UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*
For the quarterly period ended March 31, 20192020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
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|
02-0513618 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
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|
730 MILFORD ROAD, |
|
MERRIMACK, NEW HAMPSHIRE | 03054 |
(Address of principal executive offices) | (Zip Code) |
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| (603) 683-2000 |
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| (Registrant's telephone number, including area code) |
|
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:
C | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | CNXN | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES Yes ☑ NO 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 Yes ☑ NO No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| |
| Large accelerated filer ☐ |
| Accelerated filer ☑ |
| Non-accelerated filer ☐ |
| Smaller reporting company ☐ |
|
|
| 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 Yes ☐ NO No ☑
Securities registered pursuant to Section 12(b) of the Act:
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The number of shares outstanding of the issuer’s common stock as of April 29, 201927, 2020 was 26,359,259.
26,107,451.
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
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| March 31, |
| December 31, |
|
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 | ||||
ASSETS |
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Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents |
| $ | 93,470 |
| $ | 91,703 |
|
| $ | 111,323 |
| $ | 90,060 |
Accounts receivable, net |
|
| 433,948 |
|
| 447,698 |
|
|
| 485,316 |
|
| 549,626 |
Inventories, net |
|
| 137,665 |
|
| 119,195 |
|
|
| 136,985 |
|
| 124,666 |
Income taxes receivable |
|
| — |
|
| 922 |
|
|
| 1,388 |
|
| 1,388 |
Prepaid expenses and other current assets |
|
| 7,261 |
|
| 9,661 |
|
|
| 13,971 |
|
| 10,671 |
Total current assets |
|
| 672,344 |
|
| 669,179 |
|
|
| 748,983 |
|
| 776,411 |
Property and equipment, net |
|
| 55,438 |
|
| 51,799 |
|
|
| 65,754 |
|
| 64,226 |
Right-of-use assets, net |
|
| 16,750 |
|
| — |
| ||||||
Right-of-use assets |
|
| 15,776 |
|
| 13,842 | |||||||
Goodwill |
|
| 73,602 |
|
| 73,602 |
|
|
| 73,602 |
|
| 73,602 |
Intangibles assets, net |
|
| 9,223 |
|
| 9,564 |
| ||||||
Intangible assets, net |
|
| 8,002 |
|
| 8,307 | |||||||
Other assets |
|
| 1,092 |
|
| 1,211 |
|
|
| 1,075 |
|
| 947 |
Total Assets |
| $ | 828,449 |
| $ | 805,355 |
|
| $ | 913,192 |
| $ | 937,335 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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|
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Current Liabilities: |
|
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|
|
|
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Accounts payable |
| $ | 204,196 |
| $ | 201,640 |
|
| $ | 219,917 |
| $ | 235,641 |
Accrued payroll |
|
| 18,066 |
|
| 24,319 |
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|
| 20,479 |
|
| 28,050 |
Accrued expenses and other liabilities |
|
| 36,619 |
|
| 33,840 |
|
|
| 36,913 |
|
| 45,232 |
Total current liabilities |
|
| 258,881 |
|
| 259,799 |
|
|
| 277,309 |
|
| 308,923 |
Deferred income taxes |
|
| 17,184 |
|
| 17,184 |
|
|
| 20,170 |
|
| 20,170 |
Operating lease liability |
|
| 13,215 |
|
| — |
| ||||||
Noncurrent operating lease liabilities |
|
| 12,551 |
|
| 10,330 | |||||||
Other liabilities |
|
| 1,577 |
|
| 2,469 |
|
|
| 600 |
|
| 600 |
Total Liabilities |
|
| 290,857 |
|
| 279,452 |
|
|
| 310,630 |
|
| 340,023 |
Stockholders’ Equity: |
|
|
|
|
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|
Common stock |
|
| 288 |
|
| 288 |
|
|
| 289 |
|
| 288 |
Additional paid-in capital |
|
| 116,098 |
|
| 115,842 |
|
|
| 118,620 |
|
| 118,045 |
Retained earnings |
|
| 453,737 |
|
| 441,010 |
|
|
| 529,590 |
|
| 514,694 |
Treasury stock, at cost |
|
| (32,531) |
|
| (31,237) |
|
|
| (45,937) |
|
| (35,715) |
Total Stockholders’ Equity |
|
| 537,592 |
|
| 525,903 |
|
|
| 602,562 |
|
| 597,312 |
Total Liabilities and Stockholders’ Equity |
| $ | 828,449 |
| $ | 805,355 |
|
| $ | 913,192 |
| $ | 937,335 |
See notes to unaudited condensed consolidated financial statements.
1
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands, except per share data)
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| Three Months Ended |
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| Three Months Ended |
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|
| March 31, |
|
| March 31, |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
Net sales |
| $ | 632,921 |
| $ | 624,895 |
|
| $ | 711,850 |
| $ | 632,921 |
|
Cost of sales |
|
| 533,574 |
|
| 528,523 |
|
|
| 598,732 |
|
| 533,574 |
|
Gross profit |
|
| 99,347 |
|
| 96,372 |
|
|
| 113,118 |
|
| 99,347 |
|
Selling, general and administrative expenses |
|
| 81,235 |
|
| 80,900 |
|
|
| 92,468 |
|
| 81,235 |
|
Restructuring and other charges |
|
| 703 |
|
| — |
|
|
| — |
|
| 703 |
|
Income from operations |
|
| 17,409 |
|
| 15,472 |
|
|
| 20,650 |
|
| 17,409 |
|
Interest income, net |
|
| 198 |
|
| 116 |
|
|
| 92 |
|
| 198 |
|
Income before taxes |
|
| 17,607 |
|
| 15,588 |
|
|
| 20,742 |
|
| 17,607 |
|
Income tax provision |
|
| (4,880) |
|
| (4,288) |
|
|
| (5,846) |
|
| (4,880) |
|
Net income |
| $ | 12,727 |
| $ | 11,300 |
|
| $ | 14,896 |
| $ | 12,727 |
|
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Earnings per common share: |
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Basic |
| $ | 0.48 |
| $ | 0.42 |
|
| $ | 0.57 |
| $ | 0.48 |
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Diluted |
| $ | 0.48 |
| $ | 0.42 |
|
| $ | 0.56 |
| $ | 0.48 |
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Shares used in computation of earnings per common share: |
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Basic |
|
| 26,359 |
|
| 26,835 |
|
|
| 26,236 |
|
| 26,359 |
|
Diluted |
|
| 26,525 |
|
| 26,916 |
|
|
| 26,421 |
|
| 26,525 |
|
See notes to unaudited condensed consolidated financial statements.
2
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(amounts in thousands)
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| |
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| Total |
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| Three months ended March 31, 2019 | |||||||||||||||||||
|
| Common Stock |
| Additional |
| Retained |
| Treasury Stock |
| Stockholders' |
|
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| Total | ||||||||||
|
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity |
|
| Common Stock |
| Additional |
| Retained |
| Treasury Stock |
| Stockholders' | ||||||||||||||
For the Three-Month Period Ended March 31, 2018: |
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|
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| |||||||||||||||||||
Balance at December 31, 2017 |
| 28,709 |
|
| $ 287 |
|
| $ 114,154 |
|
| $ 383,673 |
| (1,856) |
|
| $ (15,862) |
|
| $ 482,252 |
| |||||||||||||||||||
Cumulative effect of adoption of ASC 606 |
| — |
|
| — |
| — |
|
| 1,197 |
| — |
|
| — |
|
| 1,197 |
| ||||||||||||||||||||
Stock-based compensation expense |
| — |
|
| — |
| 207 |
|
| — |
| — |
|
| — |
|
| 207 |
| ||||||||||||||||||||
Repurchase of common stock for treasury |
| — |
|
| — |
| — |
|
| — |
| (116) |
|
| (2,997) |
|
| (2,997) |
| ||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| 11,300 |
| — |
|
| — |
|
| 11,300 |
| |||||||||||||||||||
Balance at March 31, 2018 |
| 28,709 |
|
| $ 287 |
|
| $ 114,361 |
|
| $ 396,170 |
| (1,972) |
|
| $ (18,859) |
|
| $ 491,959 |
| |||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||
For the Three-Month Period Ended March 31, 2019: |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||||||||||||
Balance at December 31, 2018 |
| 28,787 |
|
| $ 288 |
|
| $ 115,842 |
|
| $ 441,010 |
| (2,391) |
|
| $ (31,237) |
|
| $ 525,903 |
|
| 28,787 |
| $ | 288 |
| $ | 115,842 |
| $ | 441,010 |
| (2,391) |
| $ | (31,237) |
| $ | 525,903 |
Stock-based compensation expense |
| — |
|
| — |
| 269 |
|
| — |
| — |
|
| — |
|
| 269 |
|
| — |
|
| — |
|
| 269 |
|
| — |
| — |
|
| — |
|
| 269 | |
Restricted stock units vested |
| 3 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — | |
Issuance of common stock under Employee Stock Purchase Plan |
| — |
|
| — |
|
| (13) |
|
| — |
| ─ |
|
| ─ |
|
| (13) |
|
| — |
|
| — |
|
| (13) |
|
| — |
| — |
|
| — |
|
| (13) |
Repurchase of common stock for treasury |
| — |
|
| — |
| — |
|
| — |
| (43) |
|
| (1,294) |
|
| (1,294) |
|
| — |
|
| — |
|
| — |
|
| — |
| (43) |
|
| (1,294) |
|
| (1,294) | |
Net income |
| — |
|
| — |
|
| — |
|
| 12,727 |
| — |
|
| — |
|
| 12,727 |
|
| — |
|
| — |
|
| — |
|
| 12,727 |
| — |
|
| — |
|
| 12,727 |
Balance at March 31, 2019 |
| 28,790 |
|
| $ 288 |
|
| $ 116,098 |
|
| $ 453,737 |
| (2,434) |
|
| $ (32,531) |
|
| $ 537,592 |
|
| 28,790 |
| $ | 288 |
| $ | 116,098 |
| $ | 453,737 |
| (2,434) |
| $ | (32,531) |
| $ | 537,592 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
| Three months ended March 31, 2020 | |||||||||||||||||
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| Total | |
|
| Common Stock |
| Additional |
| Retained |
| Treasury Stock |
| Stockholders' | |||||||||
|
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | |||||
Balance at December 31, 2019 |
| 28,870 |
| $ | 288 |
| $ | 118,045 |
| $ | 514,694 |
| (2,526) |
| $ | (35,715) |
| $ | 597,312 |
Stock-based compensation expense |
| — |
|
| — |
|
| 624 |
|
| — |
| — |
|
| — |
|
| 624 |
Restricted stock units vested |
| 4 |
|
| 1 |
|
| — |
|
| — |
| — |
|
| — |
|
| 1 |
Shares withheld for taxes paid on stock awards |
| — |
|
| — |
|
| (49) |
|
| — |
| — |
|
| — |
|
| (49) |
Repurchase of common stock for treasury |
| — |
|
| — |
|
| — |
|
| — |
| (247) |
|
| (10,222) |
|
| (10,222) |
Net income |
| — |
|
| — |
|
| — |
|
| 14,896 |
| — |
|
| — |
|
| 14,896 |
Balance at March 31, 2020 |
| 28,874 |
| $ | 289 |
| $ | 118,620 |
| $ | 529,590 |
| (2,773) |
| $ | (45,937) |
| $ | 602,562 |
See notes to unaudited condensed consolidated financial statements.
3
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
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| ||
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| Three Months Ended |
|
| Three Months Ended |
| ||||||||
|
| March 31, |
|
| March 31, |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
Cash Flows provided by Operating Activities: |
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|
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Net income |
| $ | 12,727 |
| $ | 11,300 |
|
| $ | 14,896 |
| $ | 12,727 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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|
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|
|
|
| ||
Depreciation and amortization |
|
| 3,709 |
|
| 3,300 |
|
|
| 3,147 |
|
| 3,709 |
|
Provision for doubtful accounts |
|
| 256 |
|
| 417 |
|
|
| 2,833 |
|
| 256 |
|
Stock-based compensation expense |
|
| 269 |
|
| 207 |
|
|
| 624 |
|
| 269 |
|
Deferred income taxes |
|
| — |
|
| 429 |
| |||||||
Changes in assets and liabilities: |
|
|
|
|
|
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|
|
|
|
|
| ||
Accounts receivable |
|
| 13,494 |
|
| 57,389 |
|
|
| 61,477 |
|
| 13,494 |
|
Inventories |
|
| (18,470) |
|
| 10,302 |
|
|
| (12,319) |
|
| (18,470) |
|
Prepaid expenses, income tax receivables and other current assets |
|
| 3,322 |
|
| 2,721 |
|
|
| (3,300) |
|
| 3,322 |
|
Other non-current assets |
|
| 119 |
|
| (1,880) |
|
|
| (98) |
|
| 119 |
|
Accounts payable |
|
| 2,121 |
|
| (42,521) |
|
|
| (15,499) |
|
| 2,121 |
|
Accrued expenses and other liabilities |
|
| 551 |
|
| (4,420) |
|
|
| (7,205) |
|
| 551 |
|
Net cash provided by operating activities |
|
| 18,098 |
|
| 37,244 |
|
|
| 44,556 |
|
| 18,098 |
|
Cash Flows used in Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Purchases of equipment |
|
| (6,572) |
|
| (5,007) |
|
|
| (4,595) |
|
| (6,572) |
|
Net cash used in investing activities |
|
| (6,572) |
|
| (5,007) |
|
|
| (4,595) |
|
| (6,572) |
|
Cash Flows used in Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Proceeds from short-term borrowings |
|
| — |
|
| 859 |
| |||||||
Purchase of treasury shares |
|
| (1,294) |
|
| (2,997) |
|
|
| (10,222) |
|
| (1,294) |
|
Dividend payment |
|
| (8,452) |
|
| (9,122) |
|
|
| (8,427) |
|
| (8,452) |
|
Issuance of stock under Employee Stock Purchase Plan |
|
| (13) |
|
| — |
|
|
| — |
| (13) |
| |
Payment of payroll taxes on stock-based compensation through shares withheld |
|
| (49) |
|
| — |
| |||||||
Net cash used in financing activities |
|
| (9,759) |
|
| (11,260) |
|
|
| (18,698) |
|
| (9,759) |
|
Increase in cash and cash equivalents |
|
| 1,767 |
|
| 20,977 |
|
|
| 21,263 |
|
| 1,767 |
|
Cash and cash equivalents, beginning of period |
|
| 91,703 |
|
| 49,990 |
|
|
| 90,060 |
|
| 91,703 |
|
Cash and cash equivalents, end of period |
| $ | 93,470 |
| $ | 70,967 |
|
| $ | 111,323 |
| $ | 93,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Accrued capital expenditures |
| $ | 1,987 |
| $ | 1,140 |
|
| $ | 1,237 |
| $ | 1,987 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Income taxes paid |
| $ | 291 |
| $ | 320 |
|
| $ | 369 |
| $ | 291 |
|
See notes to unaudited condensed consolidated financial statements.
4
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”“Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission (the “SEC”), other than the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”) using a modified retrospective 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 ourthe Company’s Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three months ended March 31, 20192020 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2019.2020.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the amounts reported in the accompanying condensed consolidated financial statements. Actual results could differ from those estimates.
Comprehensive Income
We had no items of comprehensive income, other than our net income for each of the periods presented.
Restructuring and other charges
|
|
|
|
|
| Three months ended March 31, | |
|
| 2019 | |
Employee separations |
| $ | 553 |
Lease termination costs |
|
| 150 |
Total restructuring and other charges |
| $ | 703 |
The restructuring and other charges recorded in the first quarter of 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits. These costs will be paid within a year of termination and are included in accrued expenses at March 31, 2019. Also included were exit costs incurred associated with the 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 March 31, 2019 and we have no ongoing restructuring plans.
5
Adoption of Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board, or the FASB, issued ASC 842 - Leases, which amended the accounting standards for leases. The 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.
The Company adopted ASC 842 effective January 1, 2019 using a modified retrospective transition approach to each lease that existed as of the adoption date and any leases entered into after that date. We elected the 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 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 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% |
6
As of March 31, 2019, future lease payments over the remaining term of capitalized operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
| Related Parties |
|
| Others |
|
| Total |
2019, excluding the three months ended March 31, 2019 |
| $ | 1,137 |
| $ | 2,534 |
| $ | 3,671 |
2020 |
|
| 1,385 |
|
| 3,379 |
|
| 4,764 |
2021 |
|
| 1,253 |
|
| 2,481 |
|
| 3,734 |
2022 |
|
| 1,253 |
|
| 1,484 |
|
| 2,737 |
2023 |
|
| 1,149 |
|
| 1,034 |
|
| 2,183 |
2024 |
|
| — |
|
| 1,043 |
|
| 1,043 |
Thereafter |
|
| — |
|
| 583 |
|
| 583 |
|
| $ | 6,177 |
| $ | 12,538 |
| $ | 18,715 |
|
|
|
|
|
|
|
|
|
|
Imputed interest |
|
|
|
|
|
|
|
| (964) |
Lease liability balance at March 31, 2019 |
|
|
|
|
|
|
| $ | 17,751 |
Future aggregate minimum annual lease payments as of December 31, 2018 reported in our 2018 Form 10-K under the previous lease accounting standard were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
| Related Parties |
|
| Others |
|
| Total |
2019 |
| $ | 1,516 |
| $ | 3,519 |
| $ | 5,035 |
2020 |
|
| 1,407 |
|
| 3,386 |
|
| 4,793 |
2021 |
|
| 1,253 |
|
| 2,466 |
|
| 3,719 |
2022 |
|
| 1,253 |
|
| 1,490 |
|
| 2,743 |
2023 |
|
| 1,149 |
|
| 820 |
|
| 1,969 |
2024 and thereafter |
|
| — |
|
| 1,395 |
|
| 1,395 |
|
| $ | 6,578 |
| $ | 13,076 |
| $ | 19,654 |
As of March 31, 2019, the ROU asset had a net balance of $16,750. The long-term lease liability was $13,215 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated 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 newCompany has adopted this standard is effective for fiscal years beginning January 1, 2020 for both interim and annual reporting periods. The Company expects to adopt this new standard in 2019 when it performs itsan annual goodwill impairment testassessment in the fourth quarter.quarter of each calendar year, and more frequently if events or circumstances occur that would indicate a potential decline in fair value. The Company does not expect the adoption of this ASUstandard is not expected to have a material impact on itsthe Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which adds an impairment model for financial instruments, including trade receivables, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected losses, which is expected to result in more timely recognition of such losses. The Company adopted this new standard beginning January 1, 2020 for both interim and annual reporting periods. The impact of the adoption of this standard was limited to the Company’s trade receivables as it does not currently have any other financial instruments that would be affected by this standard. Customers are evaluated for their credit worthiness at the time of contract inception. Based on the results of the credit assessments, the Company will extend credit under its standard payment terms or may request alternative early payment actions. In addition, the Company analyzes its aged receivables for collectability at least quarterly, and if necessary, records a reserve against those receivable it determines may not be collectable. As such, the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
75
Recently Issued Financial Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and is effective immediately through December 31, 2022. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The Company expects to adopt the guidance during the allowable time period but does not believe the adoption will have a material effect on its consolidated financial statements.
Note 2–Revenue
We disaggregateThe Company disaggregates revenue from ourits arrangements with customers by type of products and services, as we believeit believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended March 31, 20192020 and 2018,2019, along with the reportable segment for each category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 |
| Three Months Ended March 31, 2020 | ||||||||||||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total |
| Business |
| Enterprise |
| Public Sector |
| Total | ||||||||
Notebooks/Mobility |
| $ | 80,935 |
| $ | 66,565 |
| $ | 27,375 |
| $ | 174,875 |
| $ | 91,613 |
| $ | 79,316 |
| $ | 28,966 |
| $ | 199,895 |
Desktops |
|
| 26,784 |
|
| 35,969 |
|
| 10,887 |
|
| 73,640 |
|
| 33,294 |
|
| 34,209 |
|
| 10,472 |
|
| 77,975 |
Software |
|
| 34,688 |
|
| 27,776 |
|
| 9,272 |
|
| 71,736 |
|
| 36,398 |
|
| 26,182 |
|
| 7,295 |
|
| 69,875 |
Servers/Storage |
|
| 25,717 |
|
| 17,425 |
|
| 12,416 |
|
| 55,558 |
|
| 25,830 |
|
| 16,234 |
|
| 11,746 |
|
| 53,810 |
Net/Com Products |
|
| 22,239 |
|
| 14,628 |
|
| 10,144 |
|
| 47,011 |
|
| 21,012 |
|
| 24,946 |
|
| 9,810 |
|
| 55,768 |
Displays and Sound |
|
| 20,332 |
|
| 26,935 |
|
| 9,879 |
|
| 57,146 |
|
| 23,946 |
|
| 23,568 |
|
| 11,443 |
|
| 58,957 |
Accessories |
|
| 22,053 |
|
| 56,515 |
|
| 9,645 |
|
| 88,213 |
|
| 28,021 |
|
| 90,974 |
|
| 8,809 |
|
| 127,804 |
Other Hardware/Services |
|
| 20,184 |
|
| 29,822 |
|
| 14,736 |
|
| 64,742 |
|
| 18,671 |
|
| 37,989 |
|
| 11,106 |
|
| 67,766 |
Total net sales |
| $ | 252,932 |
| $ | 275,635 |
| $ | 104,354 |
| $ | 632,921 |
| $ | 278,785 |
| $ | 333,418 |
| $ | 99,647 |
| $ | 711,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2018 (1) | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 71,729 |
| $ | 63,438 |
| $ | 23,898 |
| $ | 159,065 |
Desktops |
|
| 28,291 |
|
| 31,226 |
|
| 10,074 |
|
| 69,591 |
Software |
|
| 34,424 |
|
| 28,441 |
|
| 6,863 |
|
| 69,728 |
Servers/Storage |
|
| 31,501 |
|
| 24,543 |
|
| 17,139 |
|
| 73,183 |
Net/Com Products |
|
| 27,026 |
|
| 12,368 |
|
| 12,758 |
|
| 52,152 |
Displays and Sound |
|
| 23,310 |
|
| 22,005 |
|
| 9,471 |
|
| 54,786 |
Accessories |
|
| 25,017 |
|
| 38,969 |
|
| 9,822 |
|
| 73,808 |
Other Hardware/Services |
|
| 21,980 |
|
| 36,254 |
|
| 14,348 |
|
| 72,582 |
Total net sales |
| $ | 263,278 |
| $ | 257,244 |
| $ | 104,373 |
| $ | 624,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, 2019 | ||||||||||
|
| Business |
| Enterprise |
| Public Sector |
| Total | ||||
Notebooks/Mobility |
| $ | 80,935 |
| $ | 66,565 |
| $ | 27,375 |
| $ | 174,875 |
Desktops |
|
| 26,784 |
|
| 35,969 |
|
| 10,887 |
|
| 73,640 |
Software |
|
| 34,688 |
|
| 27,776 |
|
| 9,272 |
|
| 71,736 |
Servers/Storage |
|
| 25,717 |
|
| 17,425 |
|
| 12,416 |
|
| 55,558 |
Net/Com Products |
|
| 22,239 |
|
| 14,628 |
|
| 10,144 |
|
| 47,011 |
Displays and Sound |
|
| 20,332 |
|
| 26,935 |
|
| 9,879 |
|
| 57,146 |
Accessories |
|
| 22,053 |
|
| 56,515 |
|
| 9,645 |
|
| 88,213 |
Other Hardware/Services |
|
| 20,184 |
|
| 29,822 |
|
| 14,736 |
|
| 64,742 |
Total net sales |
| $ | 252,932 |
| $ | 275,635 |
| $ | 104,354 |
| $ | 632,921 |
Contract Balances
The following table provides information about contract liabilityliabilities from arrangements with customers as of March 31, 20192020 and December 31, 2018.2019.
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||
Contract liability, which are included in "Accrued expenses and other liabilities" |
| $ | 4,692 |
| $ | 2,679 |
|
|
|
|
|
|
|
|
| March 31, 2020 |
| December 31, 2019 | ||
Contract liabilities, which are included in "Accrued expenses and other liabilities" |
| $ | 2,532 |
| $ | 5,942 |
86
Changes in the contract liability balances during the three months ended March 31, 20192020 are as follows (in thousands):
|
|
|
|
|
|
|
| Three Months Ended |
| ||
|
| March 31, | 2020 | ||
Balances at December 31, 2018 |
| $ | 2,679 | ||
Balances at December 31, 2019 | $ | 5,942 | |||
Cash received in advance and not recognized as revenue |
|
| 4,657 |
| 4,852 |
Amounts recognized as revenue as performance obligations satisfied |
|
| (2,644) |
| (8,262) |
Balances at March 31, 2019 |
| $ | 4,692 | ||
Balances at March 31, 2020 | $ | 2,532 |
Note 3–Earnings Per Share
Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31 , |
|
| Three Months Ended March 31 , |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 12,727 |
| $ | 11,300 |
|
| $ | 14,896 |
| $ | 12,727 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share |
|
| 26,359 |
|
| 26,835 |
|
|
| 26,236 |
|
| 26,359 |
|
Dilutive effect of unvested employee stock awards |
|
| 166 |
|
| 81 |
|
|
| 185 |
|
| 166 |
|
Denominator for diluted earnings per share |
|
| 26,525 |
|
| 26,916 |
|
|
| 26,421 |
|
| 26,525 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.48 |
| $ | 0.42 |
|
| $ | 0.57 |
| $ | 0.48 |
|
Diluted |
| $ | 0.48 |
| $ | 0.42 |
|
| $ | 0.56 |
| $ | 0.48 |
|
For the three months ended March 31, 20192020 and 2018,2019, we had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.
k
Note 4–4—Leases
The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset as of March 31, 2020 was $4,353 and a corresponding lease liability of $4,353 associated with related party leases.
7
As of March 31, 2020, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended March 31, 2020 |
| Three months ended March 31, 2019 | ||||||||||||||
| Related Parties |
| Others |
| Total |
| Related Parties |
| Others |
| Total | ||||||
Lease Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized operating lease cost | $ | 379 |
| $ | 784 |
| $ | 1,163 |
| $ | 379 |
| $ | 831 |
| $ | 1,210 |
Short-term lease cost |
| 41 |
|
| 2 |
|
| 43 |
|
| 41 |
|
| 2 |
|
| 43 |
Total lease cost | $ | 420 |
| $ | 786 |
| $ | 1,206 |
| $ | 420 |
| $ | 833 |
| $ | 1,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows | $ | 379 |
| $ | 781 |
| $ | 1,160 |
| $ | 379 |
| $ | 884 |
| $ | 1,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized operating leases |
| 3.65 |
|
| 6.29 |
|
| 5.60 |
|
| 4.59 |
|
| 10.55 |
|
| 8.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized operating leases |
| 3.92% |
|
| 3.92% |
|
| 3.92% |
|
| 3.92% |
|
| 3.92% |
|
| 3.92% |
As of March 31, 2020, future lease payments over the remaining term of capitalized operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
| Related Parties |
|
| Others |
|
| Total |
2020, excluding the three months ended March 31, 2020 |
| $ | 1,006 |
| $ | 2,489 |
| $ | 3,495 |
2021 |
|
| 1,253 |
|
| 3,091 |
|
| 4,344 |
2022 |
|
| 1,253 |
|
| 2,111 |
|
| 3,364 |
2023 |
|
| 1,149 |
|
| 1,675 |
|
| 2,824 |
2024 |
|
| — |
|
| 1,699 |
|
| 1,699 |
2025 |
|
| — |
|
| 1,594 |
|
| 1,594 |
Thereafter |
|
| — |
|
| 888 |
|
| 888 |
|
| $ | 4,661 |
| $ | 13,547 |
| $ | 18,208 |
|
|
|
|
|
|
|
|
|
|
Imputed interest |
|
|
|
|
|
|
|
| (1,595) |
Lease liability balance at March 31, 2020 |
|
|
|
|
|
|
| $ | 16,613 |
As of March 31, 2020, the ROU asset had a balance of $15,776. The long-term lease liability was $12,551 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $4,062.
Note 5–Segment and Related DisclosuresInformation
The internal reporting structure used by our chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. We report these charges to the operating segments as “Allocations.” Certain
8
headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.
9
Segment information applicable to our reportable operating segments for the three months ended March 31, 20192020 and 20182019 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31 , |
|
| Three Months Ended March 31 , | ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 | ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 252,932 |
| $ | 263,278 |
|
| $ | 278,785 |
| $ | 252,932 |
Enterprise Solutions |
|
| 275,635 |
|
| 257,244 |
|
|
| 333,418 |
|
| 275,635 |
Public Sector Solutions |
|
| 104,354 |
|
| 104,373 |
|
|
| 99,647 |
|
| 104,354 |
Total net sales |
| $ | 632,921 |
| $ | 624,895 |
|
| $ | 711,850 |
| $ | 632,921 |
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 8,765 |
| $ | 9,482 |
|
| $ | 11,301 |
| $ | 8,765 |
Enterprise Solutions |
|
| 15,473 |
|
| 12,678 |
|
|
| 16,722 |
|
| 15,473 |
Public Sector Solutions |
|
| (3,066) |
|
| (3,125) |
|
|
| (3,322) |
|
| (3,066) |
Headquarters/Other |
|
| (3,763) |
|
| (3,563) |
|
|
| (4,051) |
|
| (3,763) |
Total operating income |
|
| 17,409 |
|
| 15,472 |
|
|
| 20,650 |
|
| 17,409 |
Interest income, net |
|
| 198 |
|
| 116 |
|
|
| 92 |
|
| 198 |
Income before taxes |
| $ | 17,607 |
| $ | 15,588 |
|
| $ | 20,742 |
| $ | 17,607 |
Selected operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 150 |
| $ | 174 |
|
| $ | 159 |
| $ | 150 |
Enterprise Solutions |
|
| 639 |
|
| 482 |
|
|
| 681 |
|
| 639 |
Public Sector Solutions |
|
| 21 |
|
| 34 |
|
|
| 15 |
|
| 21 |
Headquarters/Other |
|
| 2,899 |
|
| 2,610 |
|
|
| 2,292 |
|
| 2,899 |
Total depreciation and amortization |
| $ | 3,709 |
| $ | 3,300 |
|
| $ | 3,147 |
| $ | 3,709 |
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Solutions |
| $ | 280,889 |
| $ | 255,230 |
|
| $ | 319,909 |
| $ | 280,889 |
Enterprise Solutions |
|
| 484,497 |
|
| 406,303 |
|
|
| 536,672 |
|
| 484,497 |
Public Sector Solutions |
|
| 55,536 |
|
| 52,709 |
|
|
| 52,285 |
|
| 55,536 |
Headquarters/Other |
|
| 7,527 |
|
| (10,672) |
|
|
| 4,326 |
|
| 7,527 |
Total assets |
| $ | 828,449 |
| $ | 703,570 |
|
| $ | 913,192 |
| $ | 828,449 |
The assets of our three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment, right-of-use assets, and intercompany balance, net. As of March 31, 20192020 and 2018,2019, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $11,201$7,024 and $10,431,$11,201, respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segmentsegment-by-segment basis.
Note 5–6–Commitments and Contingencies
We are subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business. In the opinion of management, the outcome of such matters is not expected to have a material, adverse effect on our financial position, results of operations, and/or cash flows.
We are subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, and such outcomes could have a material, negativeadverse impact on our financial position, results of operations, and/or cash flows.
9
Note 6–7–Bank Credit FacilityBorrowings
We have a $50,000 credit facility collateralized by our account receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank
10
Offered Rate (“LIBOR”) (2.49%(0.99% at March 31, 2019) 2020), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (5.50%(3.25% at March, 31 2019)2020). The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility to trailing twelve months Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. We had no outstanding bank borrowings at March 31, 20192020 or 2018,2019, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.
1110
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.
We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors, including the effects of the novel coronavirus (COVID-19) on our business, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.
OVERVIEW
We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by first-partythird-party service providers. We operate through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.
We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.
As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our
11
customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our
12
advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.
The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we are expanding our IT solutions business, which requires the addition of highly-skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.be negatively impacted.
Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality. In October 2017, we began a two-year initiative to upgrade our IT infrastructure for which we expect our related capital investments to range from $3.0 to $4.0 million over the next three to six months, when we expect to have completed the initiative.
EFFECTS OF COVID-19
In December 2019, a novel coronavirus disease (“COVID-19”) was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries. On March 11, 2020, the WHO characterized COVID-19 as a global pandemic.
National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home. Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country. We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We have also evaluated the potential impact of the pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.
The COVID-19 pandemic has resulted in material adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers. Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.
12
The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.
In addition, the COVID-19 pandemic has caused, and may continue to cause, disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations. In our opinion, customers who operate within the hospitality, airline, and retail industries, and in particular those within our Business Solutions Segment, are likely to be most adversely affected. It is possible we could experience a decrease in orders as a result of the pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future. We may also experience delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether. As a result, we have increased our reserve against uncollectable amounts, which resulted in a significant increase in our operating expenses in the first quarter.
See the important information in Item 1A. Risk Factors below, under the caption “The continued spread of COVID-19 and the imposition of related health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.”
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Three Months Ended |
|
|
| Three Months Ended |
|
| ||||||||
| March 31, |
|
|
| March 31, |
|
| ||||||||
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
|
| ||||
Net sales (in millions) | $ | 632.9 |
| $ | 624.9 |
|
|
| $ | 711.9 |
| $ | 632.9 |
|
|
Gross margin |
| 15.7 | % |
| 15.4 | % |
|
|
| 15.9 | % |
| 15.7 | % |
|
Selling, general and administrative expenses |
| 12.8 | % |
| 12.9 | % |
|
|
| 13.0 | % |
| 12.8 | % |
|
Income from operations |
| 2.8 | % |
| 2.5 | % |
|
|
| 2.9 | % |
| 2.8 | % |
|
Net sales of $632.9$711.9 million for the first quarter of 20192020 reflected an increase of $8.0$79.0 million compared to the first quarter of 2018,2019, which was driven primarily by growth in our Enterprise Solutions selling segment.and Business Solutions segments. Our investments in advance solution salesability to meet the continued demand for the personal computer refresh, and to supply customers with the necessary technology to implement work-from-home strategies and assist on the front lines of the COVID-19 pandemic fight led to increased sales of mobility, desktop, and softwarenet/com products. We also saw significant increases in accessory products, though we experienced downward pressure on net sales growth because a greater portion of our software saleswhich were recognized on a net basisdriven by large project rollouts in the current quarter.period. Gross profit dollars increased year-over-year by $3.0$13.9 million due to higher invoice selling margins realized on advanced solution sales, and increased sales of both hardware and software products.products, and changes in customer mix. SG&A expenses increased by $0.3$11.2 million, but decreasedmostly due to higher personnel costs, and increased as a percentage of net sales. Operating income in the first quarter of 20192020 increased year-over-year both in dollars and as a percentage of net sales by $1.9$3.2 million and 3015 basis points, respectively, primarily as a result of increased net sales and lower SG&A expenses as a percentage of net sales.gross profit margins, which grew by 19 basis points over the period.
13
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| ||
|
| March 31, |
|
| ||
|
| 2019 |
| 2018 (1) |
|
|
Sales Segment |
|
|
|
|
|
|
Enterprise Solutions |
| 44 | % | 41 | % |
|
Business Solutions |
| 40 |
| 42 |
|
|
Public Sector Solutions |
| 16 |
| 17 |
|
|
Total |
| 100 | % | 100 | % |
|
|
|
|
|
|
|
|
Product Mix |
|
|
|
|
|
|
Notebooks/Mobility |
| 28 | % | 26 | % |
|
Desktops |
| 12 |
| 11 |
|
|
Software |
| 11 |
| 11 |
|
|
Servers/Storage |
| 9 |
| 12 |
|
|
Net/Com Products |
| 7 |
| 8 |
|
|
Displays and Sound |
| 9 |
| 9 |
|
|
Accessories |
| 14 |
| 12 |
|
|
Other Hardware/Services |
| 10 |
| 11 |
|
|
Total |
| 100 | % | 100 | % |
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||
|
| March 31, |
| ||
|
| 2020 |
| 2019 |
|
Sales Segment |
|
|
|
|
|
Enterprise Solutions |
| 47 | % | 44 | % |
Business Solutions |
| 39 |
| 40 |
|
Public Sector Solutions |
| 14 |
| 16 |
|
Total |
| 100 | % | 100 | % |
|
|
|
|
|
|
Product Mix |
|
|
|
|
|
Notebooks/Mobility |
| 28 | % | 28 | % |
Desktops |
| 11 |
| 12 |
|
Software |
| 10 |
| 11 |
|
Servers/Storage |
| 8 |
| 9 |
|
Net/Com Products |
| 8 |
| 7 |
|
Displays and Sound |
| 8 |
| 9 |
|
Accessories |
| 18 |
| 14 |
|
Other Hardware/Services |
| 9 |
| 10 |
|
Total |
| 100 | % | 100 | % |
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
| Three Months Ended |
|
| ||||
|
| March 31, |
|
|
| March 31, |
|
| ||||
|
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
|
|
Sales Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Solutions |
| 14.9 | % | 14.3 | % |
|
| 13.9 | % | 14.9 | % |
|
Business Solutions |
| 17.8 |
| 17.6 |
|
|
| 18.8 |
| 17.8 |
|
|
Public Sector Solutions |
| 12.6 |
| 12.9 |
|
|
| 14.5 |
| 12.6 |
|
|
Total |
| 15.7 | % | 15.4 | % |
|
| 15.9 | % | 15.7 | % |
|
14
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
| Three Months Ended |
| ||||||||
|
| March 31, |
|
|
| March 31, |
| ||||||||
($ in millions) |
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
| ||||
Personnel costs |
| $ | 61.0 |
| $ | 62.7 |
|
|
| $ | 69.4 |
| $ | 61.0 |
|
Advertising |
|
| 4.6 |
|
| 3.8 |
|
|
|
| 4.6 |
|
| 4.6 |
|
Facilities operations |
|
| 4.8 |
|
| 4.1 |
|
|
|
| 5.1 |
|
| 4.8 |
|
Professional fees |
|
| 2.5 |
|
| 2.4 |
|
|
|
| 2.6 |
|
| 2.5 |
|
Credit card fees |
|
| 1.5 |
|
| 1.7 |
|
|
|
| 1.7 |
|
| 1.5 |
|
Depreciation and amortization |
|
| 3.7 |
|
| 3.3 |
|
|
|
| 3.1 |
|
| 3.7 |
|
Other |
|
| 3.1 |
|
| 2.9 |
|
|
|
| 6.0 |
|
| 3.1 |
|
Total SG&A expense |
| $ | 81.2 |
| $ | 80.9 |
|
|
| $ | 92.5 |
| $ | 81.2 |
|
Percentage of net sales |
|
| 12.8 | % |
| 12.9 | % |
|
|
| 13.0 | % |
| 12.8 | % |
Restructuring and other charges
In the first quarter14
Year-Over-Year Comparisons
Three Months Ended March 31, 20192020 Compared to Three Months Ended March 31, 20182019
Changes in net sales and gross profit by segment are shown in the following table:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended March 31, |
|
|
|
|
| Three Months Ended March 31, |
|
|
|
| ||||||||||||||||||
|
| 2019 |
| 2018 |
|
|
|
|
| 2020 |
| 2019 |
|
|
|
| ||||||||||||||
|
|
|
|
| % of |
|
|
|
| % of |
| % |
|
|
|
|
|
| % of |
|
|
|
| % of |
| % |
|
| ||
($ in millions) |
| Amount |
| Net Sales |
| Amount |
| Net Sales |
| Change |
|
|
| Amount |
| Net Sales |
| Amount |
| Net Sales |
| Change |
|
| ||||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Enterprise Solutions |
| $ | 275.6 |
| 43.5 | % | $ | 257.2 |
| 41.2 | % | 7.2 | % |
|
| $ | 333.4 |
| 46.8 | % | $ | 275.6 |
| 43.5 | % | 21.0 | % |
| ||
Business Solutions |
|
| 252.9 |
| 40.0 |
|
| 263.3 |
| 42.1 |
| (3.9) |
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| 278.8 |
| 39.2 |
|
| 252.9 |
| 40.0 |
| 10.2 |
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Public Sector Solutions |
|
| 104.4 |
| 16.5 |
|
| 104.4 |
| 16.7 |
| — |
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| 99.7 |
| 14.0 |
|
| 104.4 |
| 16.5 |
| (4.5) |
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| ||
Total |
| $ | 632.9 |
| 100.0 | % | $ | 624.9 |
| 100.0 | % | 1.3 | % |
|
| $ | 711.9 |
| 100.0 | % | $ | 632.9 |
| 100.0 | % | 12.5 | % |
| ||
Gross Profit: |
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Enterprise Solutions |
| $ | 41.2 |
| 14.9 | % | $ | 36.7 |
| 14.3 | % | 12.3 | % |
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| $ | 46.2 |
| 13.9 | % | $ | 41.2 |
| 14.9 | % | 12.1 | % |
| ||
Business Solutions |
|
| 45.0 |
| 17.8 |
|
| 46.2 |
| 17.6 |
| (2.6) |
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| 52.5 |
| 18.8 |
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| 45.0 |
| 17.8 |
| 16.7 |
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Public Sector Solutions |
|
| 13.1 |
| 12.5 |
|
| 13.5 |
| 12.9 |
| (3.0) |
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| 14.4 |
| 14.5 |
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| 13.1 |
| 12.6 |
| 9.9 |
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| ||
Total |
| $ | 99.3 |
| 15.7 | % | $ | 96.4 |
| 15.4 | % | 3.0 | % |
|
| $ | 113.1 |
| 15.9 | % | $ | 99.3 |
| 15.7 | % | 13.9 | % |
|
Net sales increased in the first quarter of 20192020 compared to the first quarter of 2018,2019, as explained below:
· | Net sales of |
· | Net sales of |
15
|
· | Net sales of |
Gross profit for the first quarter of 20192020 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 the 21.0% increase in net sales year-over-year, driven primarily by increases in net sales of net/com, accessory, and notebooks/mobility products, which grew by 70.5%, 61.0%, and 19.2%, respectively. The change in gross margin in the quarter was driven by fluctuations in customer and hardware product mix. |
15
· | Gross profit for the Business Solutions segment increased due to increased sales and higher invoice selling margins. Invoice selling margins |
· | Gross profit for the |
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Selling, general and administrative expenses increased in both dollars but decreasedand as a percentage of net sales in the first quarter of 20192020 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:
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| Three Months Ended March 31, |
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| Three Months Ended March 31, |
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| 2019 |
| 2018 |
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| 2020 |
| 2019 |
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($ in millions) |
| Amount |
| Sales |
| Amount |
| Sales |
| Change |
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| Amount |
| Sales |
| Amount |
| Sales |
| Change |
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Enterprise Solutions |
| $ | 25.7 |
| 9.3 | % | $ | 24.0 |
| 9.3 | % | 7.1 | % |
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| $ | 29.5 |
| 8.8 | % | $ | 25.7 |
| 9.3 | % | 14.8 | % |
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Business Solutions |
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| 36.2 |
| 14.3 |
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| 36.8 |
| 14.0 |
| (1.6) |
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| 41.2 |
| 14.8 |
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| 36.2 |
| 14.3 |
| 13.8 |
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Public Sector Solutions |
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| 16.2 |
| 15.5 |
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| 16.6 |
| 15.9 |
| (2.4) |
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| 17.7 |
| 17.8 |
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| 16.2 |
| 15.5 |
| 9.3 |
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Headquarters/Other, unallocated |
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| 3.1 |
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| 3.5 |
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| (11.4) |
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| 4.1 |
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| 3.1 |
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| 32.3 |
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Total |
| $ | 81.2 |
| 12.8 | % | $ | 80.9 |
| 12.9 | % | 0.4 | % |
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| $ | 92.5 |
| 13.0 | % | $ | 81.2 |
| 12.8 | % | 13.9 | % |
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· | SG&A expenses for the Enterprise Solutions segment increased in dollars, but decreased as a percentage of net sales. The year-over-year change in SG&A dollars was attributable to increased personnel costs of $2.4 million, driven by merit increases and |
· | SG&A expenses for the Business Solutions segment increased in both dollars and as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily |
· | SG&A expenses for the |
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16
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· | SG&A expenses for the Headquarters/Other group |
16
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 in the table 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 first quarter of 20192020 increased to $17.4$20.7 million, compared to $15.5$17.4 million for the first quarter of 2018,2019, primarily due to the increase in net sales and gross profit year-over-year. Income from operations as a percentage of net sales was 2.8%2.9% for the first quarter of 2019,2020, compared to 2.5%2.8% of net sales for the prior year quarter, primarily as a result of the growth rate in net salesgross profit slightly exceeding the growth rate in SG&A expenses.
Our effective tax rate was 28.2% for the first quarter of 2020, compared to 27.7% for the first quarter of 2019, compared to 27.5% for the first quarter of 2018.2019. We expect our corporate income tax rate for 20192020 to range from 27%26% to 29% and to vary based on fluctuations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.28%.
Net income for the first quarter of 20192020 increased to $12.7$14.9 million, compared to $11.3$12.7 million for the first quarter of 2018,2019, primarily due to higher gross profit and an increase in gross margin which outpaced the growth in operating expense managementexpenses in the first quarter of 2019,2020, as compared to the first quarter of 2018.2019.
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 businesses. Market conditions impact and help determine our strategic use of funds.
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. 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 two-year initiative to upgrade our IT infrastructure, and we expect the remaining capital investments related to this project to range from $3.0 to $4.0 million over the three to six months, when we expect to have completed the initiative.
We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our bank line of credit, as follows:
· | Cash on Hand. At March 31, |
· | Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate a positive cash flow. |
· | Credit Facilities. As of March 31, |
The COVID-19 global pandemic has created some uncertainty in financial liquidity. A number of customers across affected industries have requested various concessions from us. We have worked closely with our partners to mitigate the impact these concessions might have on us, but we expect that these situations will continue to arise as we navigate through this crisis.
17
Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, or our customers continue to be materially adversely affected by the COVID-19 pandemic, our cash flows from operations may be substantially affected. See also related risks listed below under “Item 1A. “Risk Factors.”
17
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated:
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| Three Months Ended |
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| Three Months Ended |
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($ in millions) |
| 2019 |
| 2018 |
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| 2020 |
| 2019 |
| ||||
Net cash provided by operating activities |
| $ | 18.1 |
| $ | 37.2 |
|
| $ | 44.6 |
| $ | 18.1 |
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Net cash used in investing activities |
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| (6.6) |
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| (5.0) |
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| (4.6) |
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| (6.6) |
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Net cash used in financing activities |
|
| (9.7) |
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| (11.2) |
|
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| (18.7) |
|
| (9.7) |
|
Increase in cash and cash equivalents |
| $ | 1.8 |
| $ | 21.0 |
|
| $ | 21.3 |
| $ | 1.8 |
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Cash provided by operating activities was $18.1$44.6 million in the three months ended March 31, 2019.2020. Cash flow provided by operations in the three months ended March 31, 20192020 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, an increase accounts payable,which was reduced by $61.5 million year-over-year and a decrease in prepaid expenses.was driven by strong collection efforts and the timing of product shipments. These factors that contributed to the positive inflow of cash from operating activities were partially offset by an increasedecreases in inventory. Accounts receivable decreased by $13.8accounts payable of $15.5 million, fromincreases in inventory of $12.3 million, and decreases in accrued expenses of $7.2 million compared with the prior year-end balance. DaysOur days sales outstanding increased to 58 days at March 31, 2020, compared to 55 days at March 31, 2019, compared to 53 days at March 31, 2018.2019. Inventory increased from the prior year-end balance by $18.5 million due to higher levels of inventory on-hand related to future backlog and an increase in shipments in transit but not received by our customers as of March 31, 20192020 compared to December 31, 2018.2019. Inventory turns, decreasedwhich measures the number of times inventory was sold and replaced during the period, increased to 1721 for the first quarter of 20192020 compared to 2317 turns for the prior year quarter. Operating cash flow in the three months ended March 31, 2019 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, an increase in accounts payable, and a decrease in prepaid expenses, offset partially by an increase in inventory.
Cash used in investing activities in the three months ended March 31, 20192020 represented $6.6$4.6 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 $5.0$6.6 million of purchases of property and equipment in the prior year.
Cash used in financing activities in the three months ended March 31, 20192020 consisted primarily of $10.2 million for the repurchase treasury shares and an $8.4 million payment of a special $0.32 per share dividend. In the prior year period, financing activities primarily represented an $8.5 million payment of a special $0.32 per share dividend and $1.3 million for the purchase of treasury shares. Whereas in the prior year period, financing activities primarily represented a $9.1 million payment of a special $0.34 per share dividend and $3.0 million for the purchase of treasury shares, partially offset by $0.9 million of proceeds from short-term borrowings.
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. 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 (5.50%(3.25% at March 31, 2019)2020). The one-month LIBOR rate at March 31, 20192020 was 2.49%0.99%. 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 March 31, 2019,2020, $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.
18
Operating Leases. We lease facilities from our principal stockholders and facilities and equipment from third parties under non-cancelable operating leases. On January 1, 2019, we adopted ASC 842, which replaces existing lease accounting rules with a requirement to establish a right-of-use (ROU) asset model. As a result of the adoption, we recorded a ROU asset and a lease liability on the balance sheet for leases with terms longer than twelve months as of the date of transition. Refer to the Adoption of Recently Issued Accounting Standards section within Note 1 to the consolidated financial statements for 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, 20182019 have not materially changed since the report was filed.
18
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. These factors may also be adversely impacted by the COVID-19 pandemic.
Credit Facility. 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 covenants:
· | Our funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by our consolidated trailing twelve months Adjusted 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 outstanding borrowings under the credit facility during the |
· | 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, 2016 (loss quarters not counted). Such amount was calculated as |
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, 2018.2019.
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.
19
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, 2018.2019. In the quarter ending March 31, 2020, we identified an additional risk that could materially adversely impact our business, financial condition, results of operations and cash flows, which has been included in “Part II – Other Information” of this Form 10-Q. No other material changes have occurred in our market risks since December 31, 2018.2019.
20
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019.2020. 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 the 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. 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, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Except as noted below, thereThere was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
DuringIn response to the quarter ended March 31, 2019,COVID-19 pandemic, we changed existing controlshave undertaken measures to ensure we adequately implemented the new accounting standard relatedprotect our employees, partners, and clients, including encouraging employees to lease accounting effective January 1, 2019. The modified and new controls were designedwork remotely. These changes have compelled us to ensure we sufficiently evaluatedmodify some of our lease contracts and properly assessed the impact of the new accounting standard on our financial statements and related disclosures.control procedures, however, those changes have so far not been material.
21
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, 2018,2019, which could materially affect our business, financial position, and results of operations. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the Annual Report, and the risk factor disclosure in the Annual Report is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q.
We did not identify anyidentified an additional risksrisk in the current period that arewas not included in our Annual Report. Risk factors which
The continued spread of COVID-19 and the imposition of related public health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.
In December 2019, the 2019 novel coronavirus surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and several countries, including the United States, Japan and Australia have initiated travel restrictions to and from China. The impacts of the outbreak are unknown and rapidly evolving.
The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause actualmaterial disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.
We rely on third-party suppliers and manufacturers. This outbreak has resulted in the extended shutdown of certain businesses, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. Any disruption of our suppliers and their contract manufacturers will likely impact our sales and operating results. In addition, the COVID-19 pandemic has caused, and may continue to cause, disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity. It is possible we could experience a decrease in orders as a result of the pandemic. We may also experience delays in collecting amounts owed to us.
This widespread health crisis has adversely affected the global economy, and may result in an economic downturn that could impact demand for our products.
To date the outbreak has not had a material adverse impact on our operations. However, the future impact of the outbreak is highly uncertain and cannot be predicted, and there is no assurance that the outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact will depend on future developments, including actions taken to 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 withcontain 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, 2018.coronavirus.
22
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 monthsquarter ended March 31, 2019.2020.
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ISSUER PURCHASES OF EQUITY SECURITIES | ISSUER PURCHASES OF EQUITY SECURITIES | 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) |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2) |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||
January 1 - January 31, 2019 |
| 42,537 |
| $ | 30.44 |
| 42,537 |
| $ | 26,098 | ||||||||||
February 1 - February 28, 2019 |
| — |
| $ | — |
| — |
| $ | 26,098 | ||||||||||
March 1 - March 31, 2019 |
| — |
| $ | — |
| — |
| $ | 26,098 | ||||||||||
January 1 - January 31, 2020 |
| 7,203 |
| $ | 49.87 |
| 7,203 |
| $ | 22,555 | ||||||||||
February 1 - February 29, 2020 |
| 158,835 |
| $ | 41.99 |
| 158,835 |
| $ | 15,885 | ||||||||||
March 1 - March 31, 2020 |
| 81,199 |
| $ | 39.32 |
| 81,199 |
| $ | 12,692 | ||||||||||
Total |
| 42,537 |
| $ | 30.44 |
| 42,537 |
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| 247,237 |
| $ | 41.34 |
| 247,237 |
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(1) | In December 2018, our Board of Directors announced a |
(2) | We have repurchased in aggregate approximately |
22
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Exhibit |
| Description | |
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31.1 | * |
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31.2 | * |
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32.1 | * |
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32.2 | * |
| |
101.INS | ** |
| XBRL Instance Document. |
101.SCH | ** |
| XBRL Taxonomy Extension Schema Document. |
101.CAL | ** |
| XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | ** |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | ** |
| XBRL Taxonomy Label Linkbase Document. |
101.PRE | ** |
| XBRL Taxonomy Presentation Linkbase Document. |
|
| ||
|
* 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 March 31, 20192020 and December 31, 2018,2019, (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 20192020 and MarchMarch 31, 20182019, (iii) Condensed Consolidated Statements of Stockholders’ Equity at March 31, 20192020 and December 31, 2018,2019, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20192020 and March 31, 2018,2019, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PC CONNECTION, INC.
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Date: |
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| By: | /s/ TIMOTHY J. MCGRATH |
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| Timothy J. McGrath |
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| President and Chief Executive Officer (Duly Authorized Officer) |
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Date: |
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| By: | /s/ THOMAS C. BAKER |
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| Thomas C. Baker |
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| Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
24