UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*
For the quarterly period ended March 31, 20182019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
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02-0513618 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
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730 MILFORD ROAD, |
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MERRIMACK, NEW HAMPSHIRE | 03054 |
(Address of principal executive offices) | (Zip Code) |
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| (603) 683-2000 |
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| (Registrant's telephone number, including area code) |
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Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ☑ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer ☐ |
| Accelerated filer ☑ |
| Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
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| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☑
Securities registered pursuant to Section 12(b) of the Act:
C | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | CNXN | Nasdaq Global Select Market |
The number of shares outstanding of the issuer’s common stock as of April 30, 2018 29, 2019 was 26,683,323.26,359,259.
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
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| March 31, |
| December 31, |
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| 2018 |
| 2017 |
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| March 31, |
| December 31, |
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| 2019 |
| 2018 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 70,967 |
| $ | 49,990 |
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| $ | 93,470 |
| $ | 91,703 |
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Accounts receivable, net |
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| 408,334 |
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| 449,682 |
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| 433,948 |
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| 447,698 |
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Inventories,net |
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| 85,582 |
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| 106,753 |
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Inventories, net |
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| 137,665 |
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| 119,195 |
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Income taxes receivable |
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| — |
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| 922 |
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Prepaid expenses and other current assets |
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| 6,437 |
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| 5,737 |
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| 7,261 |
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| 9,661 |
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Income taxes receivable |
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| 380 |
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| 3,933 |
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Total current assets |
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| 571,700 |
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| 616,095 |
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| 672,344 |
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| 669,179 |
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Property and equipment, net |
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| 44,019 |
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| 41,491 |
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| 55,438 |
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| 51,799 |
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Right-of-use assets, net |
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| 16,750 |
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| — |
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Goodwill |
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| 73,602 |
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| 73,602 |
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| 73,602 |
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| 73,602 |
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Other intangibles, net |
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| 10,645 |
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| 11,025 |
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Long-term accounts receivable |
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| 1,890 |
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| — |
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Intangibles assets, net |
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| 9,223 |
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| 9,564 |
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Other assets |
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| 1,714 |
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| 5,638 |
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| 1,092 |
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| 1,211 |
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Total Assets |
| $ | 703,570 |
| $ | 747,851 |
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| $ | 828,449 |
| $ | 805,355 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Borrowings under bank line of credit |
| $ | 859 |
| $ | — |
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Accounts payable |
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| 152,115 |
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| 194,257 |
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| $ | 204,196 |
| $ | 201,640 |
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Accrued payroll |
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| 18,066 |
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| 24,319 |
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Accrued expenses and other liabilities |
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| 23,434 |
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| 31,096 |
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| 36,619 |
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| 33,840 |
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Accrued payroll |
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| 17,207 |
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| 22,662 |
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Total current liabilities |
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| 193,615 |
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| 248,015 |
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| 258,881 |
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| 259,799 |
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Deferred income taxes |
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| 16,125 |
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| 15,696 |
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| 17,184 |
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| 17,184 |
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Operating lease liability |
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| 13,215 |
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| — |
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Other liabilities |
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| 1,871 |
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| 1,888 |
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| 1,577 |
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| 2,469 |
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Total Liabilities |
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| 211,611 |
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| 265,599 |
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| 290,857 |
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| 279,452 |
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Stockholders’ Equity: |
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Common stock |
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| 287 |
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| 287 |
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| 288 |
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| 288 |
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Additional paid-in capital |
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| 114,361 |
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| 114,154 |
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| 116,098 |
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| 115,842 |
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Retained earnings |
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| 396,170 |
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| 383,673 |
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| 453,737 |
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| 441,010 |
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Treasury stock, at cost |
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| (18,859) |
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| (15,862) |
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| (32,531) |
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| (31,237) |
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Total Stockholders’ Equity |
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| 491,959 |
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| 482,252 |
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| 537,592 |
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| 525,903 |
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Total Liabilities and Stockholders’ Equity |
| $ | 703,570 |
| $ | 747,851 |
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| $ | 828,449 |
| $ | 805,355 |
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See notes to unaudited condensed consolidated financial statements.
1
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands, except per share data)
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| Three Months Ended |
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| Three Months Ended |
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| March 31, |
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| March 31, |
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| 2018 |
| 2017 |
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| 2019 |
| 2018 |
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Net sales |
| $ | 624,895 |
| $ | 670,594 |
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| $ | 632,921 |
| $ | 624,895 |
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Cost of sales |
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| 528,523 |
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| 583,861 |
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| 533,574 |
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| 528,523 |
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Gross profit |
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| 96,372 |
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| 86,733 |
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| 99,347 |
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| 96,372 |
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Selling, general and administrative expenses |
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| 80,900 |
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| 75,281 |
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| 81,235 |
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| 80,900 |
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Restructuring and other charges |
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| 703 |
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| — |
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Income from operations |
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| 15,472 |
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| 11,452 |
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| 17,409 |
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| 15,472 |
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Interest income, net |
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| 116 |
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| 19 |
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| 198 |
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| 116 |
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Income before taxes |
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| 15,588 |
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| 11,471 |
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| 17,607 |
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| 15,588 |
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Income tax provision |
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| (4,288) |
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| (4,039) |
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| (4,880) |
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| (4,288) |
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Net income |
| $ | 11,300 |
| $ | 7,432 |
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| $ | 12,727 |
| $ | 11,300 |
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Earnings per common share: |
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Basic |
| $ | 0.42 |
| $ | 0.28 |
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| $ | 0.48 |
| $ | 0.42 |
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Diluted |
| $ | 0.42 |
| $ | 0.28 |
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| $ | 0.48 |
| $ | 0.42 |
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Shares used in computation of earnings per common share: |
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Basic |
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| 26,835 |
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| 26,697 |
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| 26,359 |
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| 26,835 |
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Diluted |
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| 26,916 |
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| 26,866 |
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| 26,525 |
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| 26,916 |
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See notes to unaudited condensed consolidated financial statements.
2
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATIONCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Item 1―Financial Statements(Unaudited)
(amounts in thousands)
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| Total |
| |
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| Common Stock |
| Additional |
| Retained |
| Treasury Stock |
| Stockholders' |
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| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity |
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For the Three-Month Period Ended March 31, 2018: |
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Balance at December 31, 2017 |
| 28,709 |
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| $ 287 |
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| $ 114,154 |
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| $ 383,673 |
| (1,856) |
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| $ (15,862) |
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| $ 482,252 |
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Cumulative effect of adoption of ASC 606 |
| — |
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| — |
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| — |
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| 1,197 |
| — |
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| — |
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| 1,197 |
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Stock-based compensation expense |
| — |
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| — |
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| 207 |
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| — |
| — |
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| — |
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| 207 |
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Repurchase of common stock for treasury |
| — |
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| — |
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| — |
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| — |
| (116) |
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| (2,997) |
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| (2,997) |
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Net income |
| — |
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| — |
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| — |
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| 11,300 |
| — |
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| — |
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| 11,300 |
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Balance at March 31, 2018 |
| 28,709 |
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| $ 287 |
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| $ 114,361 |
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| $ 396,170 |
| (1,972) |
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| $ (18,859) |
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| $ 491,959 |
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For the Three-Month Period Ended March 31, 2019: |
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Balance at December 31, 2018 |
| 28,787 |
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| $ 288 |
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| $ 115,842 |
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| $ 441,010 |
| (2,391) |
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| $ (31,237) |
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| $ 525,903 |
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Stock-based compensation expense |
| — |
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| — |
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| 269 |
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| — |
| — |
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| — |
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| 269 |
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Restricted stock units vested |
| 3 |
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| — |
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| — |
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| — |
| — |
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| — |
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| — |
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Issuance of common stock under Employee Stock Purchase Plan |
| — |
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| — |
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| (13) |
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| — |
| ─ |
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| ─ |
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| (13) |
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Repurchase of common stock for treasury |
| — |
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| — |
|
| — |
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| — |
| (43) |
|
| (1,294) |
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| (1,294) |
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Net income |
| — |
|
| — |
|
| — |
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| 12,727 |
| — |
|
| — |
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| 12,727 |
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Balance at March 31, 2019 |
| 28,790 |
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| $ 288 |
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| $ 116,098 |
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| $ 453,737 |
| (2,434) |
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| $ (32,531) |
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| $ 537,592 |
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See notes to unaudited condensed consolidated financial statements.
3
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
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| Three Months Ended |
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| Three Months Ended |
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| March 31, |
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| March 31, |
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| 2018 |
| 2017 |
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| 2019 |
| 2018 |
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Cash Flows from Operating Activities: |
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Cash Flows provided by Operating Activities: |
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Net income |
| $ | 11,300 |
| $ | 7,432 |
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| $ | 12,727 |
| $ | 11,300 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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| 3,300 |
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| 2,855 |
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| 3,709 |
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| 3,300 |
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Deferred income taxes |
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| 429 |
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| 38 |
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Provision for doubtful accounts |
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| 417 |
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| 545 |
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| 256 |
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| 417 |
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Stock-based compensation expense |
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| 207 |
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| 183 |
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| 269 |
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| 207 |
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Deferred income taxes |
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| — |
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| 429 |
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Changes in assets and liabilities: |
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Accounts receivable |
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| 57,389 |
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| 32,885 |
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| 13,494 |
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| 57,389 |
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Inventories |
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| 10,302 |
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| (9,438) |
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| (18,470) |
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| 10,302 |
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Prepaid expenses, income tax receivables and other current assets |
|
| 2,721 |
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| 1,016 |
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| 3,322 |
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| 2,721 |
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Other non-current assets |
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| (1,880) |
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| 22 |
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| 119 |
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| (1,880) |
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Accounts payable |
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| (42,521) |
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| (6,177) |
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| 2,121 |
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| (42,521) |
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Accrued expenses and other liabilities |
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| (4,420) |
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| (3,936) |
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| 551 |
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| (4,420) |
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Net cash provided by operating activities |
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| 37,244 |
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| 25,425 |
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| 18,098 |
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| 37,244 |
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Cash Flows used for Investing Activities: |
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Cash Flows used in Investing Activities: |
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Purchases of equipment |
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| (5,007) |
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| (1,487) |
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| (6,572) |
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| (5,007) |
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Net cash used for investing activities |
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| (5,007) |
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| (1,487) |
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Cash Flows used for Financing Activities: |
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Net cash used in investing activities |
|
| (6,572) |
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| (5,007) |
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Cash Flows used in Financing Activities: |
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Proceeds from short-term borrowings |
|
| 859 |
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| — |
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| — |
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| 859 |
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Purchase of treasury shares |
|
| (2,997) |
|
| — |
|
|
| (1,294) |
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| (2,997) |
|
Dividend payment |
|
| (9,122) |
|
| (9,041) |
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|
| (8,452) |
|
| (9,122) |
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Exercise of stock options |
|
| — |
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| 1,678 |
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Net cash used for financing activities |
|
| (11,260) |
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| (7,363) |
| |||||||
Issuance of stock under Employee Stock Purchase Plan |
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| (13) |
|
| — |
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Net cash used in financing activities |
|
| (9,759) |
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| (11,260) |
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Increase in cash and cash equivalents |
|
| 20,977 |
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| 16,575 |
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|
| 1,767 |
|
| 20,977 |
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Cash and cash equivalents, beginning of period |
|
| 49,990 |
|
| 49,180 |
|
|
| 91,703 |
|
| 49,990 |
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Cash and cash equivalents, end of period |
| $ | 70,967 |
| $ | 65,755 |
|
| $ | 93,470 |
| $ | 70,967 |
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Non-cash Investing and Financing Activities: |
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Accrued capital expenditures |
| $ | 1,140 |
| $ | 291 |
|
| $ | 1,987 |
| $ | 1,140 |
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Supplemental Cash Flow Information: |
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Income taxes paid |
| $ | 320 |
| $ | 1,546 |
|
| $ | 291 |
| $ | 320 |
|
See notes to unaudited condensed consolidated financial statements.
34
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission (the “SEC”), other than the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”2016-02, Leases (“ASC 606”842”) under theusing a modified retrospective methodapproach as of January 1, 2018, as discussed below. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three months ended March 31, 20182019 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2018.
Revenue Recognition
On January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Adoption of Recently Issued Accounting Standards in 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 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. We account for a contract 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 a contract. 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 generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our contracts.
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 varies based on terms of the contract. 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.
4
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 upon the commencement of the term of the software 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 costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales contract. 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 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 contract.
Certain software sales include on premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk, 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 separately. We determine the stand-alone selling price (“SSP”) of the license and the software maintenance and allocate the transaction price amongst the performance obligations. 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 contract.
Certain of our 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, 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”) on IT products, both as part of the initial arrangement and separately from the IT products. When sold as one transaction, we determine the SSP of the IT products and the ESP and allocate the transaction price amongst the separate performance obligations. We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales contract.
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 such 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.
We use our own engineering personnel 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 agree on the sales contract.
Significant Judgments
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.
5
Estimates may be required to determine SSP for each distinct performance obligation. 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-premises license 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 generally limited to defective merchandise. Revenue is recognized at delivery and a reserve for sales returns is recorded. We make estimates of product returns based on significant historical experience and record our sales return reserves as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses.
Description of Revenue
We disaggregate revenue from the contracts with customers by types of products and services, as we believe it best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following table represents a disaggregation of revenue from contracts with customers for the three months ended March 31, 2018 and 2017, along with the reportable segment for each category.
|
|
|
|
|
|
|
|
|
|
| For the three months ended March 31, 2018 | ||||||
|
| Business Solutions |
| Enterprise Solutions |
| Public Sector Solutions |
| Total |
Software | $ | 34,424 | $ | 28,441 | $ | 6,863 | $ | 69,728 |
Notebooks/Mobility |
| 71,729 |
| 63,438 |
| 23,898 |
| 159,065 |
Servers/Storage |
| 31,501 |
| 24,543 |
| 17,139 |
| 73,183 |
Net/Com products |
| 27,026 |
| 12,368 |
| 12,758 |
| 52,152 |
Other hardware/services |
| 98,598 |
| 128,454 |
| 43,715 |
| 270,767 |
|
|
|
|
|
|
|
|
|
Total net sales | $ | 263,278 | $ | 257,244 | $ | 104,373 | $ | 624,895 |
|
|
|
|
|
|
|
|
|
|
| For the three months ended March 31, 2017 | ||||||
|
| Business Solutions |
| Enterprise Solutions |
| Public Sector Solutions |
| Total |
Software | $ | 59,803 | $ | 54,882 | $ | 14,626 | $ | 129,311 |
Notebooks/Mobility |
| 72,878 |
| 50,000 |
| 26,290 |
| 149,168 |
Servers/Storage |
| 26,503 |
| 21,654 |
| 12,186 |
| 60,343 |
Net/Com products |
| 22,969 |
| 16,471 |
| 17,524 |
| 56,964 |
Other hardware/services |
| 91,480 |
| 109,911 |
| 73,417 |
| 274,808 |
|
|
|
|
|
|
|
|
|
Total net sales | $ | 273,633 | $ | 252,918 | $ | 144,043 | $ | 670,594 |
Contract Balances
The following table provides information about contract liability from contracts with customers as of March 31, 2018 and January 1, 2018 (in thousands):
|
|
|
|
|
|
|
|
| March 31, 2018 |
| January 1, 2018 | ||
Contract liability, which are included in "Accrued expenses and other liabilities" |
|
| 3,087 |
|
| 2,914 |
6
Significant changes in the contract liability balances during the three months ended March 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| Contract Liabilities | |
Balances at January 1, 2018 |
| $ | 2,914 |
Reclassification of the beginning contract liability to revenue, as the result of performance obligations satisfied |
|
| (1,146) |
Cash received in advance and not recognized as revenue |
|
| 1,319 |
Balances at March 31, 2018 |
| $ | 3,087 |
2019.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the amounts reported in the accompanying condensed consolidated financial statements. Actual results could differ from those estimates.
Comprehensive Income
We had no items of comprehensive income, other than our net income for each of the periods presented.
Adoption of Recently Issued Accounting StandardsRestructuring and other charges
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASC 606, which amends the existing accounting standards for revenue recognition and expanded our disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects 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 effect of applying the standard to all contracts not completed as of the adoption date. Upon adoption we recorded $1,197 as an increase retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
|
|
|
|
|
| Three months ended March 31, | |
|
| 2019 | |
Employee separations |
| $ | 553 |
Lease termination costs |
|
| 150 |
Total restructuring and other charges |
| $ | 703 |
The adoption resultedrestructuring and other charges recorded in accelerationthe first quarter of 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits. These costs will be paid within a year of termination and are included in accrued expenses at March 31, 2019. Also included were exit costs incurred associated with the timingclosing of revenue recognized for certain transactions. For example;one of our office facilities. There were no restructuring and other charges recorded in the first quarter of 2018.
IT product revenue was previously recognized revenue at the timeAll planned restructuring and other charges were incurred as of delivery to the customer. We have determined that control of the product may transfer prior to delivery to the customer for transaction whereMarch 31, 2019 and we have a legal right to payment upon shipment of the goods; title and risk of loss of/damage to the shipped goods are transferred to the customer, and the seller transfers physical possession of the shipped goods, and shipping terms do not affect customer acceptance. In addition, certain transactions where product remains in our possession has been recognized as of the transaction date when all revenue recognition criteria have been met.
no ongoing restructuring plans.
75
The following table presents the effectAdoption of the adoption of ASC 606 on our condensed consolidated balance sheet as of January 1, 2018:
|
|
|
|
|
|
|
|
|
|
| Adjustments |
|
|
|
| Balance at |
| Due to ASU |
| Balance at |
|
| December 31, 2017 |
| 2014-09 |
| January 1, 2018 |
Balance Sheet |
|
|
|
|
|
|
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 is affected by the presentation of revenue transactions as an agent instead of principal in the following transactions:
Revenue related to the sale of cloud products as well as certain security software will be recognized net of costs of sales as we have 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 accepts the term and conditions in the sales contract. 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 will recognize 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 will reduce both net sales and cost of sales with no impact on reported gross profit as compared to our prior accounting policies.
The following tables present the effect of the adoption of ASC 606 on our condensed consolidated income statement and balance sheet as of and for the three-months ended March 31, 2018 and as of March 31, 2018, respectively:
|
|
|
|
|
|
|
|
| For the three months ended March 31, 2018 | ||||
|
|
|
|
|
| Balances without |
|
| As |
|
|
| Adoption of |
|
| Reported |
| Adjustments |
| ASC 606 |
Income statement |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
Net sales | $ | 624,895 | $ | 75,558 | $ | 700,453 |
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
Cost of sales |
| 528,523 |
| 76,168 |
| 604,691 |
|
|
|
|
|
|
|
Income from operations |
| 15,472 |
| (497) |
| 14,975 |
Income before taxes |
| 15,588 |
| (497) |
| 15,091 |
Net income | $ | 11,300 | $ | (362) | $ | 10,938 |
8
|
|
|
|
|
|
|
|
| March 31, 2018 | ||||
|
|
|
|
|
| Balances without |
|
| As |
|
|
| Adoption of |
|
| Reported |
| Adjustments |
| ASC 606 |
Balance Sheet |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
Accounts receivable, net | $ | 408,334 | $ | (17,182) | $ | 391,152 |
Inventories |
| 85,582 |
| 13,503 |
| 99,085 |
Prepaid expenses and other current assets |
| 6,437 |
| 247 |
| 6,684 |
Long-term receivables |
| 1,890 |
| (1,890) |
| — |
Other assets |
| 1,714 |
| 3,914 |
| 5,628 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Accounts payable | $ | 152,115 | $ | (234) | $ | 151,881 |
Accrued expenses and other liabilities |
| 23,434 |
| 1,277 |
| 24,711 |
Accrued payroll |
| 17,207 |
| (327) |
| 16,880 |
Deferred income taxes |
| 16,125 |
| (564) |
| 15,561 |
|
|
|
|
|
|
|
Stockholders' Equity |
|
|
|
|
|
|
Retained earnings | $ | 396,170 | $ | (1,559) | $ | 394,611 |
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 contracts 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 condensed consolidated statement of cash flows.
Recently Issued Financial Accounting Standards
In February 2017,2016, the Financial Accounting Standards Board, or the FASB, issued ASU 2017-02,ASC 842 - Leases., which amended the accounting standards for leases. The new standard establishescore principle of the guidance is that an entity should establish 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 isCompany adopted ASC 842 effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. AJanuary 1, 2019 using a modified retrospective transition approach is required for capitalto each lease that existed as of the adoption date and operatingany leases existing at, or entered into after that date. We elected the beginningpackage of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification of any expired or existing leases, and (3) any initial direct costs for any existing leases as of the earliesteffective date. The Company also elected the hindsight practical expedient, which allows it to use hindsight in determining the lease term. The adoption did not result in a cumulative adjustment to opening equity. The comparative period presentedinformation has not been restated and continues to be reported under the accounting standards in the financial statements, with certain practical expedients available. We are currentlyeffect for those periods.
In assessing the potential impact of the adoption, the Company elected to apply the short-team lease exception to any leases with contractual obligations of ASU 2017-02one year or less. These leases will continue to be treated as operating leases in accordance with the new accounting standard. Consequently, the adoption resulted in the capitalization of a number of the Company’s office leases, for which it recognized a lease liability of $18,835, which was based on the present value of the future payments for these leases. The Company recorded a corresponding right-of-use asset of $18,723, which was adjusted for $114 of remaining unamortized lease incentives as of December 31, 2018. Only those components that were considered integral to the right to use an underlying asset were considered lease components when determining the amounts to capitalize. In accordance with ASC 842, the discount rates used in the present value calculations for each lease should be the rates implicit in the lease, if readily available. Since none of the lease agreements contain explicit discount rates, 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 remaining contractual term for these leases as of January 1, 2019 ranged from 20 to 197 months. Options to renew were considered in determining the present value of the future lease payments in the event the Company believed it was reasonably certain it will assert its respective options to renew.
The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset as of March 31, 2019 was $5,998 and a corresponding lease liability of $5,675 associated with related party leases.
As of March 31, 2019, the Company had no leases that were classified as financing leases and there were no additional operating or financing leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases:
|
|
|
|
|
|
|
|
|
| Three months ended March 31, 2019 | |||||||
| Related Parties |
| Others |
| Total | |||
Lease Cost |
|
|
|
|
|
|
|
|
Capitalized operating lease cost | $ | 379 |
| $ | 831 |
| $ | 1,210 |
Short-term lease cost |
| 41 |
|
| 2 |
|
| 43 |
Total lease cost | $ | 420 |
| $ | 833 |
| $ | 1,253 |
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: |
|
|
|
|
|
|
|
|
Operating cash flows | $ | 379 |
| $ | 884 |
| $ | 1,263 |
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years): |
|
|
|
|
|
|
|
|
Capitalized operating leases |
| 4.59 |
|
| 10.55 |
|
| 8.64 |
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
|
|
Capitalized operating leases |
| 3.92% |
|
| 3.92% |
|
| 3.92% |
6
As of March 31, 2019, future lease payments over the remaining term of capitalized operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
| Related Parties |
|
| Others |
|
| Total |
2019, excluding the three months ended March 31, 2019 |
| $ | 1,137 |
| $ | 2,534 |
| $ | 3,671 |
2020 |
|
| 1,385 |
|
| 3,379 |
|
| 4,764 |
2021 |
|
| 1,253 |
|
| 2,481 |
|
| 3,734 |
2022 |
|
| 1,253 |
|
| 1,484 |
|
| 2,737 |
2023 |
|
| 1,149 |
|
| 1,034 |
|
| 2,183 |
2024 |
|
| — |
|
| 1,043 |
|
| 1,043 |
Thereafter |
|
| — |
|
| 583 |
|
| 583 |
|
| $ | 6,177 |
| $ | 12,538 |
| $ | 18,715 |
|
|
|
|
|
|
|
|
|
|
Imputed interest |
|
|
|
|
|
|
|
| (964) |
Lease liability balance at March 31, 2019 |
|
|
|
|
|
|
| $ | 17,751 |
Future aggregate minimum annual lease payments as of December 31, 2018 reported in our 2018 Form 10-K under the previous lease accounting standard were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years 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 |
|
| $ | 6,578 |
| $ | 13,076 |
| $ | 19,654 |
As of March 31, 2019, the ROU asset had a net balance of $16,750. The long-term lease liability was $13,215 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated financial statements.balance sheets, was $4,536.
Recently Issued Financial Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax deductibletax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04The new standard is effective for the Companyfiscal years beginning January 1, 2020 for both interim and annual reporting periods. We are currently assessingThe Company expects to adopt this new standard in 2019 when it performs its annual goodwill impairment test in the potential impact offourth quarter. The Company does not expect the adoption of ASC 2017-04this ASU to have a material impact on ourits consolidated financial statements.
7
Note 2–Revenue
We disaggregate revenue from our arrangements with customers by type of products and services, as we believe this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended March 31, 2019 and 2018, along with the reportable segment for each category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 80,935 |
| $ | 66,565 |
| $ | 27,375 |
| $ | 174,875 |
Desktops |
|
| 26,784 |
|
| 35,969 |
|
| 10,887 |
|
| 73,640 |
Software |
|
| 34,688 |
|
| 27,776 |
|
| 9,272 |
|
| 71,736 |
Servers/Storage |
|
| 25,717 |
|
| 17,425 |
|
| 12,416 |
|
| 55,558 |
Net/Com Products |
|
| 22,239 |
|
| 14,628 |
|
| 10,144 |
|
| 47,011 |
Displays and Sound |
|
| 20,332 |
|
| 26,935 |
|
| 9,879 |
|
| 57,146 |
Accessories |
|
| 22,053 |
|
| 56,515 |
|
| 9,645 |
|
| 88,213 |
Other Hardware/Services |
|
| 20,184 |
|
| 29,822 |
|
| 14,736 |
|
| 64,742 |
Total net sales |
| $ | 252,932 |
| $ | 275,635 |
| $ | 104,354 |
| $ | 632,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2018 (1) | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 71,729 |
| $ | 63,438 |
| $ | 23,898 |
| $ | 159,065 |
Desktops |
|
| 28,291 |
|
| 31,226 |
|
| 10,074 |
|
| 69,591 |
Software |
|
| 34,424 |
|
| 28,441 |
|
| 6,863 |
|
| 69,728 |
Servers/Storage |
|
| 31,501 |
|
| 24,543 |
|
| 17,139 |
|
| 73,183 |
Net/Com Products |
|
| 27,026 |
|
| 12,368 |
|
| 12,758 |
|
| 52,152 |
Displays and Sound |
|
| 23,310 |
|
| 22,005 |
|
| 9,471 |
|
| 54,786 |
Accessories |
|
| 25,017 |
|
| 38,969 |
|
| 9,822 |
|
| 73,808 |
Other Hardware/Services |
|
| 21,980 |
|
| 36,254 |
|
| 14,348 |
|
| 72,582 |
Total net sales |
| $ | 263,278 |
| $ | 257,244 |
| $ | 104,373 |
| $ | 624,895 |
(1) | Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation. |
Contract Balances
The following table provides information about contract liability from arrangements with customers as of March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||
Contract liability, which are included in "Accrued expenses and other liabilities" |
| $ | 4,692 |
| $ | 2,679 |
8
Changes in the contract liability balances during the three months ended March 31, 2019 are as follows (in thousands):
|
|
|
|
|
| Three Months Ended | |
|
| March 31, | |
Balances at December 31, 2018 |
| $ | 2,679 |
Cash received in advance and not recognized as revenue |
|
| 4,657 |
Amounts recognized as revenue as performance obligations satisfied |
|
| (2,644) |
Balances at March 31, 2019 |
| $ | 4,692 |
Note 2–3–Earnings Per Share
Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to nonvestednon-vested stock units and stock options outstanding, if dilutive.
9
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Three Months Ended March 31 , |
| ||||||||
March 31, |
| 2018 |
| 2017 |
| |||||||||
|
| 2019 |
| 2018 |
| |||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 11,300 |
| $ | 7,432 |
|
| $ | 12,727 |
| $ | 11,300 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share |
|
| 26,835 |
|
| 26,697 |
|
|
| 26,359 |
|
| 26,835 |
|
Dilutive effect of employee stock awards |
|
| 81 |
|
| 169 |
| |||||||
Dilutive effect of unvested employee stock awards |
|
| 166 |
|
| 81 |
| |||||||
Denominator for diluted earnings per share |
|
| 26,916 |
|
| 26,866 |
|
|
| 26,525 |
|
| 26,916 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.42 |
| $ | 0.28 |
|
| $ | 0.48 |
| $ | 0.42 |
|
Diluted |
| $ | 0.42 |
| $ | 0.28 |
|
| $ | 0.48 |
| $ | 0.42 |
|
For the three months ended March 31, 20182019 and 2017,2018, we had no outstanding nonvestednon-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.
k
Note 3–4–Segment and Related Disclosures
The internal reporting structure used by our chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. We report these charges to the operating segments as “Allocations.” Certain 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.
109
Segment information applicable to our reportable operating segments for the three months ended March 31, 20182019 and 20172018 is shown below:
|
|
|
|
|
|
|
| |||||||
|
| Three Months Ended |
|
|
|
|
|
|
|
| ||||
|
| March 31, |
| March 31, |
|
| Three Months Ended March 31 , |
| ||||||
|
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 263,278 |
| $ | 273,633 |
|
| $ | 252,932 |
| $ | 263,278 |
|
Enterprise Solutions |
|
| 257,244 |
|
| 252,918 |
|
|
| 275,635 |
|
| 257,244 |
|
Public Sector Solutions |
|
| 104,373 |
|
| 144,043 |
|
|
| 104,354 |
|
| 104,373 |
|
Total net sales |
| $ | 624,895 |
| $ | 670,594 |
|
| $ | 632,921 |
| $ | 624,895 |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 9,482 |
| $ | 8,607 |
|
| $ | 8,765 |
| $ | 9,482 |
|
Enterprise Solutions |
|
| 12,678 |
|
| 9,057 |
|
|
| 15,473 |
|
| 12,678 |
|
Public Sector Solutions |
|
| (3,125) |
|
| (2,613) |
|
|
| (3,066) |
|
| (3,125) |
|
Headquarters/Other |
|
| (3,563) |
|
| (3,599) |
|
|
| (3,763) |
|
| (3,563) |
|
Total operating income |
|
| 15,472 |
|
| 11,452 |
|
|
| 17,409 |
|
| 15,472 |
|
Interest income, net |
|
| 116 |
|
| 19 |
|
|
| 198 |
|
| 116 |
|
Income before taxes |
| $ | 15,588 |
| $ | 11,471 |
|
| $ | 17,607 |
| $ | 15,588 |
|
Selected operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 174 |
| $ | 154 |
|
| $ | 150 |
| $ | 174 |
|
Enterprise Solutions |
|
| 482 |
|
| 594 |
|
|
| 639 |
|
| 482 |
|
Public Sector Solutions |
|
| 34 |
|
| 39 |
|
|
| 21 |
|
| 34 |
|
Headquarters/Other |
|
| 2,610 |
|
| 2,068 |
|
|
| 2,899 |
|
| 2,610 |
|
Total depreciation and amortization |
| $ | 3,300 |
| $ | 2,855 |
|
| $ | 3,709 |
| $ | 3,300 |
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 255,230 |
|
|
|
|
| $ | 280,889 |
| $ | 255,230 |
|
Enterprise Solutions |
|
| 406,303 |
|
|
|
|
|
| 484,497 |
|
| 406,303 |
|
Public Sector Solutions |
|
| 52,709 |
|
|
|
|
|
| 55,536 |
|
| 52,709 |
|
Headquarters/Other |
|
| (10,672) |
|
|
|
|
|
| 7,527 |
|
| (10,672) |
|
Total assets |
| $ | 703,570 |
|
|
|
|
| $ | 828,449 |
| $ | 703,570 |
|
The assets of our three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, and property and equipment. Totalequipment, right-of-use assets, and intercompany balance, net. As of March 31, 2019 and 2018, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $11,201 and $10,431, as of March 31, 2018.respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segment basis.
Note 4–5–Commitments and Contingencies
We are subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business. In the opinion of management, the outcome of such matters is not expected to have a material effect on our financial position, results of operations, andand/or cash flows.
We are subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, and such outcomes could have a material, negative impact on our financial position, results of operations, andand/or cash flows.
11
Note 5–6–Bank BorrowingCredit Facility
We have a $50,000 credit facility collateralized by our accounts receivableaccount receivables that expires in February 10, 2022. This facility can be increased, at our option, to $80,000 for approvedpermitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank
10
Offered Rate or LIBOR,(“LIBOR”) (2.49% at March 31, 2019) , plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (4.75%(5.50% at March 31, 2018). The one-month LIBOR rate at March 31, 2018 was 1.88%2019). 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 (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated Adjusted EBITDA could limit our potential borrowingsborrowing capacity under the credit facility. We had $859 outstanding under this credit facility at March 31, 2018, and had no outstanding bank borrowings at DecemberMarch 31, 2017. The $8592019 or 2018, and accordingly, the entire $50,000 facility was subsequently repaid toavailable for borrowings under the lender on April 2, 2018.credit facility.
1211
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.
We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.
OVERVIEW
We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by first-party service providers. We operate through three sales segments,segments: (a) the Business Solutions segment, which serve primarily: (a)serves small- to medium-sized businesses, or Business Solutions segment, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, in our Enterprise Solutions segment, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, in our Public Sector Solutions segment, through our GovConnection subsidiary.
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 inbound calls(iii) direct responses from customers responding to our catalogs and other advertising media. We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.
As a value addedvalue-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our
1312
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 TechnologyTechnical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex solutionsproducts 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 solutionsolutions business, which requires the addition of highly-skilled servicesservice 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 salesservices 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.
Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced internetInternet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest more heavilyon 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 to provide our customers enhanced functionality. In October 2017, we began a multi-yeartwo-year initiative to upgrade our IT systems and infrastructure and have incurred $6.6 million offor which we expect our related capital expenditures through March 31, 2018. We expect additional capital expendituresinvestments to range from $12.0$3.0 to $14.0$4.0 million over the next eighteen months. In addition, inthree to six months, when we expect to have completed the first quarter of 2018, we incurred $0.1 million of third-party expenses related to this upgrade initiative and expect at least this level of period expense to continue over the next six quarters.initiative.
On January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expands related disclosure requirements. See Adoption of Recently Issued Accounting Standards in Note 1, “Basis of Presentation,” in the Notes to the unaudited condensed consolidated financial statements for additional information
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
| Three Months Ended |
|
| |||||
| Three Months Ended |
|
| March 31, |
|
| ||||||||
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
|
| ||||
Net sales (in millions) | $ | 624.9 |
| $ | 670.6 |
|
| $ | 632.9 |
| $ | 624.9 |
|
|
Gross margin |
| 15.4 | % |
| 12.9 | % |
|
| 15.7 | % |
| 15.4 | % |
|
Selling, general and administrative expenses |
| 12.9 | % |
| 11.2 | % |
|
| 12.8 | % |
| 12.9 | % |
|
Income from operations |
| 2.5 | % |
| 1.7 | % |
|
| 2.8 | % |
| 2.5 | % |
|
Net sales inof $632.9 million for the first quarter of 2018 decreased year over year by $45.72019 reflected an increase of $8.0 million or 6.8%, compared to the first quarter of 2017. Net2018, which was driven primarily by growth in our Enterprise Solutions selling segment. Our investments in advance solution sales led to increased sales of mobility and software products, though we experienced downward pressure on net sales growth because a greater portion of our software sales were negatively impacted in the first quarter of 2018 by an increase in revenues reportedrecognized on a net basis as a result of our adoption of ASC 606, discussed in Note 1 to our condensed consolidated financial statements. Excluding the impact of the adoption of ASC 606, net sales would have increased by $29.9 million, or 4.5%, to $700.5 million. See Note #1 to the condensed consolidated financial statements for a discussion of the impact of our adoption of ASC 606 and a reconciliation of this adoption on our condensed consolidated balance sheet and income statement.current quarter. Gross profit dollars increased year over yearyear-over-year by $9.6$3.0 million due to higher invoice selling margins realized on advanced solution sales and increased sales of software products. SG&A expenses increased by $0.3 million, but decreased as a percentage of net sales. Operating income in the first quarter of 2019 increased year-over-year both in dollars and as a percentage of net sales by $1.9 million and 30 basis points, respectively, primarily as a result of increased net sales and lower SG&A expenses as a percentage of net sales.
1413
sales of higher-margin advanced solution sales. The increase in SG&A expenses in dollars was primarily related to incremental variable compensation associated with higher gross profits as well as increased investments in solution selling. The increase in SG&A expenses as a percentage of net sales is due primarily to our decrease in net sales as a result of the adoption of ASC 606. Operating income in the first quarter of 2018 increased year over year in dollars and as a percentage of net sales.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
| Three Months Ended |
|
| ||
|
| Three Months Ended |
|
|
| March 31, |
|
| ||||
|
| 2018 |
| 2017 |
|
|
| 2019 |
| 2018 (1) |
|
|
Sales Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Solutions |
| 44 | % | 41 | % |
| ||||||
Business Solutions |
| 42 | % | 41 | % |
|
| 40 |
| 42 |
|
|
Enterprise Solutions |
| 41 |
| 38 |
|
| ||||||
Public Sector Solutions |
| 17 |
| 21 |
|
|
| 16 |
| 17 |
|
|
Total |
| 100 | % | 100 | % |
|
| 100 | % | 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Mix |
|
|
|
|
|
|
|
|
|
|
|
|
Notebooks/Mobility |
| 26 | % | 22 | % |
|
| 28 | % | 26 | % |
|
Desktops |
| 12 |
| 11 |
|
| ||||||
Software |
| 11 |
| 11 |
|
| ||||||
Servers/Storage |
| 12 |
| 9 |
|
|
| 9 |
| 12 |
|
|
Software |
| 11 |
| 19 |
|
| ||||||
Net/Com Product |
| 8 |
| 9 |
|
| ||||||
Net/Com Products |
| 7 |
| 8 |
|
| ||||||
Displays and Sound |
| 9 |
| 9 |
|
| ||||||
Accessories |
| 14 |
| 12 |
|
| ||||||
Other Hardware/Services |
| 43 |
| 41 |
|
|
| 10 |
| 11 |
|
|
Total |
| 100 | % | 100 | % |
|
| 100 | % | 100 | % |
|
(1) | Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation. |
Our software revenues in the first quarter of 2018 decreased due to the adoption of ASC 606, which required the reporting of $78.6 million of software that previously would have been reported on a gross basis to be reported on a net basis.
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| Three Months Ended |
|
| |||
|
| Three Months Ended |
|
| March 31, |
|
| |||||
|
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
|
| |
Sales Segment |
|
|
|
|
|
|
|
|
|
|
| |
Enterprise Solutions |
| 14.9 | % | 14.3 | % |
| ||||||
Business Solutions |
| 17.6 | % | 15.3 | % |
|
| 17.8 |
| 17.6 |
|
|
Enterprise Solutions |
| 14.3 |
| 12.5 |
|
| ||||||
Public Sector Solutions |
| 12.9 |
| 9.2 |
|
|
| 12.6 |
| 12.9 |
|
|
Total |
| 15.4 | % | 12.9 | % |
|
| 15.7 | % | 15.4 | % |
|
1514
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated (dollars in millions):indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
| Three Months Ended |
|
| ||||||||
|
| 2018 |
| 2017 |
|
|
| March 31, |
|
| ||||||
($ in millions) |
| 2019 |
| 2018 |
|
| ||||||||||
Personnel costs |
| $ | 62.7 |
| $ | 58.9 |
|
|
| $ | 61.0 |
| $ | 62.7 |
|
|
Advertising, net |
|
| 3.8 |
|
| 3.1 |
|
| ||||||||
Advertising |
|
| 4.6 |
|
| 3.8 |
|
| ||||||||
Facilities operations |
|
| 4.1 |
|
| 3.5 |
|
|
|
| 4.8 |
|
| 4.1 |
|
|
Professional fees |
|
| 2.4 |
|
| 2.1 |
|
|
|
| 2.5 |
|
| 2.4 |
|
|
Credit card fees |
|
| 1.7 |
|
| 1.7 |
|
|
|
| 1.5 |
|
| 1.7 |
|
|
Depreciation and amortization |
|
| 3.3 |
|
| 2.9 |
|
|
|
| 3.7 |
|
| 3.3 |
|
|
Other, net |
|
| 2.9 |
|
| 3.1 |
|
| ||||||||
Total |
| $ | 80.9 |
| $ | 75.3 |
|
| ||||||||
Other |
|
| 3.1 |
|
| 2.9 |
|
| ||||||||
Total SG&A expense |
| $ | 81.2 |
| $ | 80.9 |
|
| ||||||||
Percentage of net sales |
|
| 12.9 | % |
| 11.2 | % |
|
|
| 12.8 | % |
| 12.9 | % |
|
Restructuring and other charges
In the first quarter of 2019, we undertook a number of actions at our Headquarters/Other group 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 $0.7 million in the first quarter of 2019. There were no restructuring and other charges recorded in the first quarter of 2018.
Year-Over-Year Comparisons
Three Months Ended March 31, 20182019 Compared to Three Months Ended March 31, 20172018
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):table:
|
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|
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|
|
|
|
| |
|
| Three Months Ended March 31, |
|
|
|
|
| Three Months Ended March 31, |
|
|
|
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| 2018 |
| 2017 |
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| 2019 |
| 2018 |
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| |||||||||||||
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| % of |
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| % of |
| % |
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| % of |
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| % of |
| % |
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| |
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| Amount |
| Net Sales |
| Amount |
| Net Sales |
| Change |
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($ in millions) |
| Amount |
| Net Sales |
| Amount |
| Net Sales |
| Change |
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Sales: |
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| |
Enterprise Solutions |
| $ | 275.6 |
| 43.5 | % | $ | 257.2 |
| 41.2 | % | 7.2 | % |
| |||||||||||||||
Business Solutions |
| $ | 263.3 |
| 42.1 | % | $ | 273.6 |
| 40.8 | % | (3.8) | % |
|
|
| 252.9 |
| 40.0 |
|
| 263.3 |
| 42.1 |
| (3.9) |
|
| |
Enterprise Solutions |
|
| 257.2 |
| 41.2 |
|
| 252.9 |
| 37.7 |
| 1.7 |
|
| |||||||||||||||
Public Sector Solutions |
|
| 104.4 |
| 16.7 |
|
| 144.1 |
| 21.5 |
| (27.5) |
|
|
|
| 104.4 |
| 16.5 |
|
| 104.4 |
| 16.7 |
| — |
|
| |
Total |
| $ | 624.9 |
| 100.0 | % | $ | 670.6 |
| 100.0 | % | (6.8) | % |
|
| $ | 632.9 |
| 100.0 | % | $ | 624.9 |
| 100.0 | % | 1.3 | % |
| |
Gross Profit: |
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| |
Enterprise Solutions |
| $ | 41.2 |
| 14.9 | % | $ | 36.7 |
| 14.3 | % | 12.3 | % |
| |||||||||||||||
Business Solutions |
| $ | 46.2 |
| 17.6 | % | $ | 41.8 |
| 15.3 | % | 10.3 | % |
|
|
| 45.0 |
| 17.8 |
|
| 46.2 |
| 17.6 |
| (2.6) |
|
| |
Enterprise Solutions |
|
| 36.7 |
| 14.3 |
|
| 31.6 |
| 12.5 |
| 15.8 |
|
| |||||||||||||||
Public Sector Solutions |
|
| 13.5 |
| 12.9 |
|
| 13.3 |
| 9.2 |
| 1.0 |
|
|
|
| 13.1 |
| 12.5 |
|
| 13.5 |
| 12.9 |
| (3.0) |
|
| |
Total |
| $ | 96.4 |
| 15.4 | % | $ | 86.7 |
| 12.9 | % | 11.1 | % |
|
| $ | 99.3 |
| 15.7 | % | $ | 96.4 |
| 15.4 | % | 3.0 | % |
|
Net sales as reported decreasedincreased in the first quarter of 20182019 compared to the first quarter of 2017,2018, as explained below:
· | Net sales of |
· | Net sales of |
15
based and security software sales, revenues from these products are recognized on a net basis, resulting in a smaller contribution to net sales. |
· | Net sales of $104.4 million for the Public Sector Solutions |
16
|
Gross profit for the first quarter of 20182019 increased year over yearyear-over-year in dollars and as a percentage of net sales (gross margin), as explained below:
· | Gross profit for the Enterprise Solutions segment increased primarily due to higher invoice selling margins of 82 basis points driven primarily by an increase in software sales reported on a net basis. This increase was partially offset by a decrease in agency fees of 3 basis points. |
· | Gross profit for the Business Solutions segment |
|
|
· | Gross profit for the Public Sector Solutions segment |
Selling, general and administrative expenses increased in dollars, andbut decreased as a percentage of net sales in the first quarter of 20182019 compared to the prior year quarter. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):below:
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| Three Months Ended March 31, |
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| Three Months Ended March 31, |
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| 2018 |
| 2017 |
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| 2019 |
| 2018 |
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| % of |
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| % of Net |
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| % of |
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| % of |
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| Segment Net |
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| Segment Net |
| % |
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| Segment Net |
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| Segment Net |
| % |
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| Amount |
| Sales |
| Amount |
| Sales |
| Change |
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($ in millions) |
| Amount |
| Sales |
| Amount |
| Sales |
| Change |
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| ||||||||||||||||
Enterprise Solutions |
| $ | 25.7 |
| 9.3 | % | $ | 24.0 |
| 9.3 | % | 7.1 | % |
| ||||||||||||||
Business Solutions |
| $ | 36.8 |
| 14.0 | % | $ | 33.2 |
| 12.1 | % | 10.8 | % |
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| 36.2 |
| 14.3 |
|
| 36.8 |
| 14.0 |
| (1.6) |
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Enterprise Solutions |
|
| 24.0 |
| 9.3 |
|
| 22.6 |
| 8.9 |
| 6.2 |
|
| ||||||||||||||
Public Sector Solutions |
|
| 16.6 |
| 15.9 |
|
| 15.9 |
| 11.1 |
| 3.8 |
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|
| 16.2 |
| 15.5 |
|
| 16.6 |
| 15.9 |
| (2.4) |
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Headquarters/Other, unallocated |
|
| 3.5 |
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| 3.6 |
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| (2.8) |
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| 3.1 |
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| 3.5 |
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| (11.4) |
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Total |
| $ | 80.9 |
| 12.9 | % | $ | 75.3 |
| 11.2 | % | 7.4 | % |
|
| $ | 81.2 |
| 12.8 | % | $ | 80.9 |
| 12.9 | % | 0.4 | % |
|
· |
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| SG&A expenses for the Enterprise Solutions segment increased in dollars and remained flat as a percentage of net sales. |
|
|
· | SG&A expenses for the Business Solutions segment decreased in dollars, but increased as a percentage of net sales. The year-over year decrease in SG&A dollars was primarily driven by a $1.5 million decrease in personnel costs, and was partially offset by an increase in usage of Headquarter services of $0.8 million. SG&A expenses as a percentage of net sales was 14.3% for the Business Solutions segment, which reflects an increase of 30 basis points resulting primarily from the lower net sales reported in Q1 2019. |
· | SG&A expenses for the Public Sector Solutions segment decreased both in dollars and as a percentage of net sales. The year-over-year decrease in SG&A dollars was primarily driven by a $0.3 million decrease in personnel expenses, including variable compensation, and $0.1 million of decreased professional fees. SG&A |
1716
expenses as a percentage of net sales was 15.5% for the Public Sector segment, which reflects a decrease of 40 basis points compared to the prior period, resulting from flat net sales and lower SG&A expenses in the current period. |
· | SG&A expenses for the Headquarters/Other group decreased due to |
Restructuring and other charges incurred in the first quarter of 2019 were $0.7 million related to a reduction in workforce in our Headquarters/Other group, and included cash severance payments and other related benefits. Also included were costs incurred related to the closing of one of our office facilities. There were no such charges incurred in the first quarter of 2018.
Income from operations for the first quarter of 20182019 increased to $15.5$17.4 million, compared to $11.5$15.5 million for the first quarter of 2017,2018, primarily due to the increase in gross profit.net sales year-over-year. Income from operations as a percentage of net sales was 2.5%2.8% for the first quarter of 2018,2019, compared to 1.7%2.5% of net sales for the prior year quarter, due toprimarily as a result of the higher gross profits achieved as well asgrowth rate in net sales exceeding the lower revenues reported under ASC 606.growth rate in SG&A expenses.
Our effective tax rate was 27.7% for the first quarter of 2019, compared to 27.5% for the first quarter of 2018, compared to 35.2% for the first quarter of 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 effective January 1, 2018. We expect our corporate income tax rate for 20182019 to range from 27% to 29% and willto vary based on fluctuations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.
Net income for the first quarter of 20182019 increased to $11.3$12.7 million, compared to $7.4$11.3 million for the first quarter of 2017,2018, primarily due to the increase inhigher gross profit and operating income and lower tax rateexpense management in the first quarter of 2018,2019, as compared to the first quarter of 2017.2018.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have used 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, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, 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 expect our capital needs for the next twelve months to consist primarily of capital expenditures of $18.0 to $20.0 million, and payments on leases and other contractual obligations of approximately $4.2 million. 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 began a multi-yeartwo-year initiative to upgrade our IT infrastructure, for whichand we have incurred $6.6 million ofexpect the remaining capital expenditures through March 31, 2018. We expect additional capital expendituresinvestments related to this project to range from $12.0$3.0 to $14.0$4.0 million over the next eighteen months. In addition, inthree to six months, when we expect to have completed the first quarter of 2018, we incurred $0.1 million of third-party expenses related to the IT upgrade initiative and expect at least this level of period expense to continue over the next six quarters.initiative.
We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings onunder our bank line of credit, as follows:
· | Cash on Hand. At March 31, |
· | Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate a positive cash flow. |
· | Credit Facilities.As of March 31, |
17
Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from
18
other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, our cash flows from operations may be substantially affected. See also related risks listed below under “Item 1A. “Risk Factors.”
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated (in millions):
indicated:
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| Three Months Ended |
|
| Three Months Ended |
| ||||||||
|
| 2018 |
| 2017 |
| |||||||||
($ in millions) |
| 2019 |
| 2018 |
| |||||||||
Net cash provided by operating activities |
| $ | 37.2 |
| $ | 25.4 |
|
| $ | 18.1 |
| $ | 37.2 |
|
Net cash used for investing activities |
|
| (5.0) |
|
| (1.5) |
| |||||||
Net cash used for financing activities |
|
| (11.2) |
|
| (7.3) |
| |||||||
Net cash used in investing activities |
|
| (6.6) |
|
| (5.0) |
| |||||||
Net cash used in financing activities |
|
| (9.7) |
|
| (11.2) |
| |||||||
Increase in cash and cash equivalents |
| $ | 21.0 |
| $ | 16.6 |
|
| $ | 1.8 |
| $ | 21.0 |
|
Cash provided by operating activities was $37.2$18.1 million in the three months ended March 31, 2018.2019. Cash flow provided forby operations in the three months ended March 31, 20182019 resulted primarily from net income before depreciation and amortization, and a decrease in accounts receivable, an increase accounts payable, and inventory, offset by a decrease in accounts payable.prepaid expenses. These factors that contributed to the positive inflow of cash from operating activities were partially offset by an increase in inventory. Accounts receivable decreased by $57.4$13.8 million from the prior year-end balance. Days sales outstanding increased to 55 days at March 31, 2019, compared to 53 days at March 31, 2018, compared to 48 days at March 31, 2017. Excluding the impact of the adoption of ASC 606, days sales outstanding would have been unchanged at 48 days at March 31, 2018 and 2017.2018. Inventory decreasedincreased from the prior year-end balance by $10.3$18.5 million due to lowerhigher levels of inventory on-hand related to future backlog and a decreasean increase in shipments in transit but not received by our customers as of March 31, 20182019 compared to December 31, 2017.2018. Inventory turns decreased to 17 for the first quarter of 2019 compared to 23 turns for the first quarter of 2018 compared to 25 turns for the prior year quarter. Excluding the impact from the adoption of ASC 606, inventory turns would have increased to 26 turns for the first quarter of 2018 compared to 25 turns for the prior year period.
At March 31, 2018, we had $152.1 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 paid 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.
Cash used forin investing activities in the three months ended March 31, 20182019 represented $5.0$6.6 million 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, compared to $1.5$5.0 million of purchases of property and equipment in the prior year.
Cash used forin financing activities in the three months ended March 31, 20182019 consisted primarily of a $8.5 million payment of a special $0.32 per share dividend and $1.3 million for the purchase of treasury shares. Whereas in the prior year period, financing activities primarily represented a $9.1 million payment of a special $0.34 per share dividend and $3.0 million for the purchase of treasury shares, partially offset by $0.9 million of proceeds from short-term borrowings. Whereas in the prior year period, financing activities primarily represented a $9.0 million payment of a special $0.40 per share dividend, offset by $1.6 million of proceeds from the exercise of stock options.
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 condensed consolidated financial statements and the accompanying notes included in this Quarterly Report.
Bank Line of Credit Facility. Our bank line of credit extends until February 2022 and is collateralized by our accounts receivable. Our borrowing capacity is up to $50.0 millionmillion. Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (4.75%(5.50% at March 31, 2018)2019). The one-month LIBOR rate at March 31, 20182019 was 1.88%2.49%. 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
19
requirements which are described below under “Factors Affecting Sources of Liquidity.” At March 31, 2018, $49.12019, $50.0 million facility was available for borrowing. In April,borrowing under the amount outstanding was paid in full.facility.
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.
18
Operating Leases. We lease facilities from our principal stockholders and facilities and equipment from third parties under non-cancelable operating leases. On January 1, 2019, we adopted ASC 842, which replaces existing lease accounting rules with a requirement to establish a right-of-use (ROU) asset model. As a result of the adoption, we recorded a ROU asset and a lease liability on the balance sheet for leases which have been reported inwith terms longer than twelve months as of the “Contractual Obligations”date of transition. Refer to the Adoption of Recently Issued Accounting Standards section of our Annual Report on Form 10-Kwithin Note 1 to the consolidated financial statements for the year ended December 31, 2017.more information.
Off-Balance Sheet Arrangements. We do not have any 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, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Contractual Obligations.The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 20172018 have not materially changed since the report was filed.
Factors Affecting Sources of Liquidity
Internally Generated Funds.The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.
Bank Line of Credit.Credit Facility. Our bank line of credit extends until February 2022 and is collateralized by our accounts receivable. As of March 31, 2018, $49.1 million 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. Our credit facility does not include restrictions on future dividend payments. Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing additional funds under this line of credit. This credit facility contains two financial tests:covenants:
· |
|
· |
|
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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, other than the adoption of ASC 606 under the modified retrospective method as of January 1, 2018 as discussed in Note 1 to the condensed consolidated financial statements. These policies include revenue recognition, accounts receivable, vendor allowances, inventory, and the value of goodwill and long-lived assets, including intangibles.2018.
20
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
2119
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of our market risks, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. No material changes have occurred in our market risks since December 31, 2017.2018.
2220
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 4 - CONTROLS AND PROCEDURES
The Company’sDisclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’sour disclosure controls and procedures as of March 31, 2018.2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by athe 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 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’sOur 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’sour disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Except as noted below, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
During the quarter ended March 31, 2018,2019, we changed existing controls to ensure we adequately implemented the new accounting standard related to revenue recognitionlease accounting effective January 1, 2018.2019. The modified and new controls were designed to address risks associated with recognizing revenue based onensure we sufficiently evaluated our lease contracts and properly assessed the five-step model inimpact of the new accounting standard on our financial statements and to ensure completeness and accuracy of the expanded disclosures required by the new standard.related disclosures.
2321
In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could materially affect our business, financial position, and results of operations. We did not identify any additional risks in the current period that are not included in our Annual Report. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the SEC, and those incorporated by reference in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 2–2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table providessets forth certain information aboutwith respect to repurchases of our purchasescommon stock during the quarterthree months ended March 31, 2018, of equity securities that we have registered pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES2019.
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| Maximum |
| |
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| Total Number |
| Number (or |
| |
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|
|
|
| of Shares |
| Approximate |
| |
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|
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| Purchased as |
| Dollar Value) of |
| |
|
| Total |
|
|
|
| Part of |
| Shares (or Units) |
| |
|
| Number of |
| Average |
| Publicly |
| that May Yet Be |
| ||
|
| Shares (or |
| Price Paid |
| Announced |
| Purchased Under |
| ||
|
| Units) |
| per Share |
| Plans or |
| the Plan or |
| ||
Period |
| Purchased |
| (or Unit) |
| Programs |
| Programs (1) |
| ||
01/01/18-01/31/18 |
| — |
| $ | — |
| — |
| $ | — |
|
02/01/18-02/28/18 |
| — |
|
| — |
| — |
|
| — |
|
03/01/18-03/31/18 |
| 116,241 |
|
| 25.78 |
| 116,241 |
|
| 14,769,319 |
|
|
| 116,241 |
| $ | 25.78 |
| 116,241 |
| $ | 14,769,319 |
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|
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||
Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||
January 1 - January 31, 2019 |
| 42,537 |
| $ | 30.44 |
| 42,537 |
| $ | 26,098 |
February 1 - February 28, 2019 |
| — |
| $ | — |
| — |
| $ | 26,098 |
March 1 - March 31, 2019 |
| — |
| $ | — |
| — |
| $ | 26,098 |
Total |
| 42,537 |
| $ | 30.44 |
| 42,537 |
|
|
|
(1) |
|
(2) | We have repurchased approximately 2.3 million shares of our common stock for approximately $29 million pursuant to Board-approved programs. |
22
|
|
|
|
Exhibit |
| Description | |
10.1 | * | Employment Agreement, dated March 1, 2019, between the Registrant and Thomas Baker. | |
10.2 | * | Letter Agreement, dated February 28, 2019, between the Registrant and Stephen Sarno. | |
31.1 | * |
| |
31.2 | * |
| |
32.1 | * |
| |
32.2 | * |
| |
101.INS | ** |
| XBRL Instance Document. |
101.SCH | ** |
| XBRL Taxonomy Extension Schema Document. |
101.CAL | ** |
| XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | ** |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | ** |
| XBRL Taxonomy Label Linkbase Document. |
101.PRE | ** |
| XBRL Taxonomy Presentation Linkbase Document. |
|
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* |
|
| Filed herewith. |
24
** |
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| Submitted electronically herewith. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 20182019 and December 31, 2017,2018, (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and March 31, 2018 and, (iii) Condensed Consolidated Statements of Stockholders’ Equity at March 31, 2017, (iii)2019 and December 31, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20182019 and March 31, 2017,2018, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
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Pursuant to the requirements 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.
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Date: | May |
| By: | /s/ TIMOTHY J. MCGRATH |
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| Timothy J. McGrath |
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| President and Chief Executive Officer (Duly Authorized Officer) |
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Date: | May |
| By: | /s/ |
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| Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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