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 ~~September 30, 2018~~March 31, 2019

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

For the transition period from to

Commission file number 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)


DELAWARE	02-0513618
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)


730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE	03054
(Address of principal executive offices)	(Zip Code)


	(603) 683-2000
	(Registrant's telephone number, including area code)

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

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

YES ☑ NO ☐

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

YES ☑ NO ☐

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


	Large accelerated filer ☐		Accelerated filer ☑
	Non-accelerated filer ☐		Smaller reporting company ☐
			Emerging growth company ☐

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

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

YES ☐ NO ☑

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 ~~October 30, 2018~~ April 29, 2019 was ~~26,730,061.~~26,359,259.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


	PART I FINANCIAL INFORMATION

		Page
ITEM 11..	~~Unaudited Condensed Consolidated Financial Statements~~:

	Condensed Consolidated Balance Sheets–~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	1

	Condensed Consolidated Statements of Income–Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	2

	Condensed Consolidated Statements of Stockholders’ Equity–~~Nine~~Three Months Ended ~~September 30,~~March 31, 2019 and 2018	3

	Condensed Consolidated Statements of Cash Flows–~~Nine~~Three Months Ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	1412

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	2520

ITEM 4.	Controls and Procedures	2621




	PART II OTHER INFORMATION

ITEM 1A.	Risk Factors	2722

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	22

ITEM 6.	Exhibits	2723

SIGNATURES		2824

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)


	September 30,		December 31,
	2018		2017		March 31,		December 31,
					2019		2018
ASSETS
Current Assets:
Cash and cash equivalents	$	102,243	$	49,990	$	93,470	$	91,703
Accounts receivable, net		400,831		449,682		433,948		447,698
Inventories, net		105,283		106,753		137,665		119,195
Income taxes receivable		2,658		3,933		—		922
Prepaid expenses and other current assets		6,068		5,737		7,261		9,661
Total current assets		617,083		616,095		672,344		669,179
Property and equipment, net		48,176		41,491		55,438		51,799
Right-of-use assets, net						16,750		—
Goodwill		73,602		73,602		73,602		73,602
Intangibles assets, net		9,924		11,025		9,223		9,564
Other assets		1,442		5,638		1,092		1,211
Total Assets	$	750,227	$	747,851	$	828,449	$	805,355
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	165,190	$	194,257	$	204,196	$	201,640
Accrued payroll		20,359		22,662		18,066		24,319
Accrued expenses and other liabilities		23,475		31,096		36,619		33,840
Total current liabilities		209,024		248,015		258,881		259,799
Deferred income taxes		16,125		15,696		17,184		17,184
Operating lease liability						13,215		—
Other liabilities		1,836		1,888		1,577		2,469
Total Liabilities		226,985		265,599		290,857		279,452
Stockholders’ Equity:
Common stock		287		287		288		288
Additional paid-in capital		115,039		114,154		116,098		115,842
Retained earnings		428,162		383,673		453,737		441,010
Treasury stock, at cost		(20,246)		(15,862)		(32,531)		(31,237)
Total Stockholders’ Equity		523,242		482,252		537,592		525,903
Total Liabilities and Stockholders’ Equity	$	750,227	$	747,851	$	828,449	$	805,355

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018
Net sales	$	658,504	$	729,230	$	1,989,969	$	2,149,616	$	632,921	$	624,895
Cost of sales		558,060		633,087		1,685,685		1,867,070		533,574		528,523
Gross profit		100,444		96,143		304,284		282,546		99,347		96,372
Selling, general and administrative expenses		81,494		74,404		244,915		226,915		81,235		80,900
Restructuring and other charges										703		—
Income from operations		18,950		21,739		59,369		55,631		17,409		15,472
Interest income (expense), net		114		(8)		412		20
Interest income, net										198		116
Income before taxes		19,064		21,731		59,781		55,651		17,607		15,588
Income tax provision		(5,298)		(8,614)		(16,489)		(21,517)		(4,880)		(4,288)
Net income	$	13,766	$	13,117	$	43,292	$	34,134	$	12,727	$	11,300

Earnings per common share:
Basic	$	0.52	$	0.49	$	1.62	$	1.28	$	0.48	$	0.42
Diluted	$	0.51	$	0.49	$	1.61	$	1.27	$	0.48	$	0.42

Shares used in computation of earnings per common share:
Basic		26,716		26,802		26,745		26,754		26,359		26,835
Diluted		26,902		26,899		26,883		26,886		26,525		26,916

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in ~~thousands, except per share data)~~thousands)


											Total												Total
	Common Stock			Additional		Retained		Treasury Stock			Stockholders'		Common Stock			Additional		Retained		Treasury Stock			Stockholders'
	Shares	Amount		Paid-In Capital		Earnings		Shares	Amount		Equity		Shares	Amount		Paid-In Capital		Earnings		Shares	Amount		Equity
For the Three-Month Period Ended March 31, 2018:
Balance at December 31, 2017	28,709		$ 287		$ 114,154		$ 383,673	(1,856)		$ (15,862)		$ 482,252	28,709		$ 287		$ 114,154		$ 383,673	(1,856)		$ (15,862)		$ 482,252
Cumulative effect of adoption of ASC 606	—		—		—		1,197	—		—		1,197	—		—		—		1,197	—		—		1,197
Stock-based compensation expense	—		—		207		—	—		—		207	—		—		207		—	—		—		207
Repurchases of treasury shares	—		—		—		—	(116)		(2,998)		(2,998)
Repurchase of common stock for treasury													—		—		—		—	(116)		(2,997)		(2,997)
Net income	—		—		—		11,300	—		—		11,300	—		—		—		11,300	—		—		11,300
Balance at March 31, 2018	28,709		287		114,361		396,170	(1,972)		(18,860)		491,958	28,709		$ 287		$ 114,361		$ 396,170	(1,972)		$ (18,859)		$ 491,959
Stock-based compensation expense	—		—		257		—	—		—		257
Repurchases of treasury shares	—		—		—		—	(54)		(1,386)		(1,386)
Issuance of common stock under Employee Stock Purchase Plan	19		—		605		—	—		—		605
Net income	—		—		—		18,226	—		—		18,226
Balance at June 30, 2018	28,728		287		115,223		414,396	(2,026)		(20,246)		509,660

For the Three-Month Period Ended March 31, 2019:
Balance at December 31, 2018													28,787		$ 288		$ 115,842		$ 441,010	(2,391)		$ (31,237)		$ 525,903
Stock-based compensation expense	—		—		273		—	—		—		273	—		—		269		—	—		—		269
Restricted stock units vested	28		—		—		—	—		—		—	3		—		—		—	—		—		—
Shares withheld for taxes paid on stock awards	—		—		(457)		—	—		—		(457)
Issuance of common stock under Employee Stock Purchase Plan													—		—		(13)		—	─		─		(13)
Repurchase of common stock for treasury													—		—		—		—	(43)		(1,294)		(1,294)
Net income	—		—		—		13,766	—		—		13,766	—		—		—		12,727	—		—		12,727
Balance at September 30, 2018	28,756		$ 287		$ 115,039		$ 428,162	(2,026)		$ (20,246)		$ 523,242
Balance at March 31, 2019													28,790		$ 288		$ 116,098		$ 453,737	(2,434)		$ (32,531)		$ 537,592

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2018		2017		2019		2018
Cash Flows provided by Operating Activities:
Net income	$	43,292	$	34,134	$	12,727	$	11,300
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,362		8,645		3,709		3,300
Provision for doubtful accounts		1,428		1,116		256		417
Stock-based compensation expense		737		560		269		207
Deferred income taxes		429		164		—		429
Loss on disposal of fixed assets		51		—
Changes in assets and liabilities:
Accounts receivable		63,881		28,101		13,494		57,389
Inventories		(9,399)		(16,189)		(18,470)		10,302
Prepaid expenses, income tax receivables and other current assets		812		(2,191)		3,322		2,721
Other non-current assets		283		(3,945)		119		(1,880)
Accounts payable		(29,361)		(13,162)		2,121		(42,521)
Accrued expenses and other liabilities		(1,262)		(8,872)		551		(4,420)
Net cash provided by operating activities		81,253		28,361		18,098		37,244
Cash Flows used in Investing Activities:
Purchases of equipment		(15,641)		(7,944)		(6,572)		(5,007)
Net cash used in investing activities		(15,641)		(7,944)		(6,572)		(5,007)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings		859		—		—		859
Repayment of short-term borrowings		(859)		—
Purchase of treasury shares		(4,384)		—		(1,294)		(2,997)
Dividend payment		(9,123)		(9,041)		(8,452)		(9,122)
Exercise of stock options		—		1,679
Issuance of stock under Employee Stock Purchase Plan		605		603		(13)		—
Payment of payroll taxes on stock-based compensation through shares withheld		(457)		(500)
Net cash used in financing activities		(13,359)		(7,259)		(9,759)		(11,260)
Increase in cash and cash equivalents		52,253		13,158		1,767		20,977
Cash and cash equivalents, beginning of period		49,990		49,180		91,703		49,990
Cash and cash equivalents, end of period	$	102,243	$	62,338	$	93,470	$	70,967

Non-cash Investing and Financing Activities:
Accrued capital expenditures	$	1,055	$	294	$	1,987	$	1,140
Supplemental Cash Flow Information:
Income taxes paid	$	15,134	$	24,293	$	291	$	320

See notes to unaudited condensed consolidated financial statements.

Table of Contents

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 the~~using a modified retrospective ~~method~~approach 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 ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 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 replaced existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See~~ ~~Adoption of Recently Issued Accounting Standards~~ ~~within this footnote for additional information.~~

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time. We account for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.

~~Nature of Products and Services~~

Information technology (“IT”) products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which is generally upon delivery to the customer. We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing.

We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer.

~~Table of Contents~~

Licenses for on-premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We are the principal in these transactions and recognize revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable.

For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services. We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions. We recognize revenue for security software net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We do not exercise control over these products or services and therefore are an agent in these transactions. We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

Certain software sales include on-premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk support, and other support services transferred over the underlying contract period. On-premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these items separately. We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

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. We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service and do not provide any service after the sale. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

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 accept the terms and conditions in the sales arrangement.

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.

~~Significant 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.

~~Table of Contents~~

We estimate the standalone selling price (“SSP”) for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

We provide our customers with a limited thirty-day right of return which is generally limited to defective merchandise. 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 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 table represents a disaggregation of revenue from arrangements with customers for the three months ended September 30, 2018 and 2017, along with the reportable segment for each category.

Three Months Ended September 30, 2018


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
68,822

$
63,926

$
50,079

$
182,827
Software (1)

31,578

25,718

15,541

72,837
Desktops

25,828

30,075

13,112

69,015
Servers/Storage

26,386

21,424

13,115

60,925
Net/Com products

27,380

16,601

12,745

56,726
Other hardware/services

64,878

107,733

43,563

216,174
Total net sales

$
244,872

$
265,477

$
148,155

$
658,504

(1) Certain software sales are reported on a net basis for the three months ended September 30, 2018 as a result of the adoption of ASC 606, but in the prior year would have been reported on a gross basis under the previous revenue recognition guidance – see the information below under the caption “Adoption of Recently Issued Accounting Standards”.

Three Months Ended September 30, 2017


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
77,374

$
50,835

$
39,369

$
167,578
Software

66,094

67,623

39,579

173,296
Desktops

29,849

25,873

16,869

72,591
Servers/Storage

29,142

19,090

14,110

62,342
Net/Com products

24,085

14,645

11,855

50,585
Other hardware/services

64,025

89,956

48,857

202,838
Total net sales

$
290,569

$
268,022

$
170,639

$
729,230

~~Table of Contents~~

The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2018 and 2017, along with the reportable segment for each category.

Nine Months Ended September 30, 2018


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
222,550

$
195,909

$
109,238

$
527,697
Software (1)

104,377

91,522

33,447

229,346
Desktops

82,518

91,307

41,948

215,773
Servers/Storage

85,190

70,262

46,753

202,205
Net/Com products

83,546

49,093

36,618

169,257
Other hardware/services

200,011

325,693

119,987

645,691
Total net sales

$
778,192

$
823,786

$
387,991

$
1,989,969

(1) Certain software sales are reported on a net basis for the nine months ended September 30, 2018 as a result of the adoption of ASC 606, but in the prior year would have been reported on a gross basis under the previous revenue recognition guidance – see the information below under the caption “Adoption of Recently Issued Accounting Standards”.

Nine Months Ended September 30, 2017


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
226,152

$
150,799

$
99,999

$
476,950
Software

195,972

203,320

76,384

475,676
Desktops

85,994

76,015

78,045

240,054
Servers/Storage

85,949

59,864

40,290

186,103
Net/Com products

71,831

51,115

45,565

168,511
Other hardware/services

194,724

281,904

125,694

602,322
Total net sales

$
860,622

$
823,017

$
465,977

$
2,149,616

~~Contract Balances~~

~~The following table provides information about contract liability from arrangements with customers as of September 30, 2018 and January 1, 2018:~~

September 30, 2018

January 1, 2018
Contract liability, which are included in "Accrued expenses and other liabilities"

$
2,629

$
2,914

~~Significant changes in the contract liability balances during the three and nine months ended September 30, 2018 are as follows (in thousands):~~

Three Months Ended

September 30,
Balances at July 1,2018

$
8,433
Cash received in advance and not recognized as revenue

1,024
Amounts recognized as revenue as performance obligations satisfied

(6,828)
Balances at September 30, 2018

$
2,629

Nine Months Ended

September 30,
Balances at January 1, 2018

$
2,914
Cash received in advance and not recognized as revenue

9,520
Amounts recognized as revenue as performance obligations satisfied

(9,805)
Balances at September 30, 2018

$
2,629

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

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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 Standards~~Restructuring and other charges

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASC 606, which amended the 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 to 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 resulted~~restructuring and other charges recorded in ~~an acceleration~~the first quarter of ~~the timing of revenue recognized for certain transactions where product that remained~~2019 were related to a reduction in workforce in our ~~possession has been recognized~~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 closing of one of our office facilities. There were no restructuring and other charges recorded in the first quarter of 2018.

All planned restructuring and other charges were incurred as of ~~the transaction date when all revenue recognition criteria~~March 31, 2019 and we have ~~been met.~~no ongoing restructuring plans.

~~The following table presents the effect 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 was 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 is now being recognized net of costs of sales as we determined that we act as an agent in these transactions. These sales are recorded on a net basis at a point in time when our vendor and the customer accept the terms and conditions in the sales arrangement. In addition,

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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 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 reduced both net sales and cost

Adoption 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 for the three and nine months ended September 30, 2018 and as of September 30, 2018, respectively:

Three Months Ended September 30, 2018

Nine Months Ended September 30, 2018






Balances without






Balances without

As

Adoption of

As

Adoption of

Reported

Adjustments

ASC 606

Reported

Adjustments

ASC 606
Income statement












Revenues












Net sales
$
658,504
$
107,826
$
766,330

$
1,989,969
$
296,583
$
2,286,552

Costs and expenses












Cost of sales

558,060

107,575

665,635

1,685,685

295,540

1,981,225

Income from operations

18,950

224

19,174

59,369

808

60,177
Income before taxes

19,064

224

19,288

59,781

808

60,589
Net income

13,766

162

13,928

43,292

584

43,876

September 30, 2018






Balances without

As

Adoption of

Reported

Adjustments

ASC 606
Balance Sheet



Assets






Accounts receivable, net
$
400,831
$
(4,463)
$
396,368
Inventories

105,283

6,059

111,342
Prepaid expenses and other current assets

6,068

129

6,197
Other assets

1,442

3,914

5,356

Liabilities






Accrued expenses and other liabilities
$
23,475
$
4,670
$
28,145
Accrued payroll

20,359

(103)

20,256
Deferred income taxes

16,125

(205)

15,920

Stockholders' Equity






Retained earnings
$
428,162
$
(613)
$
427,549

We have elected the use of certain practical expedients in our adoption of the new standard, which includes continuing to record revenue reported net of applicable taxes imposed on the related transaction and the application of the new standard to all arrangements not completed as of the adoption date. We have also elected to use the practical expedient to not account for the shipping and handling as separate performance obligations. Adoptions of the standard related to revenue recognition had no net impact on our condensed consolidated statement of cash flows.

Recently Issued ~~Financial~~ Accounting Standards

In February 2016, the Financial Accounting Standards Board, or the FASB, issued ~~ASU 2016-02,~~ASC 842 - Leases., which amended the accounting standards for leases. The ~~new standard establishes~~core 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 is~~Company adopted ASC 842 effective ~~for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A~~January 1, 2019 using a modified retrospective transition approach ~~is required for capital~~to each lease that existed as of the adoption date and ~~operating~~any leases ~~existing at, or~~ entered into after that date. We elected the ~~beginning~~package 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 ~~earliest~~effective 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~~information has not been restated and continues to be reported under the accounting standards in effect for those periods.

In assessing the impact of the adoption, the Company elected to apply the short-team lease exception to any leases with contractual obligations of one 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%

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~~presented~~

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 financial statements, or by not adjusting the comparative periods and recording a cumulative effect adjustment as of the adoption date, with certain practical expedients available. The Company has reviewed the requirements of the new standard and has formulated a plan for implementation. The Company is currently accumulating details on the population of leases and lease assets and has selected a software repository to track all of its lease agreements and to assist in the reporting and disclosures required by the new standard. The Company will continue to assess and disclose the impact that the new standard will have on its consolidated ~~financial statements, disclosures, and related controls, when known.~~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-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new standard is effective for fiscal years beginning January 1, 2020 for both interim and annual reporting periods. The Company ~~is currently assessing~~expects to adopt this new standard in 2019 when it performs its annual goodwill impairment test in the ~~potential impact of~~fourth quarter. The Company does not expect the adoption of ~~ASC 2017-04~~this ASU to have a material impact on its consolidated financial statements.

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Note 2–Revenue

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 Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	80,935	$	66,565	$	27,375	$	174,875
Desktops		26,784		35,969		10,887		73,640
Software		34,688		27,776		9,272		71,736
Servers/Storage		25,717		17,425		12,416		55,558
Net/Com Products		22,239		14,628		10,144		47,011
Displays and Sound		20,332		26,935		9,879		57,146
Accessories		22,053		56,515		9,645		88,213
Other Hardware/Services		20,184		29,822		14,736		64,742
Total net sales	$	252,932	$	275,635	$	104,354	$	632,921


	Three Months Ended March 31, 2018 (1)
	Business Solutions		Enterprise Solutions		Public Sector Solutions		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

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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 non-vested stock units and stock options outstanding, if dilutive.

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31 ,
	2018		2017		2018		2017		2019		2018
Numerator:
Net income	$	13,766	$	13,117	$	43,292	$	34,134	$	12,727	$	11,300
Denominator:
Denominator for basic earnings per share		26,716		26,802		26,745		26,754		26,359		26,835
Dilutive effect of employee stock awards		186		97		138		132
Dilutive effect of unvested employee stock awards										166		81
Denominator for diluted earnings per share		26,902		26,899		26,883		26,886		26,525		26,916
Earnings per share:
Basic	$	0.52	$	0.49	$	1.62	$	1.28	$	0.48	$	0.42
Diluted	$	0.51	$	0.49	$	1.61	$	1.27	$	0.48	$	0.42

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

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

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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.

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Segment information applicable to our reportable operating segments for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is shown below:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31 ,
	2018		2017		2018		2017		2019		2018
Net sales:
Business Solutions	$	244,872	$	290,569	$	778,192	$	860,622	$	252,932	$	263,278
Enterprise Solutions		265,477		268,022		823,786		823,017		275,635		257,244
Public Sector Solutions		148,155		170,639		387,991		465,977		104,354		104,373
Total net sales	$	658,504	$	729,230	$	1,989,969	$	2,149,616	$	632,921	$	624,895
Operating income (loss):
Business Solutions	$	8,173	$	9,543	$	28,303	$	29,430	$	8,765	$	9,482
Enterprise Solutions		13,629		12,389		43,598		35,777		15,473		12,678
Public Sector Solutions		528		2,793		(2,083)		169		(3,066)		(3,125)
Headquarters/Other		(3,380)		(2,986)		(10,449)		(9,745)		(3,763)		(3,563)
Total operating income		18,950		21,739		59,369		55,631		17,409		15,472
Interest income (expense), net		114		(8)		412		20
Interest income, net										198		116
Income before taxes	$	19,064	$	21,731	$	59,781	$	55,651	$	17,607	$	15,588
Selected operating expense:
Depreciation and amortization:
Business Solutions	$	153	$	145	$	481	$	448	$	150	$	174
Enterprise Solutions		608		519		1,653		1,661		639		482
Public Sector Solutions		25		45		91		126		21		34
Headquarters/Other		2,848		2,226		8,137		6,410		2,899		2,610
Total depreciation and amortization	$	3,634	$	2,935	$	10,362	$	8,645	$	3,709	$	3,300
Total assets:
Business Solutions					$	263,678	$	241,030	$	280,889	$	255,230
Enterprise Solutions						423,125		376,001		484,497		406,303
Public Sector Solutions						69,994		69,162		55,536		52,709
Headquarters/Other						(6,570)		5,689		7,527		(10,672)
Total assets					$	750,227	$	691,882	$	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, property and equipment, right-of-use assets, and intercompany balance, net. ~~Total~~As of March 31, 2019 and 2018, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of ~~$22,989 as of September 30, 2018.~~$11,201 and $10,431, 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, and/or cash flows.

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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, and/or cash flows.

Note 5–6–Bank ~~Borrowing~~Credit Facility

We have a $50,000 credit facility collateralized by our ~~accounts receivable~~account receivables that expires in February 10, 2022. This facility can be increased, at our option, to $80,000 for ~~approved~~permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank

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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 ~~(5.25%~~(5.50% at ~~September 30, 2018). The one-month LIBOR rate at September 30, 2018 was 2.26%~~March 31, 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 ~~borrowings~~borrowing capacity under the credit facility. We had no outstanding bank borrowings at ~~September 30,~~March 31, 2019 or 2018, ~~or December 31, 2017,~~ and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.

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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: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.

We generate sales ~~primarily~~ through (i) outbound telemarketing and field sales contacts by ~~account managers~~sales 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-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

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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 ~~Technology~~Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex ~~solutions~~products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

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

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

Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced ~~internet~~Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest ~~more heavily~~on an ongoing basis in our own IT development to meet these new ~~demands~~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-year~~two-year initiative to upgrade our IT ~~systems and~~ infrastructure ~~and have incurred $12.4 million of~~for which we expect our related capital ~~expenditures through September 30, 2018. We expect additional capital expenditures~~investments to range from ~~$8.0~~$3.0 to ~~$9.0~~$4.0 million over the next ~~nine~~three to ~~twelve months.~~

~~On January 1, 2018,~~six months, when we adopted ASC 606, which replaced 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,” inexpect to have completed the notes to the unaudited condensed consolidated financial statements for additional information and a reconciliation of the impact of this adoption to our condensed consolidated balance sheet and income statement as compared to the application of the prior guidance. In general, the adoption of ASC 606 has resulted in the recognition of more arrangements on a net basis that has reduced the amount of revenue and related cost of sales than when such arrangements were accounted for on a gross basis under prior revenue recognition rules, as well as increasing gross margins as revenue recognized on a net basis has no direct costs associated with them. We adopted the new guidance using the modified retrospective transition method. Accordingly, the prior periods have been presented using our prior accounting policies.initiative.

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						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2018			2017			2018			2017			2019			2018
Net sales (in millions)	$	658.5		$	729.2		$	1,990.0		$	2,149.6		$	632.9		$	624.9
Gross margin		15.3	%		13.2	%		15.3	%		13.1	%		15.7	%		15.4	%
Selling, general and administrative expenses		12.4	%		10.2	%		12.3	%		10.6	%		12.8	%		12.9	%
Income from operations		2.9	%		3.0	%		3.0	%		2.6	%		2.8	%		2.5	%

Net sales of $632.9 million for the first quarter of 2019 reflected an increase of $8.0 million compared to the first quarter of 2018, 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 recognized on a net basis in the current quarter. Gross profit dollars increased year-over-year by $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.

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Net sales of $658.5 million for the third quarter of 2018 reflected a decrease of $70.7 million compared to the third quarter of 2017, primarily as a result of the adoption of new revenue recognition guidance under ASC 606, which was not applied to prior year net sales. The primary impact of the new guidance was an increase in certain revenues reported on a net basis, which resulted in a decrease in net sales of $103.3 million year-over-year. Had the quarter been reported under the previous revenue recognition guidance, net sales would have been $766.3 million, reflecting an increase of 5.1% from the third quarter of 2017. Gross profit dollars increased year-over-year by $4.3 million due to higher invoice selling margins realized on increased sales of software and higher margin advanced solution sales. The increase in SG&A expenses in dollars and as a percentage of net sales was primarily related to incremental personnel costs, including variable compensation associated with higher gross profits, as well as increased investments in solution selling. SG&A expenses as a percentage of net sales is 12.4% for the third quarter of 2018, which reflects an increase of 44 basis points resulting from the factors previously noted, and an increase of 174 basis points related to the adoption of new revenue guidance under ASC 606. Operating income in the third quarter of 2018 decreased year-over-year in dollars and as a percentage of net sales by $2.8 million and 10 basis points, respectively, primarily as a result of the increase in SG&A expenses.

Net Sales Distribution

The following table sets forth our percentage of net sales by segment and product mix:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2018		2017		2018		2017		2019		2018 (1)
Sales Segment
Enterprise Solutions									44	%	41	%
Business Solutions	37	%	40	%	39	%	40	%	40		42
Enterprise Solutions	40		37		41		38
Public Sector Solutions	23		23		20		22		16		17
Total	100	%	100	%	100	%	100	%	100	%	100	%

Product Mix
Notebooks/Mobility	28	%	23	%	27	%	22	%	28	%	26	%
Desktops									12		11
Software	11		24		12		22		11		11
Desktops	10		10		11		11
Servers/Storage	9		9		10		9		9		12
Net/Com Product	9		7		9		8
Net/Com Products									7		8
Displays and Sound									9		9
Accessories									14		12
Other Hardware/Services	33		27		31		28		10		11
Total	100	%	100	%	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 third quarter of 2018 decreased due to the adoption of ASC 606, which required the reporting of $103.3 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				Nine Months Ended					Three Months Ended
	September 30,				September 30,					March 31,
	2018		2017		2018		2017			2019		2018
Sales Segment
Enterprise Solutions									14.9	%	14.3	%
Business Solutions	18.2	%	14.9	%	17.8	%	15.3	%		17.8		17.6
Enterprise Solutions	14.3		12.7		14.3		12.5
Public Sector Solutions	12.1		11.0		12.4		10.4			12.6		12.9
Total Company	15.3	%	13.2	%	15.3	%	13.1	%
Total									15.7	%	15.4	%

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Operating Expenses

The following table reflects our SG&A expenses for the periods indicated:


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
($ in millions)	2018			2017			2018			2017			2019			2018
Personnel costs	$	61.8		$	57.4		$	188.0		$	175.4		$	61.0		$	62.7
Advertising, net		4.1			3.6			12.3			10.8
Advertising														4.6			3.8
Facilities operations		4.3			3.7			12.7			11.1			4.8			4.1
Professional fees		2.3			2.0			6.9			6.4			2.5			2.4
Credit card fees		1.9			1.8			5.3			5.5			1.5			1.7
Depreciation and amortization		3.6			2.9			10.4			8.7			3.7			3.3
Other, net		3.5			3.0			9.3			9.0
Other														3.1			2.9
Total SG&A expense	$	81.5		$	74.4		$	244.9		$	226.9		$	81.2		$	80.9
Percentage of net sales		12.4	%		10.2	%		12.3	%		10.6	%		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 ~~September 30, 2018~~March 31, 2019 Compared to Three Months Ended ~~September 30, 2017~~March 31, 2018

Changes in net sales and gross profit by segment are shown in the following table:


	Three Months Ended September 30,											Three Months Ended March 31,
	2018				2017							2019					2018
			% of				% of		%						% of					% of		%
($ in millions)	Amount		Net Sales		Amount		Net Sales		Change			Amount			Net Sales		Amount			Net Sales		Change
Sales:
Enterprise Solutions											$	275.6		43.5	%	$	257.2		41.2	%	7.2	%
Business Solutions	$	244.9	37.2	%	$	290.6	39.8	%	(15.7)	%			252.9		40.0			263.3		42.1		(3.9)
Enterprise Solutions		265.5	40.3			268.0	36.8		(0.9)
Public Sector Solutions		148.1	22.5			170.6	23.4		(13.2)				104.4		16.5			104.4		16.7		—
Total	$	658.5	100.0	%	$	729.2	100.0	%	(9.7)	%		$	632.9		100.0	%	$	624.9		100.0	%	1.3	%
Gross Profit:
Enterprise Solutions											$	41.2		14.9	%	$	36.7		14.3	%	12.3	%
Business Solutions	$	44.6	18.2	%	$	43.4	14.9	%	2.8	%			45.0		17.8			46.2		17.6		(2.6)
Enterprise Solutions		37.9	14.3			34.0	12.7		11.5
Public Sector Solutions		17.9	12.1			18.7	11.0		(4.3)				13.1		12.5			13.5		12.9		(3.0)
Total	$	100.4	15.2	%	$	96.1	13.2	%	4.5	%		$	99.3		15.7	%	$	96.4		15.4	%	3.0	%

Net sales ~~as reported, decreased~~increased in the ~~third~~first quarter of ~~2018~~2019 compared to the ~~third~~first quarter of ~~2017,~~2018, as explained below:

Net sales of ~~$244.9~~$275.6 million for the ~~Business~~Enterprise Solutions segment reflect ~~a decrease~~an increase of ~~$45.7~~$18.4 million year-over-year due to ~~lower net sales of software products of $34.5 million, primarily as a result of the adoption of ASC 606 where the Company is considered to be the agent on the transaction, and lower~~increases in net sales of mobility ~~and~~products, desktop products, and other accessories of ~~$8.6~~$3.1 million, $4.7 million, and ~~$4.0~~$17.5 million, respectively. ~~Had the quarter been reported under the previous revenue recognition guidance,~~The growth was partially offset by a decrease in net sales ~~for~~of server/storage products of $7.1 million. These fluxes were primarily driven by the ~~Business Solutions segment would have increased by $3.6 million, or 1.3%~~. timing of large product rollouts.

Net sales of ~~$265.5~~$252.9 million for the ~~Enterprise~~Business Solutions segment reflect a decrease of ~~$2.5 million year-over-year due to lower~~$10.4 million. Net sales were negatively impacted by a higher percentage of our software sales recognized on a net ~~sales of software products of $41.9 million, which resulted primarily from~~basis in the ~~adoption of ASC 606~~current period in transactions where ~~the Company is~~we are considered to be the ~~agent on the transaction. This decrease was partially offset by~~ agent.~~increases~~ Though we experienced strong growth in net sales of mobility products, desktop products, and other hardware/services of $13.1 million, $4.2 million, and $17.8 million, respectively. These sales growths represented an increase year-over-year of 25.8%, 16.2%, and 19.8%, respectively. ~~Had the quarter been reported under the previous revenue recognition guidance, net sales for the Enterprise Solutions segment would have increased by $35.6 million, or 13.3%~~.cloud-

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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 ~~$148.1~~$104.4 million for the Public Sector Solutions ~~segment reflect~~were relatively flat compared with the same period a ~~decrease~~year ago. Net sales of ~~$22.5~~notebooks/mobility, software, and desktop products grew $3.5 million, $2.4 million, and $0.8 million, respectively. These increases in the current period were offset by ~~primarily driven by~~ lower net sales of ~~software~~server/storage and net/com products of ~~$24.0~~$4.7 million ~~which resulted primarily from the adoption of ASC 606 where the Company is considered to be the agent on the transaction.~~and $2.6 million, respectively.

Gross profit for the ~~third~~first quarter of ~~2018~~2019 increased year-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 ~~increased~~ decreased primarily as a result of lower net sales and a shift in product mix in the current period. The decrease was partially offset by~~due to~~ higher invoice selling ~~margins. Invoice selling~~ margins ~~increased by 297~~of 16 basis points ~~due~~driven primarily ~~to the~~by an increase in ~~revenues~~software sales reported on a net ~~basis as a result of the adoption of ASC 606.~~ basis. We also receive agency fees ~~and early pay discounts~~ from vendors for certain software and hardware sales. Agency fees are recorded as revenue with no corresponding cost of goods sold, and accordingly such fees have a positive impact on gross margin. Agency fees from enterprise software agreements ~~decreased year over year~~increased year-over-year by ~~$0.2 million. However on a rate~~$0.7 million, or 32 basis ~~this represented an 11 basis-point increase due to the reduction in net sales year-over-year. Cash discounts increased by 21 basis points year-over-year.~~points.

Gross profit for the Enterprise Solutions segment increased due to higher invoice selling margins. Invoice selling margins increased by 159 basis points in the quarter due primarily to the increase in revenues reported on a net basis as a result of the adoption of ASC 606. This increase was partially offset by a net decrease in agency fees and cash discounts of 3 basis points.

Gross profit for the Public Sector Solutions segment decreased slightly in conjunction with ~~a decrease in~~flat net sales. ~~Despite the decrease in gross profit, invoice~~Invoice selling margins ~~increased~~decreased by ~~123~~27 basis points ~~primarily~~ due to ~~the increase~~a shift in ~~revenues reported on a net basis as a result~~both client and product mix, which included increased sales of ~~the adoption of ASC 606.~~lower-margin products.

Selling, general and administrative expenses increased in dollars, ~~and~~but decreased as a percentage of net sales in the ~~third~~first quarter of ~~2018~~2019 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:

Three Months Ended September 30,

2018

2017

% of

% of

Segment Net

Segment Net

%

($ in millions)

Amount

Sales

Amount

Sales

Change


Business Solutions

$
36.4

14.9
%
$
33.8

11.6
%
7.7
%

Enterprise Solutions

24.3

9.2

21.7

8.1

12.0

Public Sector Solutions

17.5

11.8

15.9

9.3

10.1

Headquarters/Other, unallocated

3.3

3.0

10.0

Total

$
81.5

12.4
%
$
74.4

10.2
%
9.5
%

SG&A expenses for the Business Solutions segment increased in dollars and as a percentage of net sales. The year-over year increase in SG&A dollars was primarily driven by a $3.0 million increase in usage of Headquarter services, and partially offset by a $0.8 decrease in personnel expenses. SG&A expenses as a percentage of net sales was 14.9% for the Business Solutions segment, which reflects an increase of 75 basis points resulting from the factors previously noted and an increase of 247 basis points related to the adoption of ASC 606.


	Three Months Ended March 31,
	2019				2018
			% of				% of
			Segment Net				Segment Net		%
($ in millions)	Amount		Sales		Amount		Sales		Change
Enterprise Solutions	$	25.7	9.3	%	$	24.0	9.3	%	7.1	%
Business Solutions		36.2	14.3			36.8	14.0		(1.6)
Public Sector Solutions		16.2	15.5			16.6	15.9		(2.4)
Headquarters/Other, unallocated		3.1				3.5			(11.4)
Total	$	81.2	12.8	%	$	80.9	12.9	%	0.4	%

SG&A expenses for the Enterprise Solutions segment increased in dollars and remained flat as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily due to an increase of ~~$1.2~~$0.6 million of incremental personnel costs, including variable compensation associated with higher gross profit, an increase of $0.3 million in advertising expenses, and a ~~$1.2~~$0.6 million increase in the usage of ~~Headquarter~~Headquarters services. SG&A expenses as a percentage of net sales was ~~9.2%~~9.3% for the Enterprise Solutions segment ~~which reflects~~in the first quarter of 2019 and 2018.

SG&A expenses for the Business Solutions segment decreased in dollars, but increased as a ~~slight~~percentage of net sales. The year-over year decrease ~~of 10 basis points, but~~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 ~~115~~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 ~~related to~~resulting primarily from the ~~adoption of ASC 606.~~lower net sales reported in Q1 2019.

SG&A expenses for the Public Sector Solutions segment ~~increased~~decreased both in dollars and as a percentage of net sales. The year-over-year ~~increase~~decrease in SG&A dollars was primarily ~~due to an increase of $1.2~~driven by a $0.3 million decrease in ~~usage of Headquarter services, $0.2 million of incremental~~ personnel expenses, including variable compensation, and $0.1 million of decreased professional fees. SG&A

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~~$0.2 million of increased credit card fees, and other miscellaneous expenses. SG&A~~ expenses as a percentage of net sales was ~~11.8%~~15.5% for the Public Sector segment, which reflects ~~an increase~~a decrease of ~~102~~40 basis points ~~and an increase of 144 basis points related~~compared to the ~~adoption of ASC 606.~~prior period, resulting from flat net sales and lower SG&A expenses in the current period.

SG&A expenses for the Headquarters/Other group ~~increased slightly~~decreased due to ~~an increase~~a decrease in unallocated executive oversight costs. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

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 ~~third~~first quarter of ~~2018 decreased~~2019 increased to ~~$19.0~~$17.4 million, compared to ~~$21.7~~$15.5 million for the ~~third~~first quarter of ~~2017,~~2018, primarily due to the increase in ~~SG&A.~~net sales year-over-year. Income from operations as a percentage of net sales was ~~2.9%~~2.8% for the ~~third~~first quarter of ~~2018,~~2019, compared to ~~3.0%~~2.5% of net sales for the prior year quarter, primarily as a result of the ~~increase~~growth rate in net sales exceeding the growth rate in SG&A ~~expenses year-over-year.~~expenses.

Our effective tax rate was ~~27.8%~~27.7% for the ~~third~~first quarter of ~~2018,~~2019, compared to ~~39.6%~~27.5% for the ~~third~~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 ~~2018~~2019 to range from 27% to 29% and to vary based on fluctuations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.

Net income for the ~~third~~first quarter of 2019 increased to $12.7 million, compared to $11.3 million for the first quarter of 2018, ~~increased to $13.8 million, compared to $13.1 million for the third quarter of 2017,~~ primarily due to ~~the lower tax rate~~higher gross profit and operating expense management in the ~~third~~first quarter of ~~2018,~~2019, as compared to the ~~third~~first quarter of ~~2017.~~2018.

~~Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017~~

~~Changes in net sales and gross profit by segment are shown in the following table:~~

Nine Months Ended September 30,

2018

2017

% of

% of

%

($ in millions)

Amount

Net Sales

Amount

Net Sales

Change


Sales:

Business Solutions

$
778.2

39.1
%
$
860.6

40.0
%
(9.6)
%

Enterprise Solutions

823.8

41.4

823.0

38.3

0.1

Public Sector Solutions

388.0

19.5

466.0

21.7

(16.7)

Total

$
1,990.0

100.0
%
$
2,149.6

100.0
%
(7.4)
%

Gross Profit:

Business Solutions

$
138.2

17.8
%
$
131.4

15.3
%
5.2
%

Enterprise Solutions

117.8

14.3

102.8

12.5

14.6

Public Sector Solutions

48.3

12.4

48.3

10.4

—

Total

$
304.3

15.3
%
$
282.5

13.1
%
7.7
%

~~Net sales, as reported, decreased for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, as explained below:~~

Net sales of $778.2 million for the Business Solutions segment reflect a decrease of $82.4 million, due to lower net sales of software products of $91.6 million, primarily as a result of the adoption of ASC 606 where the Company is considered to be the agent on the transaction. This decrease was partially offset by an increase in net sales of net/com products of $11.7 million. Had the quarter been reported under the previous revenue recognition guidance, net sales for the Business Solutions segment would have increased by $43.6 million, or 5.1%.

Net sales of $823.8 million for the Enterprise Solutions segment reflect an increase of $0.8 million year-over-year. Sales of notebooks and desktops increased by $45.1 million and $15.3 million, respectively, while sales of server and storage equipment, along with other hardware and services also increased by $10.4 and $43.8 million, respectively. These increases were partially offset by a $111.8 million decrease in net sales of software

~~Table of Contents~~

~~product, primarily due to the adoption of ASC 606 where the Company is considered to be the agent on the transaction.Had the quarter been reported under the previous revenue recognition guidance, net sales for the Enterprise Solutions segment would have increased by $119.8 million, or 14.6%~~.

~~Net sales of $388.0 million for the Public Sector Solutions segment reflect a decrease of $78.0 million,~~ primarily driven by lower net sales of software products of $42.9 million, which resulted primarily from the adoption of ASC 606 where the Company is considered to be the agent on the transaction, and lower net sales of desktops of $36.1 million. Net sales to the federal government reflected a decrease of $43.5 million in the first three quarters of 2018, which resulted primarily from a decrease in net sales of software product due to the adoption of ASC 606, and from a large sale of desktops to a federal agency in the first half of 2017 that did not repeat in 2018. Net sales to state and local government and educational institutions reflect a decrease of $34.5 million, primarily driven by a decrease in net sales of software product due to the adoption of ASC 606, and to lower net sales to higher education customers.

~~Gross profit~~ ~~for the nine months ended September 30, 2018 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:~~

~~Gross profit for the Business Solutions segment increased~~ ~~due to higher invoice selling margins. I~~nvoice selling margins increased by 219 basis points due to the increase in revenues reported on a net basis and an increase in a shift in product mix to higher-margin advanced solution products (servers and net/com). We also receive agency fees from suppliers for certain software and hardware sales, which are recorded as revenue with no corresponding cost of goods sold, and accordingly such fees have a positive impact on gross margin. Agency fees from enterprise software agreements increased year over year by $0.3 million, which on a rate basis, represented a 15 basis-point increase.

Gross profit for the Enterprise Solutions segment increased due to higher invoice selling margins and increased agency fees. Invoice selling margins increased by 29 basis points in the first three quarters of 2018 due primarily to the increase in revenues reported on a net basis. Agency fees from enterprise software agreements increased year over year by $3.0 million, which on a rate basis, represented a 30 basis-point increase.

Gross profit for the Public Sector Solutions segment increased slightly despite the decrease in net sales, primarily due to higher invoice selling margins. Invoice selling margins increased by 219 basis points due to the increase in revenues reported on a net basis, as well as a shift in product mix to higher-margin advanced solution sales and fewer sales of lower-margin desktops and notebooks.

~~Selling, general and administrative expenses~~ increased in dollars and as a percentage of net sales in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below:

Nine Months Ended September 30,

2018

2017

% of

% of

Segment Net

Segment Net

%

($ in millions)

Amount

Sales

Amount

Sales

Change


Business Solutions

$
109.8

14.1
%
$
102.0

11.9
%
7.6
%

Enterprise Solutions

74.2

9.0

67.0

8.1

10.7

Public Sector Solutions

50.4

13.0

48.1

10.3

4.8

Headquarters/Other, unallocated

10.5

9.8

7.1

Total

$
244.9

12.3
%
$
226.9

10.6
%
7.9
%

SG&A expenses for the Business Solutions segment increased in dollars and as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily due to an increase of $1.1 million in advertising expense, $0.5 million of incremental personnel costs, including variable compensation associated with higher gross profit, and a $5.7 million increase in usage of Headquarter services. SG&A expenses as a percentage of net sales was 14.1% for the Business Solutions segment which reflects an increase of 32 basis points resulting from the factors described above and an increase of 194 basis points related to the adoption of ASC 606.

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SG&A expenses for the Enterprise Solutions segment increased in dollars and as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily due to an increase of $4.5 million of incremental personnel costs, including variable compensation associated with higher gross profit, and a $2.4 million increase in usage of Headquarter services. SG&A expenses as a percentage of net sales was 9.0% for the Enterprise Solutions segment, which reflects a decrease of 27 basis points based on the foregoing factors, but was offset by an increase of 113 basis points related to the adoption of ASC 606.

SG&A expenses for the Public Sector Solutions segment increased in dollars and as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily due to a $2.3 million increase in usage of Headquarter services. SG&A expenses as a percentage of net sales was 13.0% for the Public Sector Solutions segment, which reflects an increase of 113 basis points due primarily to increased usage of Headquarter services and an increase of 153 basis points related to the adoption of ASC 606.

SG&A expenses for the Headquarters/Other group increased due to an increase in unallocated executive oversight costs. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

~~Income from operations~~ for the nine months ended September 30, 2018 increased to $59.4 million, compared to $55.6 million for the nine months ended September 30, 2017, primarily due to the increase in gross profit. Income from operations as a percentage of net sales was 3.0% for the nine months ended September 30, 2018, compared to 2.6% of net sales for the nine months ended September 30, 2017, due to the higher gross profits achieved as well as the lower revenues reported under ASC 606.

Our effective tax rate was 27.6% for the nine months ended September 30, 2018, compared to 38.7% for the nine months ended September 30, 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 2018 to range from 27% to 29% and to vary based on fluctuations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.

~~Net income~~ for the nine months ended September 30, 2018 increased to $43.3 million, compared to $34.1 million for the nine months ended September 30, 2017, due to the increase in operating income and lower tax rate in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.

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 $14.0 to $16.0 million, and payments on leases and other contractual obligations of approximately $3.5 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-year~~two-year initiative to upgrade our IT infrastructure, ~~for which~~and we ~~have incurred $12.4 million of~~expect the remaining capital ~~expenditures through September 30, 2018. We expect additional capital expenditures~~investments related to this project to range from ~~$8.0~~$3.0 to ~~$9.0~~$4.0 million over the ~~next nine~~three to ~~twelve months.~~six months, when we expect to have completed the 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 ~~September 30, 2018,~~March 31, 2019, we had ~~$102.2~~$93.5 million in cash and cash equivalents.

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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 ~~September 30, 2018,~~March 31, 2019, we had no borrowings ~~against~~under our $50.0 million bank line of credit, which is available until February 10, 2022. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

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Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, our cash flows from operations may be substantially affected. See also related risks listed 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:



	Nine Months Ended				Three Months Ended
($ in millions)	2018		2017		2019		2018
Net cash provided by operating activities	$	81.3	$	28.4	$	18.1	$	37.2
Net cash used in investing activities		(15.6)		(7.9)		(6.6)		(5.0)
Net cash used in financing activities		(13.4)		(7.3)		(9.7)		(11.2)
Increase in cash and cash equivalents	$	52.3	$	13.2	$	1.8	$	21.0

Cash provided by operating activities was ~~$81.3~~$18.1 million in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. Cash flow provided by operations in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 resulted primarily from net income before depreciation and amortization, ~~and~~ a decrease in accounts receivable, ~~and~~ an increase accounts payable, and a decrease in 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 ~~$63.9~~$13.8 million from the prior year-end balance. Days sales outstanding increased to 5055 days at ~~September 30, 2018,~~March 31, 2019, compared to 4353 days at ~~September 30, 2017. Excluding the impact of the adoption of ASC 606, days sales outstanding would have been unchanged at 43 days at September 30, 2018 and 2017.~~March 31, 2018. Inventory increased from the prior year-end balance by ~~$9.4~~$18.5 million due to higher levels of inventory on-hand related to future backlog and an increase in shipments ~~shipped~~in transit but not received by our customers as of ~~September 30, 2018~~March 31, 2019 compared to December 31, ~~2017.~~2018. Inventory turns ~~remained flat at 22 turns~~decreased to 17 for the ~~third~~first quarter of ~~2018~~2019 compared to 2223 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 third quarter of 2018 compared to 22 turns for the prior year period.~~

At ~~September 30, 2018~~, we had $165.2 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 in investing activities in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 represented ~~$15.6~~$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 ~~$7.9~~$5.0 million of purchases of property and equipment in the prior year.

Cash used in financing activities in the ~~nine~~three months ended ~~September 30, 2018~~ ~~was $13.4 million~~ ~~and~~March 31, 2019 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 ~~$4.4~~$3.0 million for the purchase of treasury shares, partially offset by $0.6 million for the issuance of stock under the employee stock purchase plan. In the prior year period, financing activities primarily represented a $9.0 million payment of a special $0.34 per share dividend, partially offset by $1.7$0.9 million of proceeds from ~~the exercise of stock options.~~short-term borrowings.

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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 ~~million~~million. 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 ~~(5.25%~~(5.50% at ~~September 30, 2018)~~March 31, 2019). The one-month LIBOR rate at ~~September 30, 2018~~March 31, 2019 was ~~2.26%~~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 requirements which are described below under “Factors Affecting Sources of Liquidity.” At ~~September 30, 2018,~~March 31, 2019, $50.0 million was available for borrowing under the 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.

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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 in~~with 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-K~~within 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, ~~2017~~2018 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 September 30, 2018, $50.0 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:

~~The~~Our funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by ~~the~~our consolidated Adjusted ~~EBITDA~~ EBITDA—earnings before interest expense, taxes, depreciation, amortization, and special charges—for the trailing four quarters) must not be more than 2.0 to 1.0. Our ~~actual funded ratio as of September 30, 2018 was 0.01 to 1.0, as there were no~~outstanding borrowings ~~against our~~under the credit facility during the ~~three months ended September 30, 2018.~~first quarter of 2019 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2019. Future decreases in our consolidated Adjusted EBITDA, could limit our potential borrowings under the credit facility.

~~Minimum Consolidated Net Worth~~Our minimum consolidated net worth (defined as our consolidated total assets less our consolidated total liabilities) must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, ~~2017~~2016 (loss quarters not counted). Such amount was calculated as ~~$402.3~~$419.3 million at ~~September 30, 2018,~~March 31, 2019, whereas our ~~actual~~ consolidated stockholders’ equity at ~~this~~that date was ~~in compliance at $523.2~~$537.6 million.

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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.

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.

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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.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 4 - CONTROLS AND PROCEDURES

~~The Company’s~~Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ~~the Company’s~~our disclosure controls and procedures as of ~~September 30, 2018.~~March 31, 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’s~~Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, ~~the Company’s~~our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

~~There~~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 ~~September 30, 2018~~March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended March 31, 2019, we changed existing controls to ensure we adequately implemented the new accounting standard related to lease accounting effective January 1, 2019. The modified and new controls were designed to ensure we sufficiently evaluated our lease contracts and properly assessed the impact of the new accounting standard on our financial statements and related disclosures.

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PART II - OTHER INFORMATION

Item 1A - Risk Factors

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 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information with respect to repurchases of our common stock during the three months ended March 31, 2019.


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) (in thousands)
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)

In December 2018, our Board of Directors announced a new share repurchase program of our common stock authorizing up to an additional $25 million in share repurchases to be added to our existing publicly-announced share repurchase programs. Prior to that, our Board had previously authorized the spending of up to $30.0 million in aggregate, under which the remaining authorized amount is approximately $1.0 million. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions.

(2)

We have repurchased approximately 2.3 million shares of our common stock for approximately $29 million pursuant to Board-approved programs.

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Item 6 - Exhibits


Exhibit Number		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	*	Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*	Certification of the Company’s President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.



*		Filed herewith.
**		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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, (ii) Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and March 31, 2018, (iii) Condensed Consolidated Statements of Stockholders’ Equity at March 31, 2019 and ~~September 30, 2017, (iii)~~December 31, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and March 31, 2018, ~~and September 30, 2017,~~ and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES

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.


Date:	~~November 1, 2018~~May 2, 2019	By:	/s/ TIMOTHY J. MCGRATH
			Timothy J. McGrath
			President and Chief Executive Officer (Duly Authorized Officer)

Date:	~~November 1, 2018~~May 2, 2019	By:	/s/ ~~STEPHEN P. SARNO~~THOMAS BAKER
			~~Stephen P. Sarno~~Thomas Baker
			Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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	Three Months Ended September 30, 2018
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	68,822	$	63,926	$	50,079	$	182,827
Software (1)		31,578		25,718		15,541		72,837
Desktops		25,828		30,075		13,112		69,015
Servers/Storage		26,386		21,424		13,115		60,925
Net/Com products		27,380		16,601		12,745		56,726
Other hardware/services		64,878		107,733		43,563		216,174
Total net sales	$	244,872	$	265,477	$	148,155	$	658,504


	Three Months Ended September 30, 2017
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	77,374	$	50,835	$	39,369	$	167,578
Software		66,094		67,623		39,579		173,296
Desktops		29,849		25,873		16,869		72,591
Servers/Storage		29,142		19,090		14,110		62,342
Net/Com products		24,085		14,645		11,855		50,585
Other hardware/services		64,025		89,956		48,857		202,838
Total net sales	$	290,569	$	268,022	$	170,639	$	729,230


	Nine Months Ended September 30, 2018
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	222,550	$	195,909	$	109,238	$	527,697
Software (1)		104,377		91,522		33,447		229,346
Desktops		82,518		91,307		41,948		215,773
Servers/Storage		85,190		70,262		46,753		202,205
Net/Com products		83,546		49,093		36,618		169,257
Other hardware/services		200,011		325,693		119,987		645,691
Total net sales	$	778,192	$	823,786	$	387,991	$	1,989,969


	Nine Months Ended September 30, 2017
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	226,152	$	150,799	$	99,999	$	476,950
Software		195,972		203,320		76,384		475,676
Desktops		85,994		76,015		78,045		240,054
Servers/Storage		85,949		59,864		40,290		186,103
Net/Com products		71,831		51,115		45,565		168,511
Other hardware/services		194,724		281,904		125,694		602,322
Total net sales	$	860,622	$	823,017	$	465,977	$	2,149,616


	September 30, 2018		January 1, 2018
Contract liability, which are included in "Accrued expenses and other liabilities"	$	2,629	$	2,914


	Three Months Ended
	September 30,
Balances at July 1,2018	$	8,433
Cash received in advance and not recognized as revenue		1,024
Amounts recognized as revenue as performance obligations satisfied		(6,828)
Balances at September 30, 2018	$	2,629

	Nine Months Ended
	September 30,
Balances at January 1, 2018	$	2,914
Cash received in advance and not recognized as revenue		9,520
Amounts recognized as revenue as performance obligations satisfied		(9,805)
Balances at September 30, 2018	$	2,629


				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


		Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
						Balances without						Balances without
		As				Adoption of		As				Adoption of
		Reported		Adjustments		ASC 606		Reported		Adjustments		ASC 606
Income statement
Revenues
Net sales	$	658,504	$	107,826	$	766,330	$	1,989,969	$	296,583	$	2,286,552

Costs and expenses
Cost of sales		558,060		107,575		665,635		1,685,685		295,540		1,981,225

Income from operations		18,950		224		19,174		59,369		808		60,177
Income before taxes		19,064		224		19,288		59,781		808		60,589
Net income		13,766		162		13,928		43,292		584		43,876