases or their useful lives, whichever is shorter, whereas for income tax reporting purposes, they are amortized over the applicable tax lives.
Costs incurred to develop internal-use software during the application development stage are recorded in property and equipment at cost. External direct costs of materials and services consumed in developing or obtaining internal-use computer software and payroll-related costs for employees developing internal-use computer software projects, to the extent of their time spent directly on the project and specific to application development, are capitalized.
When events or circumstances indicate a potential impairment, we evaluatethe Company evaluates the carrying value of property and equipment based upon current and anticipated undiscounted cash flows. We recognizeThe Company recognizes impairment when it is probable that such estimated future cash flows will be less than the asset carrying value. NaN property and equipment impairment was recognized for each of the years ended December 31, 2021, 2020 and 2019.
Leases
The Company enters into operating lease contracts, as assessed at contract inception, primarily for real estate and equipment. On the lease commencement date, the Company records operating lease liabilities based on the present value of the future lease payments. In determining the present value of future lease payments, the Company utilized estimated rates that it would have incurred to borrow, over a similar term, the funds necessary to purchase the respective leased asset with cash.
The Company elects to apply the short-team lease exception to any leases with contractual obligations of one year or less. These leases will not have a right-of-use (“ROU”) assets and associated lease liabilities on the balance sheet. Instead, rent will be recognized on a straight-line
Goodwill and Other Intangible Assets
OurThe Company’s intangible assets consist of (1) goodwill, which is not subject to amortization; (2) an internet domain name, which is an indefinite-lived intangible not subject to amortization; and (3) amortizing intangibles, which consist of customer lists, trade names, and customer relationships, which are being amortized over their useful lives.
Note 43 describes the annual impairment methodology that we employthe Company uses each year in calculating the recoverability of goodwill and non-amortizing intangibles. This same impairment test is performed at other times during
F-10
the course of a year should an event occur or circumstance change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Recoverability of amortizing intangible assets is assessed only when events have occurred that may give rise to impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets including such intangibles, are written down to their respective fair values. NaN intangible assets impairment was recognized for each of the years ended December 31, 2021, 2020 and 2019.
F-9
Concentrations
Concentrations
Concentrations of credit risk with respect to trade account receivables are limited due to the large number of customers comprising ourthe Company’s customer base. No single customer accounted for more than 3%4% of total net sales in 2018, 2017,2021, 2020, and 2016. While no single agency of the federal government comprised more than 3% of total sales, aggregate sales to the federal government as a percentage of total net sales were 5.4%, 7.8%, and 7.5% in 2018, 2017, and 2016, respectively.2019.
Product purchases from Ingram Micro, Inc. (“Ingram”), our largest supplier,TD Synnex Corporation, and Dell Inc. accounted for approximately 22%23%, 23% and 12% respectively, of our total product purchases in both 2018 and 2017 and 21% in 2016. Purchases2021. Product purchases from Ingram Micro, Inc., TD Synnex Corporation (“Synnex”) comprisedand HP Inc. accounted for approximately 21%, 15% and 12%, 12%, and 13%, respectively, of ourthe Company’s total product purchases in 2018, 2017,2020. Product purchases from Ingram Micro, Inc., TD Synnex Corporation and 2016, respectively. Purchases from Tech Data comprised of 10%, 11% and 8% in 2018, 2017, and 2016, respectively. Purchases from Hewlett-Packard Company, or HP Inc. accounted for approximately 7%21%, 14% and 8% respectively, of ourthe Company’s total product purchases in 2018, 11% in 2017, and 9% in 2016.2019. No other singular vendor supplied more than 10% of ourthe Company’s total product purchases in 2018, 2017, or 2016.2021, 2020 and 2019. We believe that, while wethe Company may experience some short-term disruption if products from Ingram Micro, Inc., TD Synnex Corporation, Dell Inc., and HP and/Inc., or Tech Dataany of these vendors become unavailable to us, alternative sources for these products obtained directly from Ingram, Synnex, HP and Tech Data are available to us.available.
Products manufactured by HP Inc. collectively represented approximately 18%15% of ourthe Company’s net sales in 20182021, 18% in 2020 and approximately 20%19% in both 2017 and 2016. We believe that in2019. In the event we experiencethe Company experiences either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on ourthe Company’s results of operations and cash flows.
Restructuring and other charges
Restructuring and other charges
During 2018, we began presenting restructuring and other charges are presented separately from SG&A expenses. CostsIn the years ended December 31 2020 and 2019, we undertook actions across the business to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred were as follows:
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | |||||||
|
| 2018 |
| 2017 |
| 2016 | |||
Employee separations |
| $ | 967 |
| $ | 640 |
| $ | 1,766 |
Acquisition costs |
|
| — |
|
| — |
|
| 570 |
Relocation expenses |
|
| — |
|
| 84 |
|
| 291 |
Re-branding costs |
|
| — |
|
| — |
|
| 596 |
Employee compensation |
|
| — |
|
| 2,800 |
|
| — |
Other |
|
| — |
|
| 112 |
|
| 183 |
Total restructuring and other charges |
| $ | 967 |
| $ | 3,636 |
| $ | 3,406 |
The net restructuring charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.
The net restructuring and other charges recorded in 2017 were primarily driven by a reduction in workforce at our Headquarters segment, along withrelated costs related toof $1.0 million and $0.7 million for the Softmart business, which was acquired in 2016, including expenses to retain certain key personnel brought over in the acquisition. Also in 2017, we incurred additional expense of $2,700 related to a one-time cash bonus paid to all non-executive employees at the end of the year.
F-10
The net restructuring and other charges recorded in 2016 were primarily driven by a reduction in workforce after the Softmart acquisition and other employee severance expenses incurred throughout the business. We also incurred costs associated with the acquisitions and IT transitions of Softmart and GlobalServe, along with other costs associated with a company-wide rebranding campaign.
Overall, restructuring and other charges consist primarily of employee termination benefits, which are accrued in the period incurred and paid within a year of termination. Included in accrued expenses atyears ended December 31, 2018, 2017,2020 and 20162019, respectively. There were $784, $2, and $417, respectively,0 restructuring related to unpaid employee termination benefits. The amount accrued as ofcosts incurred for the year ended December 31, 2018 is expected to be paid in 2019.2021.
Other restructuring-related charges such as acquisition costs, relocation expenses and significant marketing campaigns are expensed and paid as incurred.
All planned restructuring and other charges were incurred as of December 31, 2018 and we have no ongoing restructuring plans.
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 nonvested stock units and stock options outstanding, if dilutive.
F-11
The following table sets forth the computation of basic and diluted earnings per share:
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| ||||||||||
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| 2018 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
| | | | | | | | | | | ||||||||||
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| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Numerator: |
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|
|
|
|
|
|
| | | | | | | | | | |
Net income |
| $ | 64,592 |
| $ | 54,857 |
| $ | 48,111 |
| | $ | 69,906 | | $ | 55,765 | | $ | 82,111 | |
Denominator: |
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|
|
|
|
|
|
|
|
| | | | | | | | | | |
Denominator for basic earnings per share |
|
| 26,717 |
|
| 26,771 |
|
| 26,528 |
| |
| 26,196 | |
| 26,157 | |
| 26,335 | |
Dilutive effect of employee stock awards |
|
| 137 |
|
| 120 |
|
| 191 |
| |
| 168 | |
| 179 | |
| 170 | |
Denominator for diluted earnings per share |
|
| 26,854 |
|
| 26,891 |
|
| 26,719 |
| |
| 26,364 | |
| 26,336 | |
| 26,505 | |
Earnings per share: |
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|
|
|
|
|
|
| | | | | | | | | | |
Basic |
| $ | 2.42 |
| $ | 2.05 |
| $ | 1.81 |
| | $ | 2.67 | | $ | 2.13 | | $ | 3.12 | |
Diluted |
| $ | 2.41 |
| $ | 2.04 |
| $ | 1.80 |
| | $ | 2.65 | | $ | 2.12 | | $ | 3.10 | |
For the years ended December 31, 2018, 2017,2021, 2020, and 2016, we2019, the Company did not0t exclude any outstanding nonvested stock units or stock options from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.
Other Income (Expense), Net
Other income, net for the year ended December 31, 2018 consisted of $2,255 related to a gain, net of costs incurred of $745, that was realized upon execution of a favorable $3,000 cash resolution of a contract dispute that arose in 2017. We included the $3,000 owed to us in other assets as of December 31, 2018. Also included in other income, net for the year ended December 31, 2018 was interest income of $868, offset partially by interest expense of $145.
Other income, net for the year ended December 31, 2017 consisted of interest income of $224, which was partially offset by interest expense of $126. Other expense, net for the year ended December 31, 2016 consisted of interest expense of $107, which was partially offset by interest income of $40.
Comprehensive Income
We had no items of comprehensive income, other than our net income for each of the periods presented.
F-11
Adoption of Recently Issued Financial Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board, orIn March 2020, the FASB issued ASC 606, which amended the
accounting standards for revenue recognition and expanded our disclosure requirements. The core principleASU 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 that an entity should recognize revenue to depictapplied prospectively and becomes effective immediately upon the transfer of promised goods or services to customers in an amount that reflects the consideration totransition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which the entity expectsis expected to be entitled in exchange for those goods or services.
On January 1, 2018 we adopted ASC 606 using the modified retrospective transition method, which resulted in an
adjustment at January 1, 2018 to retained earnings for the cumulative effectdiscontinued as a result of applying the standard to all contracts not
completedreference rate reform. The optional amendments are effective as of the adoption date. Upon adoption we recorded $1,197 as an increase to retained earnings.March 12, 2020 through December 31, 2022. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The adoption resulted in an acceleration of the timing of revenue recognized for certain transactions where product that remained in our possession has been recognized as of the transaction date when all revenue recognition criteria have been met.
The following table presentsCompany is currently evaluating the effect of the adoption of ASC 606 on our consolidated balance sheets as of January 1, 2018:
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| Adjustments |
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| Balance at |
| due to |
| Balance at |
|
| December 31, 2017 |
| ASC 606 |
| January 1, 2018 |
Balance Sheet |
|
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|
|
Assets |
|
|
|
|
|
|
Accounts receivable, net | $ | 449,682 | $ | 14,568 | $ | 464,250 |
Inventories |
| 106,753 |
| (10,869) |
| 95,884 |
Prepaid expenses and other current assets |
| 5,737 |
| (132) |
| 5,605 |
Long-term accounts receivable |
| — |
| 1,890 |
| 1,890 |
Other assets |
| 5,638 |
| (3,914) |
| 1,724 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Accounts payable |
| 194,257 |
| (62) |
| 194,195 |
Accrued expenses and other liabilities |
| 31,096 |
| (312) |
| 30,784 |
Accrued payroll |
| 22,662 |
| 291 |
| 22,953 |
Deferred income taxes |
| 15,696 |
| 429 |
| 16,125 |
|
|
|
|
|
|
|
Stockholders' Equity |
|
|
|
|
|
|
Retained earnings | $ | 383,673 | $ | 1,197 | $ | 384,870 |
In addition to the timing of revenue recognition impacted by the above-described transactions, upon adoption of ASC 606, the amount of revenue to be recognized prospectively was affected by the presentation of revenue transactions as an agent instead of principal in certain transactions. Specifically, revenue related to the sale of cloud products, as well as certain security software, is now being recognized net of costs as we determined that we act as an agent in these transactions. These sales are recorded on a net basis at a point in time when our vendor and the customer accept the terms and conditions in the sales arrangement. In addition, we sell third-party software maintenance that is delivered over time either separately or bundled with the software license. We have determined that software maintenance is a distinct performance obligation that we do not control, and accordingly, we act as an agent in these transactions and recognized the related revenue on a net basis under ASC 606. We previously recognized revenue for cloud products, security software, and software maintenance on a gross basis (i.e., acting as a principal). This change reduced both net sales and cost of sales with no impact on reported gross profit as compared to our prior accounting policies.
F-12
The following tables present the effect of the adoption of ASC 606 on our consolidated income statement and balance sheet for the year ended December 31, 2018 and as of December 31, 2018, respectively:
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|
| Year Ended December 31, 2018 | ||||
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|
|
|
|
| Balances without |
|
| As |
|
|
| Adoption of |
|
| Reported |
| Adjustments |
| ASC 606 |
Income statement |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
Net sales |
| $ 2,699,489 |
| $ 404,690 |
| $ 3,104,179 |
|
|
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|
|
Costs and expenses |
|
|
|
|
|
|
Cost of sales |
| 2,288,403 |
| 403,737 |
| 2,692,140 |
|
|
|
|
|
|
|
Income from operations |
| 85,686 |
| 750 |
| 86,436 |
Income before taxes |
| 88,664 |
| 750 |
| 89,414 |
Net income |
| 64,592 |
| 526 |
| 65,118 |
|
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|
|
| December 31, 2018 | ||||
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|
| Balances without |
|
| As |
|
|
| Adoption of |
|
| Reported |
| Adjustments |
| ASC 606 |
Balance Sheet |
|
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|
|
|
|
Assets |
|
|
|
|
|
|
Accounts receivable, net |
| $ 447,698 |
| $ (6,949) |
| $ 440,749 |
Inventories |
| 119,195 |
| 4,798 |
| 123,993 |
Prepaid expenses and other current assets |
| 9,661 |
| 148 |
| 9,809 |
Other assets |
| 1,211 |
| 3,914 |
| 5,125 |
|
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Liabilities |
|
|
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|
|
|
Accrued expenses and other liabilities |
| $ 33,840 |
| $ 2,904 |
| $ 36,744 |
Accrued payroll |
| 24,319 |
| (116) |
| 24,203 |
Deferred income taxes |
| 17,184 |
| (219) |
| 16,965 |
|
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Stockholders' Equity |
|
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Retained earnings |
| $ 441,010 |
| $ (657) |
| $ 440,353 |
We have elected the use of certain practical expedients in our adoption of the new standard, which includes continuing to record revenue reported net of applicable taxes imposed on the related transaction and the application of the new standard to all arrangements not completed as of the adoption date. We have also elected to use the practical expedient to not account for the shipping and handling as separate performance obligations. Adoptions of the standard related to revenue recognition had no net impact on our consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The Company adopted this standard on January 1, 2017. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, includingCompany, but does not believe the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This change eliminates the notion of the additional paid-in capital pool and reduces the complexity in accounting for excess tax benefits and tax deficiencies. The primary impact of our adoption was the recognition of excess tax benefits related to equity compensation in our provision for income taxes rather than paid-in capital, which is a change required to be applied on a prospective basis in accordance with the new guidance. There were no unrecognized excess tax benefits at
F-13
implementation. Accordingly, we recorded discrete income tax benefits in the consolidated statements of income of $1,054 in the year ended December 31, 2017, for excess tax benefits related to equity compensation. The corresponding cash flows were reflected in cash provided by operating activities instead of financing activities, as was previously required. We adopted the cash flow presentation that requires presentation of excess tax benefits within operating activities on a prospective basis. Additionally, under ASU 2016-09, we have elected to continue to estimate equity award forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld shares also had no impact to any of the periods presented in our consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.
Recently Issued Financial Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018 and will be adopted using a modified retrospective transition approach on January 1, 2019. The Company has reviewed the requirements of the new standard and expects that it will have a material impacteffect on ourits consolidated financial statements, as all long-term leases will be capitalized on the consolidated balance sheet. The Company has identified the population of leases and lease assets, has selected a software repository to track all of its lease agreements and to assist in the reporting and disclosures required by the new standard, and is still in the process of testing the data and calculations performed by the software. The Company is also in the process of implementing changes to our procedures and controls in conjunction with both the review of existing lease agreements and any future agreements that will be accounted for under this new standard. The future lease payments that will be subject to the new accounting standard are disclosed in Note 12 to the financial statements.
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. ASU 2017-04 is effective for us beginning January 1, 2020 for both interim and annual reporting periods. We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.
2. REVENUE
Nature of Products and Services
Information technology (“IT”) products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which is generally upon delivery to the customer. We recognizeThe Company recognizes revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we controlit controls the product prior to delivery to the customer and derive the economic benefits from the sales transaction given ourthe Company’s control over customer pricing.
We doThe Company does not recognize revenue for goods that remain in ourits physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we havethe Company has no ability to use the product or to direct it to another customer.
F-14
Licenses for on-premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We areThe Company is the principal in these transactions and recognizerecognizes revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable.
For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other
F-12
support services. We doThe Company does not have control over the delivery of these performance obligations, and accordingly we arethe Company is the agent in these transactions. We recognizeThe Company recognizes revenue for security software net of the related costs of sales at the point in time when ourits vendor and customer accept the terms and conditions in the sales arrangement. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We doThe Company does not exercise control over these products or services and therefore areis an agent in these transactions. We recognizeThe Company recognizes revenue for cloud products net of the related costs of sales at the point in time when ourits vendor and customer accept the terms and conditions in the sales arrangements.
Certain software sales include on-premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk support, and other support services transferred over the underlying contract period. On-premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sellthe Company sells these items separately. We recognizeThe Company recognizes revenue related to the software maintenance as the agent in these transactions because we doit does not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when ourthe Company’s vendor and customer accept the terms and conditions in the sales arrangements.
Certain of ourthe Company’s larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under enterprise agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most EAs, ourthe Company’s vendors will transfer the license and bill the customer directly, paying resellers, such as us,the Company, an agency fee or commission on these sales. We recordThe Company records these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we invoicethe Company invoices the customer directly under an EA and account for the individual items sold based on the nature of each item. OurThe Company’s vendors typically dictate how the EA will be sold to the customer.
WeThe Company also offeroffers extended service plans (“ESP”) on IT products, both as part of the initial arrangement and separately from the IT products. We recognizeThe Company recognizes revenue related to ESP as the agent in the transaction because we doit does not have control over the on-going ESP service and dodoes not provide any service after the sale. Revenue allocated to ESP is recognized at the point in time when ourthe Company’s vendor and customer accept the terms and conditions in the sales arrangement.
We use ourThe Company uses its own engineering personnel to assist in projects involving the design and installation of systems and networks, and we also engageengages third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as we performthe Company performs the underlying services and satisfy oursatisfies its performance obligations. We evaluateThe Company evaluates such engagements to determine whether we areit is the principal or the agent in each transaction. For those transactions in which we dothe Company does not control the service, we actthe Company acts as an agent and recognizerecognizes the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.
All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.
F-15
Significant Judgments
OurThe Company’s contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether we arethe Company is the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
We estimateF-13
The Company estimates the standalone selling price (“SSP”) for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. We maximizeThe Company maximizes the use of observable inputs in the determination of the estimate for SSP for the items that we doit does not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we dothe Company does not sell the product or service separately, we determinethe Company determines the SSP using information that may include market conditions and other observable inputs.
We provide ourThe Company provides its customers with a limited thirty-day right of return, which is generally limited to defective merchandise.merchandise, and gives rise to variable consideration. Revenue is recognized at delivery andbased on the most likely amount to which it is expected to be entitled. The estimated variable consideration is included in the transaction price to the extent it is probable that a reserve for sales returnssignificant reversal of cumulative revenue recognized will not occur once the uncertainty is recorded. We makeresolved. The Company makes estimates of product returns based on significant historical experience and record ourexperience. The Company records its sales return reservesreserve as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses.expenses and as a reduction of cost of sales and an associated right of return asset.
Description of Revenue
We disaggregateThe Company disaggregates revenue from ourits arrangements with customers by type of products and services, as we believeit 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 twelve monthsyear ended December 31, 20182021, 2020 and 2017,2019, along with the reportable segment for each category.
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|
|
|
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|
|
|
|
| Twelve Months Ended December 31, 2018 (1) | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 299,247 |
| $ | 272,589 |
|
| 138,818 |
| $ | 710,654 |
Accessories |
|
| 95,342 |
|
| 214,102 |
|
| 43,696 |
|
| 353,140 |
Software |
|
| 134,071 |
|
| 135,420 |
|
| 45,365 |
|
| 314,856 |
Desktops |
|
| 108,096 |
|
| 126,643 |
|
| 53,569 |
|
| 288,308 |
Servers/Storage |
|
| 111,559 |
|
| 102,209 |
|
| 59,653 |
|
| 273,421 |
Displays and sound |
|
| 89,779 |
|
| 109,497 |
|
| 52,760 |
|
| 252,036 |
Net/Com products |
|
| 109,702 |
|
| 62,060 |
|
| 52,287 |
|
| 224,049 |
Other hardware/services |
|
| 80,122 |
|
| 142,622 |
|
| 60,281 |
|
| 283,025 |
Total net sales |
| $ | 1,027,918 |
| $ | 1,165,142 |
| $ | 506,429 |
| $ | 2,699,489 |
|
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility | | $ | 426,022 | | $ | 428,868 | | $ | 241,146 | | $ | 1,096,036 |
Desktops | | | 87,822 | | | 140,468 | | | 45,989 | | | 274,279 |
Software | | | 120,104 | | | 119,423 | | | 39,611 | | | 279,138 |
Servers/Storage | | | 92,922 | | | 66,027 | | | 37,081 | | | 196,030 |
Net/Com Products | |
| 81,681 | |
| 86,454 | | | 34,336 | |
| 202,471 |
Displays and Sound | | | 99,474 | | | 125,610 | | | 59,153 | | | 284,237 |
Accessories | |
| 115,048 | |
| 179,249 | | | 44,104 | |
| 338,401 |
Other Hardware/Services | |
| 75,423 | |
| 103,360 | | | 43,220 | |
| 222,003 |
Total net sales | | $ | 1,098,496 | | $ | 1,249,459 | | $ | 544,640 | | $ | 2,892,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve Months Ended December 31, 2017 (1) | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 299,029 |
|
| 213,352 |
|
| 123,908 |
| $ | 636,289 |
Accessories |
|
| 86,339 |
|
| 166,898 |
|
| 50,058 |
|
| 303,295 |
Software |
|
| 271,805 |
|
| 284,003 |
|
| 103,680 |
|
| 659,488 |
Desktops |
|
| 116,931 |
|
| 106,779 |
|
| 98,160 |
|
| 321,870 |
Servers/Storage |
|
| 116,770 |
|
| 84,612 |
|
| 56,322 |
|
| 257,704 |
Displays and sound |
|
| 90,868 |
|
| 86,398 |
|
| 57,099 |
|
| 234,365 |
Net/Com products |
|
| 95,043 |
|
| 63,741 |
|
| 59,359 |
|
| 218,143 |
Other hardware/services |
|
| 81,854 |
|
| 126,040 |
|
| 72,835 |
|
| 280,729 |
Total net sales |
| $ | 1,158,639 |
| $ | 1,131,823 |
| $ | 621,421 |
| $ | 2,911,883 |
|
|
F-16F-14
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility | | $ | 319,046 | | $ | 303,471 | | $ | 203,090 | | $ | 825,607 |
Desktops | | | 89,828 | | | 129,011 | | | 36,744 | | | 255,583 |
Software | | | 124,681 | | | 115,596 | | | 42,793 | | | 283,070 |
Servers/Storage | |
| 93,535 | | | 76,107 | | | 42,694 | | | 212,336 |
Net/Com Products | |
| 75,141 | |
| 96,203 | | | 47,930 | |
| 219,274 |
Displays and Sound | | | 85,769 | | | 78,312 | | | 51,502 | | | 215,583 |
Accessories | | | 113,402 | |
| 201,562 | | | 47,504 | |
| 362,468 |
Other Hardware/Services | |
| 64,630 | |
| 115,307 | | | 36,432 | |
| 216,369 |
Total net sales | | $ | 966,032 | | $ | 1,115,569 | | $ | 508,689 | | $ | 2,590,290 |
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility | | $ | 317,282 | | $ | 322,530 | | | 166,132 | | $ | 805,944 |
Desktops | | | 127,373 | | | 154,602 | | | 63,949 | | | 345,924 |
Software | | | 146,287 | | | 133,584 | | | 54,956 | | | 334,827 |
Servers/Storage | |
| 105,617 | | | 72,445 | | | 60,334 | | | 238,396 |
Net/Com Products | |
| 94,340 | |
| 72,185 | | | 52,776 | |
| 219,301 |
Displays and Sound | | | 88,667 | | | 105,172 | | | 56,183 | | | 250,022 |
Accessories | | | 98,890 | |
| 211,772 | | | 46,647 | |
| 357,309 |
Other Hardware/Services | |
| 81,593 | |
| 121,530 | | | 65,188 | |
| 268,311 |
Total net sales | | $ | 1,060,049 | | $ | 1,193,820 | | $ | 566,165 | | $ | 2,820,034 |
Contract Balances
The following table provides information about contract liabilityliabilities from arrangements with customers as of December 31, 20182021 and January 1, 2018:December 31, 2020:
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|
|
|
| December 31, 2018 |
| January 1, 2018 | ||
Contract liability, which are included in "Accrued expenses and other liabilities" |
| $ | 2,679 |
| $ | 2,914 |
| | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||
Contract liabilities, which are included in "Accrued expenses and other liabilities" | | $ | 8,628 | | $ | 3,509 |
Significant changes
Changes in the contract liability balances during the yearyears ended December 31, 20182021 and 2020 are as follows (in thousands):
|
|
|
| |||
|
| Year Ended | ||||
|
| December 31, | ||||
Balances at January 1, 2018 |
| $ | 2,914 | |||
| | | | |||
|
| 2021 | ||||
Balances at December 31, 2020 | | $ | 3,509 | |||
Cash received in advance and not recognized as revenue |
|
| 16,279 | |
| 28,114 |
Amounts recognized as revenue as performance obligations satisfied |
|
| (16,514) | |
| (22,995) |
Balances at December 31, 2018 |
| $ | 2,679 | |||
Balances at December 31, 2021 | | $ | 8,628 | |||
| | | | |||
| | 2020 | ||||
Balances at December 31, 2019 | | $ | 5,942 | |||
Cash received in advance and not recognized as revenue | |
| 10,800 | |||
Amounts recognized as revenue as performance obligations satisfied | |
| (13,233) | |||
Balances at December 31, 2020 | | $ | 3,509 | |||
3. ACQUISITIONS
Softmart Acquisition
On May 27, 2016, we acquired substantially all of the assets of Softmart Inc. (“Softmart”), a global supplier of information technology and software services solutions. The purchase of Softmart is consistent with our strategy to expand our software services capabilities. Under the terms of the asset purchase agreement, we paid $31,899, net of cash acquired, and allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The excess of the purchase price over the net assets acquired represents potential synergies from Softmart’s customer base and its assembled workforce of sales representatives and software service specialists that we acquired in the transaction. This excess of purchase price over the aggregate fair values was recorded as goodwill. We incurred $357 of transaction costs in 2016 related to the acquisition which we have reported in selling, general and administrative expenses in our consolidated statement of income for the year ended December 31, 2016. The operating results of Softmart have been included in the SMB and Large Accounts segments since the acquisition date. The revenues and income from operations were not material to our consolidated results, and accordingly, we have not presented Softmart’s revenues or operating results on a pro forma basis.
The following table reflects components of the net assets acquired and liabilities assumed at fair value as of the closing date.
|
|
|
|
|
|
| Purchase Price |
| |
|
| Allocation |
| |
Current assets |
| $ | 22,812 |
|
Fixed assets |
|
| 343 |
|
Goodwill |
|
| 14,314 |
|
Customer relationships |
|
| 11,300 |
|
Total assets acquired |
|
| 48,769 |
|
Acquired liabilities |
|
| (16,252) |
|
Net assets acquired |
|
| 32,517 |
|
Less cash acquired |
|
| (628) |
|
Purchase price at closing, net of cash acquired |
| $ | 31,889 |
|
k
F-17F-15
We recorded goodwill of $7,366 and $6,948 in our SMB and Large Account segments, respectively, and the aggregate is expected to be fully deductible for tax purposes.
GlobalServe Acquisition
On October 11, 2016, we acquired the outstanding common shares of GlobalServe, Inc. (“GlobalServe”), which has developed an Internet portal tool that simplifies customers’ global IT procurement. Under the terms of the stock purchase agreement, we paid $11,101, net of cash acquired. The purchase of GlobalServe allows us to service our customers’ global IT needs through this OneSource Internet portal with consistent delivery, reporting, pricing, and logistics. We allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition and recorded the excess of purchase price over the aggregate fair values as goodwill. In 2016 we incurred $118 of transaction costs related to the acquisition which we have reported in selling, general and administrative expenses in our consolidated statement of income for the year ended December 31, 2016. We have included the operating results of GlobalServe in the Large Account segment since the acquisition date. The revenues and income from operations were not material to our consolidated results, and accordingly, we have not presented GlobalServe’s revenues or operating results on a pro forma basis.
The following table reflects components of the net assets acquired and liabilities assumed at fair value as of the closing date.
|
|
|
|
|
|
| Purchase Price |
| |
|
| Allocation |
| |
Current assets |
| $ | 1,486 |
|
Fixed assets |
|
| 4,609 |
|
Goodwill |
|
| 8,012 |
|
Customer relationships |
|
| 900 |
|
Total assets acquired |
|
| 15,007 |
|
Acquired liabilities |
|
| (734) |
|
Deferred taxes and unrecognized tax benefits |
|
| (2,390) |
|
Net assets acquired |
|
| 11,883 |
|
Less cash acquired |
|
| (782) |
|
Purchase price at closing, net of cash acquired |
| $ | 11,101 |
|
We recorded $8,012 of goodwill as a result of our acquisition of GlobalServe in our Large Account segment. None of the goodwill related to this acquisition will be deductible for tax purposes.
k
4.3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill
is held by the Company’s Large Account and SMB segments. Goodwill and intangible assets with indefinite lives are subject to an annual impairment test as of November 30 and tested more frequently if events or circumstances occur that would indicate a potential decline in fair value. For goodwill,
In 2021 and 2020, the Company performed a two-step quantitative testqualitative “step 0”analysis. ASC 350—Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is performed at a reporting unit level which requires, under the first step,more likely than not that the fair value of a reporting unit is determined and compared to the reporting unit’sless than its carrying value,amount, including goodwill. To assessThis analysis allows the fair valueCompany to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a reporting unit, both incomemore detailed quantitative analysis would be necessary. Factors considered when performing the impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market valuation approaches are used. If the fair value is determined to be less than the carrying value, the second step is performed to measure the amount, if any, of the impairment.
Historically, wetrends, cost factors that may have performed our annual impairment test of an indefinite-lived domain namea negative impact on earnings and goodwill as of the first day of the calendar year. Beginning in 2018, we performed the test as of November 30. We assessed the potential impact this change might have on the outcome of the impairment analysis and on the overall consolidated results and determined that the impact, if any, would be immaterial. We made this conclusion based on the following factors: 1) the old and new testing dates are close in proximity, 2) based on historical impairment analyses performed,
F-18
the goodwill and intangible assets measured do not present a significant risk of impairment, and 3) we do not expect that changing the dates would produce different impairment results.
Goodwill is held by our Large Account and SMB reporting units. The fair value of the domain name and the two reporting units each substantially exceeded the respective carrying value, and accordingly, an impairment was not identified in the annual test. We also did not identify any events or circumstances that would indicate that it is more likely than not that the carrying values of the reporting units or the domain name were in excess of the respective fair values during the year ended December 31, 2018.
To determine the fair value of our reporting units, we considered operating results and future projections, as well ascash flows, changes in the Company’s overallstock price and market capitalization. The significant assumptions used in our discounted cash flowcapitalization, and other relevant entity-specific events.
Based on the above qualitative analysis, include: projected cash flowsthe Company determined goodwill was not impaired for the years ended December 31, 2021 and profitability, the discount rate used to present value future cash flows, working capital requirements, and terminal growth rates. Cash flows and profitability assumptions include sales growth, gross margin, and SG&A growth assumptions which are generally based on historical trends. The discount rate used is a "market participant" weighted average cost of capital ("WACC"). For our computation of fair value as of November 30, 2018, we used a WACC rate of 12.5%, and estimated terminal growth rate at 3.0% and working capital requirements at 9.5% of revenues. 2020.
The carrying amount of goodwill for the periods presented is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2017 |
| SMB |
| Large Account |
| Public Sector |
| Total |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Balance at December 31, 2021 |
| SMB |
| Large Account |
| Public Sector |
| Total |
| |||||||||||||||||
Goodwill, gross |
| $ | 8,539 |
| $ | 66,236 |
| $ | 7,634 |
| $ | 82,409 |
| | $ | 8,539 | | $ | 66,236 | | $ | 7,634 | | $ | 82,409 | |
Accumulated impairment losses |
|
| (1,173) |
|
| ─ |
|
| (7,634) |
|
| (8,807) |
| |
| (1,173) | |
| ─ | |
| (7,634) | |
| (8,807) | |
Net balance |
| $ | 7,366 |
| $ | 66,236 |
| $ | — |
| $ | 73,602 |
| | $ | 7,366 | | $ | 66,236 | | $ | — | | $ | 73,602 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2018 |
| SMB |
| Large Account |
| Public Sector |
| Total |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Balance at December 31, 2020 |
| SMB |
| Large Account |
| Public Sector |
| Total |
| |||||||||||||||||
Goodwill, gross |
| $ | 8,539 |
| $ | 66,236 |
| $ | 7,634 |
| $ | 82,409 |
| | $ | 8,539 | | $ | 66,236 | | $ | 7,634 | | $ | 82,409 | |
Accumulated impairment losses |
|
| (1,173) |
|
| ─ |
|
| (7,634) |
|
| (8,807) |
| |
| (1,173) | |
| ─ | |
| (7,634) | |
| (8,807) | |
Net balance |
| $ | 7,366 |
| $ | 66,236 |
| $ | — |
| $ | 73,602 |
| | $ | 7,366 | | $ | 66,236 | | $ | — | | $ | 73,602 | |
Intangible Assets
At December 31, 2018, our2021, the Company’s intangible assets included a domain name for $450, which has an indefinite life and is not subject to amortization. In addition, we acquired in 2016 the Company acquired customer relationships from ourits Softmart and GlobalServe acquisitions, which will beare amortized on a straight-line basis over their estimated useful lives of 10 years. OurThe Company’s remaining intangible assets are amortized in proportion to the estimates of the future cash flows underlying the valuation of the assets. Intangible assets and related accumulated amortization are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
| December 31, 2018 |
| December 31, 2017 |
| |||||||||||||||||||||||||||||||||||
|
| Estimated |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| |||||||||||||||||||||||||||
|
| Useful Lives |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | | | December 31, 2021 | | December 31, 2020 |
| |||||||||||||||||||||||||||||||||||
|
| Estimated |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| |||||||||||||||||||||||||||
| | Useful Lives | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| |||||||||||||||||||||||||||
Customer list |
| 8 |
| $ | 3,400 |
| $ | 3,364 |
| $ | 36 |
| $ | 3,400 |
| $ | 3,143 |
| $ | 257 |
| | 8 | | $ | 3,400 | | $ | 3,400 | | $ | — | | $ | 3,400 | | $ | 3,400 | | $ | — | |
Tradename |
| 5 |
|
| 1,190 |
|
| 1,190 |
|
| — |
|
| 1,190 |
|
| 1,190 |
|
| — |
| | 5 | |
| 1,190 | |
| 1,190 | |
| — | |
| 1,190 | |
| 1,190 | |
| — | |
Customer relationships |
| 10 |
|
| 12,200 |
|
| 3,122 |
|
| 9,078 |
|
| 12,200 |
|
| 1,882 |
|
| 10,318 |
| | 10 | |
| 12,200 | |
| 6,782 | |
| 5,418 | |
| 12,200 | |
| 5,562 | |
| 6,638 | |
Total intangible assets |
|
|
| $ | 16,790 |
| $ | 7,676 |
| $ | 9,114 |
| $ | 16,790 |
| $ | 6,215 |
| $ | 10,575 |
| | | | $ | 16,790 | | $ | 11,372 | | $ | 5,418 | | $ | 16,790 | | $ | 10,152 | | $ | 6,638 | |
F-19F-16
In 2018, 2017,2021, 2020, and 2016, we2019, the Company recorded amortization expense of $1,461, $1,561,$1,220, $1,220, and $1,281,$1,257, respectively. The estimated amortization expense relating to intangible assets in each of the five succeeding years and thereafter is as follows:
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
2019 |
| $ | 1,256 |
|
2020 |
|
| 1,220 |
|
2021 |
|
| 1,220 |
|
2022 |
|
| 1,220 |
|
2023 |
|
| 1,220 |
|
2024 and thereafter |
|
| 2,978 |
|
|
| $ | 9,114 |
|
| | | | |
For the Years Ended December 31, |
| | |
|
2022 | | $ | 1,220 | |
2023 | |
| 1,220 | |
2024 | |
| 1,220 | |
2025 | |
| 1,220 | |
2026 | | | 538 | |
| | $ | 5,418 | |
.
5.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Trade |
| $ | 401,530 |
| $ | 398,524 |
|
Vendor consideration, returns and other |
|
| 52,560 |
|
| 57,043 |
|
Due from employees |
|
| 107 |
|
| 149 |
|
Total gross accounts receivable |
|
| 454,197 |
|
| 455,716 |
|
Allowances for: |
|
|
|
|
|
|
|
Sales returns |
|
| (3,397) |
|
| (3,308) |
|
Doubtful accounts |
|
| (3,102) |
|
| (2,726) |
|
Accounts receivable, net |
| $ | 447,698 |
| $ | 449,682 |
|
| | | | | | | |
| | December 31, |
| ||||
|
| 2021 |
| 2020 |
| ||
Trade | | $ | 568,964 | | $ | 553,823 | |
Vendor consideration, returns and other | |
| 47,506 | |
| 66,461 | |
Due from employees | |
| 105 | |
| 159 | |
Total gross accounts receivable | |
| 616,575 | |
| 620,443 | |
Allowances for: | | | | | | | |
Sales returns | |
| (4,218) | |
| (4,014) | |
Credit losses | |
| (4,825) | |
| (5,408) | |
Accounts receivable, net | | $ | 607,532 | | $ | 611,021 | |
6.5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Computer software, including licenses and internally-developed software |
| $ | 75,528 |
| $ | 58,320 |
|
Furniture and equipment |
|
| 36,147 |
|
| 33,176 |
|
Leasehold improvements |
|
| 8,102 |
|
| 7,787 |
|
Total |
|
| 119,777 |
|
| 99,283 |
|
Accumulated depreciation and amortization |
|
| (67,978) |
|
| (57,792) |
|
Property and equipment, net |
| $ | 51,799 |
| $ | 41,491 |
|
| | | | | | | |
| | December 31, |
| ||||
|
| 2021 |
| 2020 |
| ||
Computer software, including licenses and internally-developed software | | $ | 96,264 | | $ | 100,285 | |
Furniture and equipment | |
| 37,040 | |
| 35,788 | |
Leasehold improvements | |
| 8,668 | |
| 8,683 | |
Total | |
| 141,972 | |
| 144,756 | |
Accumulated depreciation and amortization | |
| (80,961) | |
| (83,219) | |
Property and equipment, net | | $ | 61,011 | | $ | 61,537 | |
We recorded depreciation and amortization expense for property and equipment of $12,602, $10,278,$10,982, $12,383, and $9,172$12,057 in 2018, 2017,2021, 2020, and 2016,2019, respectively.
F-17
6. LEASES
The Company leases certain facilities from a related party, which is affiliated with the Company through common ownership. Included in the right-of-use asset as of December 31, 2021 was $2,318 and a corresponding lease liability of $2,318 associated with related party leases.
As of December 31, 2021, the Company had 0 leases that were classified as financing leases and there were 0 additional operating or financing leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases for the year ended December 31, 2021 and 2020:
| | | | | | | | | |
|
| Year Ended December 31, 2021 | |||||||
|
| Related Parties | | Others | | Total | |||
Lease Cost | |
|
| |
|
| |
|
|
Capitalized operating lease cost | | $ | 1,253 | | $ | 3,021 | | $ | 4,274 |
Short-term lease cost | |
| 426 | |
| 92 | |
| 518 |
Total lease cost | | $ | 1,679 | | $ | 3,113 | | $ | 4,792 |
| | | | | | | | | |
Other Information | |
|
| |
|
| |
|
|
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: | |
| | |
| | |
| |
Operating cash flows | | $ | 1,253 | | $ | 3,128 | | $ | 4,381 |
| | | | | | | | | |
Weighted-average remaining lease term (in years): | |
|
| |
|
| |
|
|
Capitalized operating leases | | | 1.92 | | | 4.46 | | | 3.89 |
| | | | | | | | | |
Weighted-average discount rate: | | | | | | | | | |
Capitalized operating leases | | | 3.92% | | | 3.92% | | | 3.92% |
| | | | | | | | | |
|
| Year Ended December 31, 2020 | |||||||
|
| Related Parties | | Others | | Total | |||
Lease Cost | |
|
| |
|
| |
|
|
Capitalized operating lease cost | | $ | 1,385 | | $ | 3,170 | | $ | 4,555 |
Short-term lease cost | |
| 295 | |
| 14 | |
| 309 |
Total lease cost | | $ | 1,680 | | $ | 3,184 | | $ | 4,864 |
| | | | | | | | | |
Other Information | |
|
| |
|
| |
|
|
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: | |
| | |
| | |
| |
Operating cash flows | | $ | 1,385 | | $ | 3,272 | | $ | 4,657 |
| | | | | | | | | |
Weighted-average remaining lease term (in years): | |
|
| |
|
| |
|
|
Capitalized operating leases | | | 2.92 | | | 5.57 | | | 4.89 |
| | | | | | | | | |
Weighted-average discount rate: | | | | | | | | | |
Capitalized operating leases | | | 3.92% | | | 3.92% | | | 3.92% |
F-18
As of December 31, 2021, future lease payments over the remaining term of capitalized operating leases were as follows:
| | | | | | | | | |
For the Years Ended December 31, |
| | Related Parties |
| | Others |
| | Total |
2022 | | $ | 1,253 | | $ | 2,471 | | $ | 3,724 |
2023 | |
| 1,149 | |
| 1,948 | |
| 3,097 |
2024 | |
| — | |
| 1,644 | |
| 1,644 |
2025 | |
| — | |
| 1,577 | |
| 1,577 |
2026 | | | — | | | 888 | | | 888 |
Thereafter | | | — | | | 1 | | | 1 |
| | $ | 2,402 | | $ | 8,529 | | $ | 10,931 |
| | | | | | | | | |
Imputed interest | | | | | | | | | (720) |
Lease liability balance at December 31, 2021 | | | | | | | | $ | 10,211 |
| | | | | | | | | |
As of December 31, 2021, the ROU asset had a balance of $9,579. The long-term lease liability was $6,789 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,422.
As of December 31, 2020, the ROU asset had a balance of $12,821 The long-term lease liability was $9,631 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,928.
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
| ||||||
|
| December 31, | ||||||||||
|
| 2018 |
| 2017 | ||||||||
| | | | | | | ||||||
| | December 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Customer and vendor deposits |
| $ | 8,880 |
| $ | 7,763 | | $ | 33,429 | | $ | 28,438 |
Dividends payable |
|
| 8,453 |
|
| 9,122 | ||||||
Sales taxes |
|
| 7,632 |
|
| 5,905 | ||||||
Sales tax | | | 10,471 | | | 8,400 | ||||||
Dividend Payable | |
| — | |
| 8,375 | ||||||
Short term lease liability | | | 3,422 | | | 3,928 | ||||||
Other |
|
| 8,875 |
|
| 8,306 | |
| 14,508 | |
| 8,445 |
Accrued expenses and other liabilities |
| $ | 33,840 |
| $ | 31,096 | | $ | 61,830 | | $ | 57,586 |
8. GAIN ON LIFE INSURANCE
The Company owns and is the beneficiary of 1 life insurance policy on Patricia Gallup, the Company’s Chair and Chief Administrative Officer. This policy had a total cash value recorded as “Other assets” on the Company’s balance sheet of approximately $200 as of December 31, 2021 and December 31, 2020 respectively.
On November 14, 2020, David Hall, 1 of the Company co-founders and a member of the Company’s Board of Directors passed away. The Company owned and was the beneficiary of 2 life insurance policies on Mr. Hall. These policies had a total cash value of approximately $400 recorded as “Other assets” on the Company’s balance sheet as of December 31, 2019. After the death of Mr. Hall, $1,500 was recorded as receivable on the Company’s balance sheet in 2020. The difference between the total insurance proceeds and the cash surrender value of the policies was $1,061, which was recorded as non-operating income for the year ended December 31, 2020. The life insurance proceeds were received in 2021, which are not subject to federal or state income taxes.
F-20F-19
8.9. BANK BORROWINGS
We haveThe Company has a $50,000 credit facility collateralized by ourits account receivables that expires February 10, 2022.March 31, 2025. This facility can be increased, at ourthe Company’s 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 greatest of (i) the prime rate (3.25% at December 31, 2021), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate (“LIBOR”) (2.51% at December 31, 2018) , plus a spread based on our funded debt ratio, or in1.00% per annum, provided that the absence of LIBOR, the prime rate (5.50%shall at December 31, 2018).no time be less than 0% per annum. 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 Adjusted EBITDA (EarningsEarnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges)Charges (Adjusted EBITDA). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in ourthe Company’s consolidated Adjusted EBITDA could limit ourits potential borrowing capacity under the credit facility. WeThe Company had no0 outstanding bank borrowings at December 31, 20182021 or 2017,2020, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility. As of December 31, 2021, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
9.In December of 2021, we entered into an amendment to our credit facility to, among other things, extend the maturity date to March 31, 2025, at which time any amounts outstanding shall become due. See “Part II – Item 9b. Other Information – Third Amendment to Third Amended and Restated Credit and Security Agreement” for additional information.
10. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Preferred Stock
OurThe Company’s Amended and Restated Certificate of Incorporation (the “Restated Certificate”) authorizes the issuance of up to 10,000 shares of preferred stock, $.01 par value per share (the “Preferred Stock”). Under the terms of the Restated Certificate, the Board is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue by a unanimous vote such shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such rights, preferences, privileges, and restrictions, including voting rights, dividend rights, redemption privileges, and liquidation preferences, as shall be determined by the Board. There were no0 preferred shares outstanding at December 31, 20182021 or 2017.2020.
Share Repurchase Authorization
As of December 31, 2017, there was $30.0 million authorized for share repurchase. In 2001, our Board of Directors authorized2018, the spending of up to $15,000 to repurchase shares of our common stock. In 2014, ourCompany’s Board approved a new share repurchase program authorizing up to an additional $15,000 in share repurchases, for a total authorized repurchase amount of $30,000. We consider block repurchases directly from larger stockholders, as well as open market purchases, in carrying out our ongoing stock repurchase program.
In 2018, we repurchased 535 shares for $15,374 under the Board-approved repurchase programs. As of December 31, 2018, we have repurchased an aggregate of 2,217 shares for $27,608 under our Board-approved repurchase programs.
On December 17, 2018, our Board approved a new share repurchase program authorizing up to $25,000$25.0 million in additional share repurchases. There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. We intend to complete the remaining 2001 and 2014 repurchase programs before repurchasing shares under the new program. The timing and amount of any share repurchases will be based on market conditions and other factors. At
There was 0 shares repurchases during the year ended December 31, 2018,2021. The Company repurchased 247 and 135 shares for $10.2 million and $4.5 million during the years ended December 31, 2020 and 2019, respectively, under Board-authorized repurchase programs. As of December 31, 2021, the Company has repurchased an aggregate of 2,599 shares for $42.3 million under Board-authorized repurchase programs, and the maximum approximate dollar value of shares that may yet be purchased under the Company’s existing Board-authorized programsprogram is $27,392.$12.7 million.
F-21F-20
Dividend Payments
The following table summarizes ourthe Company’s special cash dividends declared in the three years ended December 31, 2018:2021, 2020 and 2019:
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| ||||||||||
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| 2018 |
| 2017 |
| 2016 |
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| | | | | | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Dividend per share |
| $ | 0.32 |
| $ | 0.34 |
| $ | 0.34 |
| | $ | 1.00 | | $ | 0.32 | | $ | 0.32 | |
Stockholder record date |
|
| 12/28/2018 |
|
| 12/29/2017 |
|
| 12/30/2016 |
| |
| 11/18/2021 | |
| 1/12/2021 | |
| 12/27/2019 | |
Total dividend |
| $ | 8,452 |
| $ | 9,122 |
| $ | 9,041 |
| | $ | 26,224 | | $ | 8,375 | | $ | 8,427 | |
Payment date |
|
| 1/11/2019 |
|
| 1/12/2018 |
|
| 1/12/2017 |
| | | 12/03/2021 | | | 1/29/2021 | |
| 1/10/2020 | |
The dividends paid in January 2019, 20182020 and 20172019 were included in accrued expenses and other liabilities at December 31, 2018, 20172020 and 2016. We have no current plans to pay additional cash dividends on our common stock in the foreseeable future, and declaration2019, respectively. Declaration of any future cash dividends will depend upon ourthe Company’s financial position, strategic plans, and general business conditions.
Equity Compensation Plan Descriptions
In 2007, the Board adopted and ourthe Company’s stockholders approved the 2007 Stock Incentive Plan. In 2010, the Board adopted and ourthe stockholders approved the Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”), which, among other things, extended the term of the 2007 Plan to 2020. In May 2016, our2019, the Company’s stockholders approved an amendment to the 2007 Plan, which authorized the issuance of 1,7001,900 shares of common stock. Under the terms of the 2007 Plan, we arethe Company is authorized, for a ten-year period, to grant options, stock appreciation rights, nonvested stock, nonvested stock units, and other stock-based awards to employees, officers, directors, and consultants.
In 2020, the Board adopted and the Company’s stockholders approved the 2020 Stock Incentive Plan (the “2020 plan”), which replaces the Amended and Restated 2007 Stock Incentive Plan. The 2020 plan extended the term of the Restated 2007 plan and authorized the issuance of 350 shares of common stock plus any shares that remain available for grant under the Restated 2007 plan. As of December 31, 2018,2021, there were 8188 shares eligible for future grants under the 20072020 Plan.
1997 Employee Stock Purchase Plan
In November 1997, the Board adopted and ourthe Company’s stockholders approved the 1997 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan authorizes the issuance of common stock to participating employees. Under the Purchase Plan, as amended, our employees are eligible to purchase companyCompany stock at 95% of the purchase price as of the last business day of each six-month offering period. An aggregate of 1,1621,203 shares of common stock has been reserved for issuance under the Purchase Plan, of which 1,1551,200 shares have been purchased. The Purchase Plan was suspended by the Board since June, 2020. No decision has been made whether to resume the Purchase Plan as of December 31, 2021.
Accounting for Share-Based Compensation
We measureThe Company measures the grant date fair value of equity awards given to employees and recognize that cost, adjusted for forfeitures, over the period that services are performed. We valueThe Company values grants with multiple vesting periods as a single award, estimateestimates expected forfeitures based upon historical patterns of employee turnover, and recordrecords share-based compensation as a component of SG&A expenses. In 2016 and in 2018, we granted nonvested stock units. No equity awards were granted in 2017.
The following table summarizes the components of share-based compensation recorded as expense forexpenses included in the three years ended December 31, 2018:consolidated statements of net income (dollars in thousands):
| | | | | | | | | | |
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| 2021 |
| 2020 |
| 2019 |
| |||
Pre-tax expense for nonvested units | | $ | 4,231 | | $ | 2,668 | | $ | 1,863 | |
Tax benefit | |
| (1,167) | |
| (635) | |
| (505) | |
Net effect on net income | | $ | 3,064 | | $ | 2,033 | | $ | 1,358 | |
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|
| 2018 |
| 2017 |
| 2016 |
| |||
Pre-tax expense for nonvested units |
| $ | 1,080 |
| $ | 741 |
| $ | 1,049 |
|
Tax benefit |
|
| (293) |
|
| (297) |
|
| (420) |
|
Net effect on net income |
| $ | 787 |
| $ | 444 |
| $ | 629 |
|
F-21
In 20162021, 2020, and in 2018, we2019, the Company issued nonvested stock units that settle in stock and vest over periods up to tensix years. No awards were issued in 2017. Recipients of nonvested stock units do not possess stockholder rights. The fair value of
F-22
nonvested stock units is based on the end of day market value of our common stock on the grant date. The following table summarizes our nonvested stock unit activity in 2018:2021:
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| Nonvested Stock Units |
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| Weighted-Average |
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| Grant Date |
| |||||||
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| Shares | Fair Value |
| ||||||||
Nonvested at January 1, 2018 |
| 288 |
| $ | 21.01 |
| ||||||
| | | | | | | ||||||
| | Nonvested Stock Units |
| |||||||||
|
| |
| Weighted-Average |
| |||||||
| | | | Grant Date |
| |||||||
| | Shares | Fair Value |
| ||||||||
Nonvested at January 1, 2021 |
| 460 | | $ | 32.17 | | ||||||
Granted |
| 190 |
|
| 24.90 |
| | 180 | | | 46.02 | |
Vested |
| (55) |
|
| 17.94 |
|
| (120) | |
| 31.37 | |
Nonvested at December 31, 2018 |
| 423 |
|
| 23.16 |
| ||||||
Canceled | | (11) | | | 44.66 | | ||||||
Nonvested at December 31, 2021 |
| 509 | |
| 36.98 | | ||||||
The weighted-average grant-date fair value of nonvested stock units granted in 20182021, 2020 and 20162019 was $24.90$46.02, $44.31 and $24.72,$42.06, respectively. No awards were granted in 2017. The total fair value of nonvested stock units that vested in 2018, 2017,2021, 2020, and 20162019 was $1,635, $1,638,$5,529, $4,044, and $2,348,$3,476, respectively. Unearned compensation cost related to the nonvested portion of outstanding nonvested stock units was $8,736$17,366 as of December 31, 2018,2021, and is expected to be recognized over a weighted-average period of approximately 7.03.6 years. The aggregate intrinsic value of the nonvested stock units at December 31, 2018,2021, which is calculated based on the positive difference between the fair value of the Company’s stock on December 31, 20182021 and the grant price of the underlying awards, was $12,561.$21,934.
Stock Equivalent Units
We haveThe Company has also previously issued stock equivalent units, (“SEUs”), which settle in cash and vest ratably over four years, to non-executive employees. The fair value of these liability awards is based on the closing market price of ourthe Company’s common stock, and is remeasured at the end of each reporting period until the SEUs vest. We reportThe Company reports the compensation as a component of SG&A expense and the related liability as accrued payroll on the consolidated balance sheets.
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| 2018 |
| 2017 |
| 2016 |
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| | | | | | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Units issued |
|
| — |
|
| 100 |
|
| 23 |
|
| | — |
| | — |
| | — | |
Compensation expense |
| $ | 1,871 |
| $ | 1,429 |
| $ | 1,973 |
| | $ | 425 | | $ | 840 | | $ | 1,802 | |
10.11. INCOME TAXES
The provision for income taxes consisted of the following:
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| Years Ended December 31, |
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| 2018 |
| 2017 |
| 2016 |
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| | | | | | | | | | | ||||||||||
| | Years Ended December 31, |
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| 2021 |
| 2020 |
| 2019 |
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Current: |
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|
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|
|
| | | | | | | | | | |
Federal |
| $ | 16,643 |
| $ | 21,813 |
| $ | 23,923 |
| | $ | 18,450 | | $ | 13,350 | | $ | 20,481 | |
State |
|
| 6,370 |
|
| 4,861 |
|
| 4,913 |
| |
| 7,413 | |
| 5,726 | |
| 7,101 | |
Total current |
|
| 23,013 |
|
| 26,674 |
|
| 28,836 |
| |
| 25,863 | |
| 19,076 | |
| 27,582 | |
Deferred: |
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| | | | | | | | | | |
Federal |
|
| 1,087 |
|
| (5,132) |
|
| 2,920 |
| |
| 655 | |
| (1,108) | |
| 2,186 | |
State |
|
| (28) |
|
| 1,226 |
|
| 586 |
| |
| 98 | |
| (537) | |
| 800 | |
Total deferred |
|
| 1,059 |
|
| (3,906) |
|
| 3,506 |
| |
| 753 | |
| (1,645) | |
| 2,986 | |
Net provision |
| $ | 24,072 |
| $ | 22,768 |
| $ | 32,342 |
| ||||||||||
Provision for income taxes | | $ | 26,616 | | $ | 17,431 | | $ | 30,568 | | ||||||||||
F-23F-22
The components of the deferred taxes at December 31, 20182021 and 20172020 are as follows:
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|
| 2018 |
| 2017 |
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| | | | | | | | |||||||
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| 2021 |
| 2020 |
| |||||||||
Deferred tax assets: |
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|
|
|
|
|
| | | | | | | |
Provisions for doubtful accounts |
| $ | 825 |
| $ | 724 |
| |||||||
Allowance for credit losses | | $ | 1,266 | | $ | 1,418 | | |||||||
Inventory costs capitalized for tax purposes |
|
| 112 |
|
| 127 |
| |
| 254 | |
| 165 | |
Inventory valuation reserves |
|
| 280 |
|
| 275 |
| |
| 402 | |
| 271 | |
Sales return reserves |
|
| 132 |
|
| 129 |
| |
| 164 | |
| 158 | |
Deductible expenses, primarily employee-benefit related |
|
| 319 |
|
| 357 |
| |
| 18 | |
| 661 | |
Accrued compensation |
|
| 2,014 |
|
| 981 |
| |
| 2,792 | |
| 3,295 | |
Revenue deferral |
|
| — |
|
| 409 |
| |||||||
Operating lease liability | | | 2,668 | | | 3,559 | | |||||||
Other |
|
| 1,254 |
|
| 875 |
| |
| 1,399 | |
| 1,475 | |
Compensation under non-statutory stock option agreements |
|
| 82 |
|
| 34 |
| |
| 866 | |
| 393 | |
State tax loss carryforwards |
|
| 958 |
|
| 877 |
| |
| 1,411 | |
| 1,079 | |
Federal benefit for uncertain state tax positions |
|
| 177 |
|
| 177 |
| |||||||
Total gross deferred tax assets |
|
| 6,153 |
|
| 4,965 |
| |
| 11,240 | |
| 12,474 | |
Less: Valuation allowance |
|
| (839) |
|
| (745) |
| |
| (1,174) | |
| (942) | |
Net deferred tax assets |
|
| 5,314 |
|
| 4,220 |
| |
| 10,066 | |
| 11,532 | |
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|
|
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|
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| |||||||
| | | | | | | | |||||||
Deferred tax liabilities: |
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|
|
|
|
|
| | | | | | | |
Goodwill and other intangibles |
|
| (12,850) |
|
| (12,516) |
| |
| (14,243) | |
| (13,625) | |
Property and equipment |
|
| (9,548) |
|
| (7,218) |
| | | (12,552) | | | (12,976) | |
Right-of-use assets | | | (2,503) | | | (3,366) | | |||||||
Prepaid expenses |
|
| (100) |
|
| (182) |
| |
| (46) | |
| (90) | |
Total gross deferred tax liabilities |
|
| (22,498) |
|
| (19,916) |
| |
| (29,344) | |
| (30,057) | |
Net deferred tax liability |
| $ | (17,184) |
| $ | (15,696) |
| | $ | (19,278) | | $ | (18,525) | |
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| | | | | | | | |||||||
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Current deferred tax assets |
| $ | — |
| $ | — |
| | $ | — | | $ | — | |
Noncurrent deferred tax liability |
|
| (17,184) |
|
| (15,696) |
| |
| (19,278) | |
| (18,525) | |
Net deferred tax liability |
| $ | (17,184) |
| $ | (15,696) |
| | $ | (19,278) | | $ | (18,525) | |
We haveThe Company has deferred tax assets from state net operating loss carryforwards aggregating $1,213$1,786 at December 31, 20182021 representing state tax benefits, net of federal taxes, of approximately $958.$1,411. These loss carryforwards are subject to between five, fifteen and, or twenty-year carryforward periods, with $8 expiring after 2019, $6 expiring after 2020, $3 expiring after 2021, $3 expiring afterin 2022, $3 expiring afterin 2023, $1,171$4 expiring in 2024, $4 expiring in 2025, $3 expiring in 2026, $1,516 expiring beyond 2023,2026, and $19$253 with no expiration. We haveThe Company has provided valuation allowances of $839$1,174 and $745$942 at December 31, 20182021 and 2017,2020, respectively, against the state tax loss carryforwards, representing the portion of carryforward losses that we believethe Company believes are not likely to be realized. The net change in the total valuation allowance reflects a $94, $260, and $102$232 increase in 2018, 2017,2021, and 2016,a $50 decrease in 2020, respectively. The valuation allowance was increased in 2018, 2017, and 2016 to offset the corresponding increase to the deferred tax asset associated with state net operating loss carryforwards.
A reconciliation of our 2018, 2017,the Company’s 2021, 2020, and 20162019 income tax provision to total income taxes at the statutory federal tax rate is as follows:
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| ||||||||||
|
| 2018 |
| 2017 |
| 2016 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Federal income taxes, at statutory tax rate |
| $ | 18,619 |
| $ | 27,169 |
| $ | 28,159 |
| | $ | 20,270 | | $ | 15,378 | | $ | 23,663 | |
State income taxes, net of federal benefit |
|
| 5,157 |
|
| 3,843 |
|
| 3,947 |
| |
| 5,954 | |
| 3,987 | |
| 6,977 | |
Nondeductible expenses |
|
| 454 |
|
| (113) |
|
| 602 |
| |
| 645 | |
| 365 | |
| 651 | |
Remeasurement of net deferred tax balances |
|
| — |
|
| (7,815) |
|
| — |
| ||||||||||
Other–net |
|
| (158) |
|
| (316) |
|
| (366) |
| ||||||||||
Tax provision |
| $ | 24,072 |
| $ | 22,768 |
| $ | 32,342 |
| ||||||||||
Tax credits | | | — | | | (2,093) | | | — | | ||||||||||
Other, net | |
| (253) | |
| (206) | |
| (723) | | ||||||||||
Income tax provision | | $ | 26,616 | | $ | 17,431 | | $ | 30,568 | | ||||||||||
F-24
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35.0% to 21.0%, and setting limitations on deductibility of certain costs. This rate reduction, which took effect on January 1, 2018, required the revaluation of our net deferred tax liability. The revaluation resulted in the recording of an income tax benefit of $7.7 million for the fourth quarter of 2017.
We fileCompany files one consolidated U.S. Federal income tax return that includes all of ourits subsidiaries as well as several consolidated, combined, and separate companyCompany returns in many U.S. state tax jurisdictions. The tax years 2014-20172017-
F-23
2020 remain open to examination by the major state taxing jurisdictions in which we file.the Company files. The tax years 2015-20172018-2020 remain open to examination by the Internal Revenue Service.
A reconciliation of unrecognized tax benefits for 2018, 2017,2021, 2020, and 2016,2019, is as follows:
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| ||||||||||
|
| 2018 |
| 2017 |
| 2016 |
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| | | | | | | | | | | ||||||||||
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| 2021 |
| 2020 |
| 2019 |
| |||||||||||||
Balance at January 1, |
| $ | 368 |
| $ | 684 |
| $ | 869 |
| | $ | — | | $ | — | | $ | 368 | |
Additions on tax positions of prior years |
|
| — |
|
| — |
|
| — |
| | | — | | | — | | | — | |
Lapses of applicable statute of limitations |
|
| — |
|
| (159) |
|
| (185) |
| | | — | | | — | | | (368) | |
Settlements |
|
| — |
|
| (157) |
|
| — |
| |
| — | |
| — | |
| — | |
Balance at December 31, |
| $ | 368 |
| $ | 368 |
| $ | 684 |
| | $ | — | | $ | — | | $ | — | |
We recognizeFor the year ended December 31, 2019, the unrecognized tax benefits decreased by $368 related to the expiration of various state statute of limitation periods.
Previously, the Company recognized interest and penalties related to unrecognized income tax benefits as a component of income tax expense, and the corresponding accrual iswas included as a component of our liability for unrecognized income tax benefits. DuringThe Company did 0t recognize any interest and penalties for the years ended December 31, 2018, 2017, and 2016, we recognized interest and penalties totaling $0, $0, and $62, respectively. At December 31, 2018 and 2017, accrued interest aggregated $481 and accrued penalties aggregated $93. As of December 31, 2018 and 2017, all unrecognized tax benefits and the related interest and penalties, if recognized, would favorably affect our effective tax rate.2021, 2020 or 2019.
We do not anticipate that total unrecognized tax benefits will change significantly due to the settlement of audits, expiration of statutes of limitations, or other reasons in the next twelve months.
11.12. EMPLOYEE BENEFIT PLAN
We haveThe Company has a contributory profit-sharing and employee savings plan covering all qualified employees. NoNaN contributions to the profit-sharing element of the plan were made by usthe Company in 2018, 2017, or 2016. We2021, 2020, and 2019. The Company made matching contributions to the employee savings element of such plan of $2,538, $2,396,$5,951, $5,656, and $2,320$2,778 in 2018, 2017,2021, 2020, and 2016,2019, respectively.
12.13. COMMITMENTS AND CONTINGENCIES
Operating LeasesContingencies
We lease our corporate headquarters and an adjacent office facility from an entity controlled by our principal stockholders. The five-year operating lease for our corporate headquarters ended in November 2018 and the Company is currently in the process of negotiating an amendment to extend the lease term. The operating lease for the adjacent facility ended in July 2018 and the Company is currently in the process of negotiating an amendment to extend the lease term. We also lease several other buildings from our principal stockholders on a month-to-month basis. In addition, we lease offices from unrelated parties with remaining terms of one to ten years.
F-25
Future aggregate minimum annual lease payments under these leases at December 31, 2018 are as follows:
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Year Ended December 31, |
| Related Parties |
| Others |
| Total |
| |||
2019 |
| $ | 1,516 |
| $ | 3,519 |
| $ | 5,035 |
|
2020 |
|
| 1,407 |
|
| 3,386 |
|
| 4,793 |
|
2021 |
|
| 1,253 |
|
| 2,466 |
|
| 3,719 |
|
2022 |
|
| 1,253 |
|
| 1,490 |
|
| 2,743 |
|
2023 |
|
| 1,149 |
|
| 820 |
|
| 1,969 |
|
2024 and thereafter |
|
| — |
|
| 1,395 |
|
| 1,395 |
|
Total rent expense aggregated $5,428, $5,225, and $4,753 for the years ended December 31, 2018, 2017, and 2016, respectively, under the terms of the operating leases described above. Such amounts included $1,651, $1,647, and $1,640 in 2018, 2017, and 2016, respectively, paid to related parties.
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 effect on our business, financial position, results of operations, or cash flows.
We recordThe Company records a liability when we believeit believes that a loss is both probable and reasonably estimable. On a quarterly basis, we reviewthe Company reviews each of these legal proceedings to determine whether it is probable, reasonably possible, or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated. Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of such loss. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material. We expenseThe Company expenses legal fees in the period in which they are incurred.
We areThe Company is 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 negative impact on our financial position, results of operations, and cash flows.
13.14. SEGMENT AND RELATED DISCLOSURES
The internal reporting structure used by ourthe Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. OurThe Company’s CODM is ourits Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
OurF-24
The Company’s operations are organized under three3 reporting 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 government 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 reportThe Company reports these charges to the operating segments as “Allocations.” Certain 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.
In May 2016, we acquired Softmart. We have included the operating results for Softmart in our Business Solutions and Enterprise Solutions segments beginning on May 27, 2016, the closing date of the acquisition.
In October 2016, we acquired GlobalServe. We have included the operating results for GlobalServe in our Enterprise Solutions segment beginning on October 11, 2016, the closing date of the acquisition.
F-26
Net sales presented below exclude inter-segment product revenues. Segment information applicable to ourthe Company’s reportable operating segments for the years ended December 31, 2018, 2017,2021, 2020, and 20162019 is shown below:
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| Years Ended December 31, |
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| 2021 |
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| 2019 |
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Net sales: |
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Business Solutions |
| $ | 1,027,918 |
| $ | 1,158,639 |
| $ | 1,091,182 |
| | $ | 1,098,496 | | $ | 966,032 | | $ | 1,060,049 | |
Enterprise Solutions |
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| 1,165,142 |
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| 1,131,823 |
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| 1,011,990 |
| |
| 1,249,459 | |
| 1,115,569 | |
| 1,193,820 | |
Public Sector Solutions |
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| 506,429 |
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| 621,421 |
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| 589,420 |
| |
| 544,640 | |
| 508,689 | |
| 566,165 | |
Total net sales |
| $ | 2,699,489 |
| $ | 2,911,883 |
| $ | 2,692,592 |
| | $ | 2,892,595 | | $ | 2,590,290 | | $ | 2,820,034 | |
Operating income (loss): |
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Business Solutions |
| $ | 40,188 |
| $ | 40,425 |
| $ | 41,596 |
| | $ | 43,783 | | $ | 32,351 | | $ | 52,557 | |
Enterprise Solutions |
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| 61,663 |
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| 50,163 |
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| 42,504 |
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| 74,653 | |
| 59,382 | |
| 67,837 | |
Public Sector Solutions |
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| (2,260) |
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| 953 |
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| 8,561 |
| |
| (4,928) | |
| (2,763) | |
| 7,319 | |
Headquarters/Other |
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| (13,905) |
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| (14,014) |
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| (12,141) |
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| (16,991) | |
| (16,896) | |
| (15,741) | |
Total operating income |
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| 85,686 |
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| 77,527 |
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| 80,520 |
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| 96,517 | |
| 72,074 | |
| 111,972 | |
Other income (expense), net |
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| 2,978 |
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| 98 |
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| (67) |
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Other (expenses) income, net | |
| 5 | |
| 1,122 | |
| 707 | | ||||||||||
Income before taxes |
| $ | 88,664 |
| $ | 77,625 |
| $ | 80,453 |
| | $ | 96,522 | | $ | 73,196 | | $ | 112,679 | |
Selected operating expense: |
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Depreciation and amortization: |
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Business Solutions |
| $ | 632 |
| $ | 592 |
| $ | 425 |
| | $ | 655 | | $ | 636 | | $ | 596 | |
Enterprise Solutions |
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| 2,318 |
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| 2,163 |
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| 1,784 |
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| 2,408 | |
| 2,771 | |
| 2,474 | |
Public Sector Solutions |
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| 112 |
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| 159 |
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| 160 |
| |
| 62 | |
| 60 | |
| 89 | |
Headquarters/Other |
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| 11,001 |
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| 8,925 |
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| 8,084 |
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| 9,077 | |
| 10,136 | |
| 10,155 | |
Total depreciation and amortization |
| $ | 14,063 |
| $ | 11,839 |
| $ | 10,453 |
| | $ | 12,202 | | $ | 13,603 | | $ | 13,314 | |
Total assets: |
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Business Solutions |
| $ | 274,202 |
| $ | 249,064 |
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| | $ | 401,624 | | $ | 365,366 | | | | |
Enterprise Solutions |
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| 477,296 |
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| 413,921 |
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| 645,938 | |
| 588,264 | | | | |
Public Sector Solutions |
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| 66,000 |
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| 75,531 |
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| 84,787 | |
| 96,233 | | | | |
Headquarters/Other |
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| (12,143) |
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| 9,335 |
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| (48,966) | |
| (34,490) | | | | |
Total assets |
| $ | 805,355 |
| $ | 747,851 |
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| | $ | 1,083,383 | | $ | 1,015,373 | | | | |
The assets of ourthe Company’s operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Goodwill of $66,236 and $7,366 is held by ourthe Enterprise Solutions and Business Solutions segments, respectively, as of December 31, 2018.2021. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment and intercompany balance, net. Total assets for the Headquarters/Other group are presented net of intercompany balances eliminations of $19,019$39,390 and $29,731$43,388 for the years ended December 31, 20182021 and 2017,2020, respectively. OurThe Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade ourits management information systems. These systems serve all of ourthe Company’s subsidiaries, to varying degrees, and as a result, ourthe CODM does not evaluate capital expenditures on a segment basis.
F-25
Substantially all of ourthe Company’s sales in 2018, 2017,2021, 2020, and 20162019 were made to customers located in the United States. Shipments to customers located in foreign countries were not more than 1%2% of total net sales in 2018, 2017,2021, 2020, and 2016.2019. All of ourthe Company’s assets at December 31, 20182021 and 20172020 were located in the United States. OurThe Company’s primary target customers are SMBs, medium-to-large corporate accounts, and federal, state, and local government agencies, educational institutions, and medium-to-large corporate accounts. No single customer accounted for more than 3% of total net sales in 2018, 2017, or 2016. While no single agency of the federal government comprised more than 3% of total sales, aggregate sales to the federal government were 5.4%, 7.8%, and 7.5% in 2018, 2017, and 2016, respectively.
F-27F-26
14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly data of the Company for each of the calendar quarters in 2018 and 2017. This information has been prepared on the same basis as the annual financial statements, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the annual financial statements and the notes thereto included elsewhere in this document. The quarterly operating results are not necessarily indicative of future results of operations.
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| Quarters Ended |
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| June 30, |
| September 30, |
| December 31, |
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| 2018 |
| 2018 |
| 2018 |
| 2018 |
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Net sales |
| $ | 624,895 |
| $ | 706,570 |
| $ | 658,504 |
| $ | 709,520 |
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Cost of sales |
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| 528,523 |
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| 599,102 |
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| 558,060 |
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| 602,718 |
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Gross profit |
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| 96,372 |
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| 107,468 |
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| 100,444 |
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| 106,802 |
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Selling, general and administrative expenses |
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| 80,900 |
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| 82,521 |
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| 81,494 |
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| 79,518 |
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Restructuring and other charges |
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| — |
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| — |
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| — |
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| 967 |
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Income from operations |
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| 15,472 |
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| 24,947 |
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| 18,950 |
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| 26,317 |
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Other income, net |
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| 116 |
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| 182 |
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| 114 |
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| 2,566 |
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Income before taxes |
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| 15,588 |
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| 25,129 |
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| 19,064 |
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| 28,883 |
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Income tax provision |
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| (4,288) |
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| (6,903) |
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| (5,298) |
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| (7,583) |
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Net income |
| $ | 11,300 |
| $ | 18,226 |
| $ | 13,766 |
| $ | 21,300 |
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Earnings per common share: |
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Basic |
| $ | 0.42 |
| $ | 0.68 |
| $ | 0.52 |
| $ | 0.80 |
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Diluted |
| $ | 0.42 |
| $ | 0.68 |
| $ | 0.51 |
| $ | 0.80 |
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Weighted average common shares outstanding: |
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Basic |
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| 26,835 |
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| 26,685 |
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| 26,716 |
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| 26,632 |
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Diluted |
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| 26,916 |
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| 26,820 |
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| 26,902 |
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| 26,766 |
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| Quarters Ended |
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| June 30, |
| September 30, |
| December 31, |
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| 2017 |
| 2017 (1) |
| 2017 |
| 2017 (1) |
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Net sales |
| $ | 670,594 |
| $ | 749,792 |
| $ | 729,230 |
| $ | 762,267 |
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Cost of sales |
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| 583,861 |
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| 650,122 |
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| 633,087 |
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| 662,737 |
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Gross profit |
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| 86,733 |
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| 99,670 |
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| 96,143 |
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| 99,530 |
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Selling, general and administrative expenses |
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| 75,281 |
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| 76,289 |
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| 74,404 |
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| 74,939 |
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Restructuring and other charges |
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| — |
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| 941 |
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| — |
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| 2,695 |
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Income from operations |
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| 11,452 |
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| 22,440 |
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| 21,739 |
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| 21,896 |
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Interest income (expense), net |
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| 19 |
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| 9 |
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| (8) |
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| 78 |
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Income before taxes |
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| 11,471 |
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| 22,449 |
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| 21,731 |
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| 21,974 |
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Income tax provision |
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| (4,039) |
|
| (8,864) |
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| (8,614) |
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| (1,251) |
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Net income |
| $ | 7,432 |
| $ | 13,585 |
| $ | 13,117 |
| $ | 20,723 |
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Earnings per common share: |
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Basic |
| $ | 0.28 |
| $ | 0.51 |
| $ | 0.49 |
| $ | 0.77 |
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Diluted |
| $ | 0.28 |
| $ | 0.51 |
| $ | 0.49 |
| $ | 0.77 |
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Weighted average common shares outstanding: |
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Basic |
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| 26,697 |
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| 26,761 |
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| 26,802 |
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| 26,822 |
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Diluted |
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| 26,866 |
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| 26,893 |
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| 26,899 |
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| 26,907 |
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F-28
PC CONNECTION, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
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| Balance at |
| Charged to |
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| Balance at |
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| Beginning |
| Costs and |
| Deductions/ |
| End of |
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| of Period |
| Expenses |
| Write-Offs |
| Period |
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Description |
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Allowance for Sales Returns |
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Year Ended December 31, 2016 | $ | 3,235 |
| 32,909 |
| (32,435) | $ | 3,709 |
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Year Ended December 31, 2017 | $ | 3,709 |
| 32,399 |
| (32,800) | $ | 3,308 |
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Year Ended December 31, 2018 | $ | 3,308 |
| 28,504 |
| (28,415) | $ | 3,397 |
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Allowance for Doubtful Accounts |
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Year Ended December 31, 2016 | $ | 2,219 |
| 360 |
| (269) | $ | 2,310 |
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Year Ended December 31, 2017 | $ | 2,310 |
| 1,658 |
| (1,242) | $ | 2,726 |
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Year Ended December 31, 2018 | $ | 2,726 |
| 1,680 |
| (1,304) | $ | 3,102 |
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| Balance at |
| Charged to |
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| Balance at |
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| | Beginning | | Costs and | | Deductions/ | | End of |
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| | of Period | | Expenses | | Write-Offs | | Period |
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Description | | | | | | | | | |
Allowance for Sales Returns | | | | | | | | | |
Year Ended December 31, 2019 | $ | 3,397 |
| 27,943 |
| (27,874) | $ | 3,466 | |
Year Ended December 31, 2020 | $ | 3,466 |
| 29,435 |
| (28,887) | $ | 4,014 | |
Year Ended December 31, 2021 | $ | 4,014 |
| 32,635 |
| (32,431) | $ | 4,218 | |
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Allowance for Credit Losses | | | | | | | | | |
Year Ended December 31, 2019 | $ | 3,102 |
| 25 |
| (925) | $ | 2,202 | |
Year Ended December 31, 2020 | $ | 2,202 |
| 3,316 |
| (110) | $ | 5,408 | |
Year Ended December 31, 2021 | $ | 5,408 |
| 3,307 |
| (3,890) | $ | 4,825 | |
S-1