Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*
For the quarterly period ended September 30, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
02-0513618
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE
03054
(Address of principal executive offices)
(Zip Code)
(603) 683-2000
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:
C
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CNXN
Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the issuer’s common stock as of October 28, 2019 was 26,316,263.
PC CONNECTION, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
ITEM 1.
Condensed Consolidated Balance Sheets–September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2019 and 2018
Notes to Unaudited Condensed Consolidated Financial Statements
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.
Controls and Procedures
PART II OTHER INFORMATION
ITEM 1A.
Risk Factors
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
September 30,
December 31,
2019
2018
ASSETS
Current Assets:
Cash and cash equivalents
$
98,489
91,703
Accounts receivable, net
478,907
447,698
Inventories, net
126,078
119,195
Income taxes receivable
—
922
Prepaid expenses and other current assets
6,881
9,661
Total current assets
710,355
669,179
Property and equipment, net
62,336
51,799
Right-of-use assets, net
14,850
Goodwill
73,602
Intangible assets, net
8,613
9,564
Other assets
892
1,211
Total Assets
870,648
805,355
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
197,736
201,640
Accrued payroll
23,393
24,319
Accrued expenses and other liabilities
36,341
33,840
Total current liabilities
257,470
259,799
Deferred income taxes
17,194
17,184
Operating lease liability
11,386
Other liabilities
1,454
2,469
Total Liabilities
287,504
279,452
Stockholders’ Equity:
Common stock
288
Additional paid-in capital
117,301
115,842
Retained earnings
501,155
441,010
Treasury stock, at cost
(35,600)
(31,237)
Total Stockholders’ Equity
583,144
525,903
Total Liabilities and Stockholders’ Equity
See notes to unaudited condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Three Months Ended
Nine Months Ended
Net sales
729,410
658,504
2,103,407
1,989,969
Cost of sales
610,547
558,060
1,768,210
1,685,685
Gross profit
118,863
100,444
335,197
304,284
Selling, general and administrative expenses
86,226
81,494
252,125
244,915
Restructuring and other charges
703
Income from operations
32,637
18,950
82,369
59,369
Interest income, net
62
114
444
412
Income before taxes
32,699
19,064
82,813
59,781
Income tax provision
(8,949)
(5,298)
(22,668)
(16,489)
Net income
23,750
13,766
60,145
43,292
Earnings per common share:
Basic
0.90
0.52
2.28
1.62
Diluted
0.51
2.27
1.61
Shares used in computation of earnings per common share:
26,323
26,716
26,339
26,745
26,479
26,902
26,496
26,883
2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended September 30, 2019
Total
Additional
Retained
Treasury Stock
Stockholders'
Shares
Amount
Paid-In Capital
Earnings
Equity
Balance at June 30, 2019
28,818
(2,500)
Stock-based compensation expense
426
Restricted stock units vested
22
Shares withheld for taxes paid on stock awards
(337)
Repurchase of common stock for treasury
(23)
(862)
Balance at September 30, 2019
28,840
(2,523)
Nine months ended September 30, 2019
Balance at December 31, 2018
28,787
(2,391)
1,259
34
Issuance of common stock under Employee Stock Purchase Plan
19
609
(409)
(132)
(4,363)
3
Three months ended September 30, 2018
Balance at June 30, 2018
28,728
(2,026)
273
28
(457)
Balance at September 30, 2018
28,756
287
115,039
428,162
(20,246)
523,242
Nine months ended September 30, 2018
Balance at December 31, 2017
28,709
114,154
383,673
(1,856)
(15,862)
482,252
Cumulative effect of adoption of ASC 606
1,197
737
605
(170)
(4,384)
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows provided by Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
10,184
10,362
Provision for doubtful accounts
181
1,428
10
429
Loss on disposal of fixed assets
51
Changes in assets and liabilities:
Accounts receivable
(31,390)
63,881
Inventories
(6,883)
(9,399)
Prepaid expenses, income tax receivables and other current assets
3,702
812
Other non-current assets
319
283
(3,167)
(29,361)
5,548
(1,262)
Net cash provided by operating activities
40,022
81,253
Cash Flows used in Investing Activities:
Purchases of equipment
(20,621)
(15,641)
Net cash used in investing activities
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
859
Repayment of short-term borrowings
(859)
Purchase of treasury shares
Dividend payment
(8,452)
(9,123)
Issuance of stock under Employee Stock Purchase Plan
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(12,615)
(13,359)
Increase in cash and cash equivalents
6,786
52,253
Cash and cash equivalents, beginning of period
49,990
Cash and cash equivalents, end of period
102,243
Non-cash Investing and Financing Activities:
Accrued capital expenditures
1,684
1,055
Supplemental Cash Flow Information:
Income taxes paid
18,972
15,134
5
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, 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, 2019, as discussed below. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three and nine months ended September 30, 2019 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2019.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the amounts reported in the accompanying condensed consolidated financial statements. Actual results could differ from those estimates.
Nine months ended September 30,
Employee separations
553
Lease termination costs
150
Total restructuring and other charges
The restructuring and other charges were recorded in the first quarter of 2019 and 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 any unpaid balances are included in accrued expenses at September 30, 2019. Also included are exit costs incurred associated with the closing of one of our office facilities.
All planned restructuring and other charges were incurred as of March 31, 2019 and the Company has no ongoing restructuring plans.
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.
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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. The Company 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 as of January 1, 2019, 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 September 30, 2019 was $5,998 and a corresponding lease liability of $5,021 associated with related party leases.
During the third quarter of 2019, the Company amended the terms of one of its existing leases. The amendment was treated as a lease modification and was not accounted for as a separate lease. In accordance with ASC 842, the Company re-measured the right-of-use asset and the lease liability as of the modification date and also re-assessed the reasonably certain holding period of the lease.
As of September 30, 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:
Related Parties
Others
Lease Cost
Capitalized operating lease cost
379
773
1,152
1,137
2,396
3,533
Short-term lease cost
41
43
123
129
Total lease cost
420
775
1,195
1,260
2,402
3,662
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
832
2,585
3,722
Weighted-average remaining lease term (in years):
Capitalized operating leases
4.11
6.78
5.92
Weighted-average discount rate:
7
As of September 30, 2019, future lease payments over the remaining term of capitalized operating leases were as follows:
For the Years Ended December 31,
2019, excluding the nine months ended September 30, 2019
835
1,214
2020
1,385
3,382
4,767
2021
1,253
2,482
3,735
2022
1,484
2,737
2023
1,149
1,034
2,183
2024
1,043
Thereafter
1,460
5,419
11,720
17,139
Imputed interest
(1,426)
Lease liability balance at September 30, 2019
15,713
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:
1,516
3,519
5,035
1,407
3,386
4,793
2,466
3,719
1,490
2,743
820
1,969
2024 and thereafter
1,395
6,578
13,076
19,654
As of September 30, 2019, the ROU asset had a net balance of $14,850. The long-term lease liability was $11,386 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $4,327.
Recently Issued Financial Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new standard is effective for fiscal years beginning January 1, 2020 for both interim and annual reporting periods. The Company expects to adopt this new standard in 2019 when it performs its annual goodwill impairment test in the fourth quarter. The Company does not expect the adoption of this ASU to have a material impact on its 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 new standard is effective for fiscal years beginning after December 15, 2019 for both interim and annual reporting periods. The Company has evaluated the requirements of this ASU and determined that the potential exposure is limited to the impact this standard may have on its trade receivables. The Company 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 assessment, 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
8
reserve against those receivables it determines may not collectable. As such, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
Note 2–Revenue
We disaggregate revenue from our arrangements with customers by type of products and services, as we believe this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended September 30, 2019 and 2018, along with the reportable segment for each category.
Three Months Ended September 30, 2019
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
79,287
77,214
63,154
219,655
Desktops
34,806
36,821
20,499
92,126
Software
36,879
28,439
13,205
78,523
Servers/Storage
26,352
16,374
16,576
59,302
Net/Com Products
25,200
11,666
15,695
52,561
Displays and Sound
23,224
29,641
17,669
70,534
Accessories
26,306
46,546
14,545
87,397
Other Hardware/Services
21,702
31,594
16,016
69,312
Total net sales
273,756
278,295
177,359
Three Months Ended September 30, 2018 (1)
68,822
63,926
50,079
182,827
25,828
30,075
13,112
69,015
31,578
25,718
15,541
72,837
26,386
21,424
13,115
60,925
27,380
16,601
12,745
56,726
23,318
23,834
15,748
62,900
22,313
52,967
12,516
87,796
19,247
30,932
15,299
65,478
244,872
265,477
148,155
(1)
Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation.
The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2019 and 2018, along with the reportable segment for each category.
Nine Months Ended September 30, 2019
240,644
240,621
125,220
606,485
96,377
112,067
50,074
258,518
110,826
91,954
43,362
246,142
81,452
48,536
49,149
179,137
70,806
38,866
40,918
150,590
64,422
82,812
41,839
189,073
72,036
162,601
35,112
269,749
61,177
94,512
48,024
203,713
797,740
871,969
433,698
9
Nine Months Ended September 30, 2018 (1)
222,550
195,909
109,238
527,697
82,518
91,307
41,948
215,773
104,377
91,522
33,447
229,346
85,190
70,262
46,753
202,205
83,546
49,093
36,618
169,257
67,193
80,288
41,846
189,327
72,385
143,532
34,095
250,012
60,433
101,873
44,046
206,352
778,192
823,786
387,991
Contract Balances
The following table provides information about contract liability from arrangements with customers as of September 30, 2019 and December 31, 2018.
September 30, 2019
December 31, 2018
Contract liability, which is included in "Accrued expenses and other liabilities"
3,325
2,679
Changes in the contract liability balances during the three and nine months ended September 30, 2019 are as follows (in thousands):
Balances at June 30,
4,724
8,433
Cash received in advance and not recognized as revenue
1,701
1,024
Amounts recognized as revenue as performance obligations satisfied
(3,100)
(6,828)
Balances at September 30,
2,629
Balances at December 31,
2,914
8,868
9,520
(8,222)
(9,805)
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 September 30,
Nine Months Ended September 30,
Numerator:
Denominator:
Denominator for basic earnings per share
Dilutive effect of unvested employee stock awards
156
186
157
138
Denominator for diluted earnings per share
Earnings per share:
For the three and nine months ended September 30, 2019 and 2018, 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–Segment and Related Disclosures
The internal reporting structure used by our chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. We report these charges to the operating segments as “Allocations.” Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.
11
Segment information applicable to our reportable operating segments for the three and nine months ended September 30, 2019 and 2018 is shown below:
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
13,533
8,173
38,509
28,303
16,346
13,629
50,927
43,598
7,082
528
4,677
(2,083)
Headquarters/Other
(4,324)
(3,380)
(11,744)
(10,449)
Total operating income
Selected operating expense:
Depreciation and amortization:
149
153
447
481
613
608
1,858
1,653
25
68
91
2,323
2,848
7,811
8,137
Total depreciation and amortization
3,107
3,634
Total assets:
300,360
263,678
488,867
423,125
90,437
69,994
(9,016)
(6,570)
Total assets
750,227
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 September 30, 2019 and 2018, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $36,077 and $22,989, respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segment basis.
Note 5–Commitments and Contingencies
We are subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business. In the opinion of management, the outcome of such matters is not expected to have a material effect on our financial position, results of operations, and/or cash flows.
We are subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, and such outcomes could have a material, negative impact on our financial position, results of operations, and/or cash flows.
Note 6–Bank Credit Facility
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
12
substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate (“LIBOR”) (2.02% at September 30, 2019), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (5.00% at September 30, 2019). The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility to Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. We had no outstanding bank borrowings at September 30, 2019 or 2018, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.
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Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.
We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.
OVERVIEW
We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by third-party service providers. We operate through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.
We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.
As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our
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advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.
The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we are expanding our IT solutions business, which requires the addition of highly-skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.
Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.
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:
Net sales (in millions)
729.4
658.5
2,103.4
1,990.0
Gross margin
16.3
%
15.3
15.9
11.8
12.4
12.0
12.3
4.5
2.9
3.9
3.0
Net sales of $729.4 million for the third quarter of 2019 reflected an increase of $70.9 million compared to the third quarter of 2018, which was driven by growth in our Business Solutions and Public Sector Solutions segments. Our investments in advance solution sales led to increased sales of mobility, desktop, and software products despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent. Gross profit dollars increased year-over-year by $18.4 million due to higher invoice selling margins realized on advanced solution sales and increased sales of software products. SG&A expenses increased by $4.7 million, mostly due to higher personnel costs, but decreased as a percentage of net sales. Operating income in the third quarter of 2019 increased year-over-year both in dollars and as a percentage of net sales by $13.7 million and 160 basis points, respectively, primarily as a result of increased gross profit margins, which grew by 104 basis points over the period.
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Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
2018 (1)
Sales Segment
38
40
37
39
24
23
21
20
100
Product Mix
30
29
27
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
15.1
14.3
14.8
19.0
18.2
18.8
17.8
13.9
12.1
12.9
15.2
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Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
($ in millions)
Personnel costs
65.9
61.8
191.4
188.0
Advertising
4.6
4.1
14.2
Facilities operations
4.3
14.0
12.7
Professional fees
2.7
2.3
8.1
6.9
Credit card fees
1.7
1.9
5.0
5.3
3.1
3.6
10.2
10.4
Other
3.5
9.2
9.3
Total SG&A expense
86.2
81.5
252.1
244.9
Percentage of net sales
In the first quarter of 2019, we undertook a number of actions at our Headquarters/Other group to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred restructuring and related costs of $0.7 million in the first quarter of 2019. There were no restructuring and other charges recorded in the second and third quarter of 2019 or in the nine months ended September 30, 2018.
Year-Over-Year Comparisons
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
Changes in net sales and gross profit by segment are shown in the following table:
% of
Net Sales
Change
Net Sales:
278.3
38.2
265.5
40.3
4.8
273.8
37.5
37.2
177.3
24.3
148.1
22.5
19.7
100.0
10.8
Gross Profit:
42.1
37.9
11.1
52.1
44.6
16.8
24.7
17.9
38.0
118.9
100.4
18.4
Net sales increased in the third quarter of 2019 compared to the third quarter of 2018, as explained below:
·
Net sales of $278.3 million for the Enterprise Solutions segment reflect an increase of $12.8 million, or 4.8%, year-over-year. Notebooks/mobility and desktop products grew by $13.3 million and $6.7 million, respectively, as the Company has benefitted from the personal computer refresh driven by the anticipated end-of-life support for Windows 7 and technological advances in hardware that enable modern workplace solutions. Sales of software products also grew by $2.7 million despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent. These increases were partially offset by decreases in accessories and server/storage products of $6.4 million and $5.1 million, respectively, primarily driven by the timing of large product rollouts.
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Net sales of $273.8 million for the Business Solutions segment reflect an increase of $28.9 million, or 11.8% year-over-year. Sales of notebooks/mobility products, desktop products, and other accessories increased by $10.5 million, $9.0 million, and $4.0 million, respectively, while software products grew by $5.3 million despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent. Though we experienced strong growth in cloud-based and security software sales, revenues from these products are recognized on a net basis, resulting in a smaller contribution to net sales.
Net sales of $177.3 million for the Public Sector Solutions segment increased by $29.2 million, or 19.7%, compared with the same period a year ago. We experienced growth year-over-year in almost every product category highlighted by increases in net sales of notebooks/mobility and desktop products of $13.1 million and $7.4 million, respectively.
Gross profit for the third quarter of 2019 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:
Gross profit for the Enterprise Solutions segment increased largely due to favorable changes in product mix and higher invoice selling margins of 50 basis points associated primarily with an increase in software sales recognized on a net basis. Agency fees also increased by $0.9 million year-over-year. Agency fees, which we receive from vendors for certain software and hardware sales, are recorded as revenue with no corresponding cost of goods sold, and accordingly have a positive impact on gross margin.
Gross profit for the Business Solutions segment increased primarily as a result of changes in customer mix and higher invoice selling margins of 53 basis points, driven by an increase in sales volume. Agency fees from enterprise software agreements also increased year-over-year by $0.8 million.
Gross profit for the Public Sector Solutions segment increased as a result of changes in customer mix and higher invoice selling margins of 165 basis points, driven primarily by improved hardware margins and an increase in software sales reported on a net basis. Agency fees from enterprise software agreements also increased year-over-year by $0.2 million.
Selling, general and administrative expenses increased in dollars, but decreased as a percentage of net sales in the third quarter of 2019 compared to the prior year quarter. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below:
Segment Net
Sales
25.8
6.2
38.6
14.1
36.4
14.9
6.0
17.5
9.9
Headquarters/Other, unallocated
3.3
30.3
5.8
SG&A expenses for the Enterprise Solutions segment increased in both dollars and as a percentage of net sales. The year-over-year change in SG&A dollars was almost entirely attributable to increased personnel costs of $1.5 million, driven by merit increases and variable compensation associated with higher gross profit. SG&A expenses as a percentage of net sales was 9.3% for the Enterprise Solutions segment in the third quarter of 2019, which reflects an increase of 10 basis points and is a result of net sales growing at a lower rate than operating expenses when compared with the same period a year ago.
SG&A expenses for the Business Solutions segment increased in dollars and decreased as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $1.1 million increase in
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personnel costs, including variable compensation associated with higher gross profit, a $0.5 million increase in the use of Headquarter services, and a $0.4 million increase in advertisng expenses. SG&A expenses as a percentage of net sales was 14.1% for the Business Solutions segment in the third quarter of 2019 compared to 14.9% in the third quarter of 2018. This improvement, which reflects a decrease of 80 basis points year-over-year, was driven primarily by growth in net sales which outpaced the growth in operating expenses.
SG&A expenses for the Public Sector Solutions segment was flat year-over-year in dollars and decreased as a percentage of net sales. An increase in the use of Headquarter services resulted in an increase in operating expenses of $0.3 million year-over-year, but this increase was almost entirely offset by other miscellaneous operating expenses, of which there were no individually significant drivers. SG&A expenses as a percentage of net sales was 9.9% for the Public Sector Solutions segment in the third quarter of 2019 compared to 11.8% in the third quarter of 2018. This improvement year-over-year is attributable to the increase in net sales, combined with relatively flat SG&A expenses.
SG&A expenses for the Headquarters/Other group increased primarily due to a $1.4 million increase in personnel-related costs driven primarily by a higher headcount, increased payroll expense, and increased variable compensation associated with higher profits. Professional fees and facilities costs also increased by $0.6 million and $0.3 million, respectively. These increases were partially offset by a decrease in unallocated executive oversight costs of $1.0 million. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs.
Income from operations for the third quarter of 2019 increased to $32.6 million, compared to $19.0 million for the third quarter of 2018, primarily due to the increase in net sales and gross profit year-over-year. Income from operations as a percentage of net sales was 4.5% for the third quarter of 2019, compared to 2.9% of net sales for the prior year quarter, primarily as a result of the growth rate in gross profit exceeding the growth rate in SG&A expenses.
Our effective tax rate was 27.4% for the third quarter of 2019, compared to 27.8% for the third quarter of 2018. We expect our corporate income tax rate for 2019 to range from 27% to 29%.
Net income for the third quarter of 2019 increased to $23.8 million, compared to $13.8 million for the third quarter of 2018, primarily due to higher gross profit and an increase in gross margin which outpaced the growth in operating expenses in the third quarter of 2019, as compared to the third quarter of 2018.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
872.0
41.5
823.8
41.4
797.7
778.2
39.1
2.5
433.7
20.6
388.0
19.5
5.7
129.1
117.8
9.6
150.1
138.2
8.6
56.0
48.3
335.2
304.3
Net sales increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, as explained below:
Net sales of $872.0 million for the Enterprise Solutions segment reflect an increase of $48.2 million, or 5.8%, primarily driven by increases in net sales of notebooks/mobility and desktop products, which grew by $44.7 million and $20.8 million, respectively, as the Company has benefitted from the personal computer refresh driven by the anticipated end-of-life support for Windows 7 and technological advances in hardware that enable modern workplace solutions. Also contributing to the change year-over-year were an increase in sales of accessories of $19.1 million and decreases in sales of server/storage and net/com products of $21.7 million and $10.2 million, respectively, which were primarily attributable to the timing of large product rollouts.
Net sales of $797.7 million for the Business Solutions segment reflect an increase of $19.5 million, or 2.5%. The increase in net sales year-over-year was primarily driven by growth in notebooks/mobility and desktop products of $18.1 and $13.9 million, respectively. This growth was partially offset by a decrease in net/com products of $12.7 million. While net sales in the nine months ended September 30, 2019 were improved by our third quarter results, net sales throughout the year were negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent. Though we have experienced strong growth in cloud-based and security software sales, revenues from these products are recognized on a net basis, resulting in a smaller contribution to net sales.
Net sales of $433.7 million for the Public Sector Solutions segment reflect an increase of $45.7, or 11.8%. We experienced growth year-over-year in almost every product category, highlighted by increases in net sales of notebooks/mobility, sofware, and desktop products of $16.0 million, $9.9 million, and $8.1 million, respectively.
Gross profit for the nine months ended September 30, 2019 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:
Gross profit for the Enterprise Solutions segment increased due to higher invoice selling margins of 57 basis points, driven primarily by an increase in software sales reported on a net basis, and partially offset by a decrease in agency fees of 4 basis points. Agency fees, which we receive from vendors for certain software and hardware sales, are recorded as revenue with no corresponding cost of goods sold, and accordingly have a positive impact on gross margin.
Gross profit for the Business Solutions segment increased period-over-period primarily from higher invoice selling margins of 81 basis points, driven by an increase in software sales reported on a net basis. Agency fees from enterprise software agreements also increased year-over-year by $2.2 million.
Gross profit for the Public Sector Solutions segment increased as a result of changes in customer mix and higher invoice selling margins of 44 basis points, driven primarily by improved hardware margins and an increase in software sales reported on a net basis. Agency fees from enterprise software agreements also increased year-over-year by $0.2 million.
Selling, general and administrative expenses increased in dollars and decreased as a percentage of net sales in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. SG&A expenses
attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):
78.2
9.0
74.2
5.4
111.6
109.8
1.6
51.3
50.4
13.0
1.8
11.0
10.5
SG&A expenses for the Enterprise Solutions segment increased in dollars and remained flat as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $2.1 million increase in personnel expenses, including merit increases and variable compensation associated with higher gross profit, and a $1.1 million increase in the usage of Headquarters services. Also contributing to the year-over-year change were increases in advertising expenses of $0.6 million and depreciation and amortization expense of $0.2 million. SG&A expenses as a percentage of net sales was 9.0% for the Enterprise Solutions segment for both periods ended September 30, 2019 and 2018.
SG&A expenses for the Business Solutions segment increased in dollars and decreased slightly as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $2.3 million increase in the usage of Headquarter services in the current period, along with a $1.3 million increase in advertising expenses. These increases were partially offset by a decrease in personnel-related expenses of $0.8 million, which was driven by a decrease in expenses attributable to the reallocation of certain personnel-related expenses in the first half of 2018 to the Headquarters/Other group, partially offset by increased variable compensation associated with higher gross profits. Also offsetting the period-over-period increases in SG&A expenses was a decrease in bad debt expense associated with the timing of certain write-offs. SG&A expenses as a percentage of net sales was 14.0% for the Business Solutions segment, which reflects a decrease of 10 basis points compared to the prior period.
SG&A expenses for the Public Sector Solutions segment increased in dollars and decreased as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $0.8 million increase in the usage of Headquarters sevices, along with a $0.6 million increase in personnel expenses, including variable compensation associated with higher gross profit. These increases were partially offset by a $0.3 million decrease in professional fees. SG&A expenses as a percentage of net sales was 11.8% for the Public Sector segment, which reflects a decrease of 120 basis points compared to the prior period, resulting from net sales growth that outpaced spending compared with the same period a year ago.
SG&A expenses for the Headquarters/Other group increased primarily due to a $1.4 million increase in personnel-related costs driven primarily by a higher headcount, increased payroll expense, and increased variable compensation associated with higher gross profits. Professional fees and facilities costs also increased by $1.6 million and $1.2 million, respectively. The Company also incurred $0.7 million in restructuring and other charges in the current year. These increases were partially offset by a decrease in unallocated executive oversight costs of $4.2 million and a decrease in depreciation and amortization expense of $0.3 million. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs.
Restructuring and other charges incurred in the first quarter of 2019 were $0.7 million and 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 third quarter of 2019 or in the nine months ended September 30, 2018.
Income from operations for the nine months ended September 30, 2019 increased to $82.4 million, compared to $59.4 million for the nine months ended September 30, 2018, primarily due to the increase in net sales and gross profit year-over-year. Income from operations as a percentage of net sales was 3.9% for the nine months ended September 30, 2019, compared to 3.0% of net sales for the same period in the prior year, primarily due to the growth rate in gross profit exceeding the growth rate in SG&A expenses.
Our effective tax rate was 27.4% for the nine months ended September 30, 2019, compared to 27.6% for the nine months ended September 30, 2018. We expect our corporate income tax rate for 2019 to range from 27% to 29%.
Net income for the nine months ended September 30, 2019 increased to $60.1 million, compared to $43.3 million for the nine months ended September 30, 2018, primarily due to higher gross profit and improved operating expense management in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of businesses.
We believe that funds generated from operations, together with available credit under our bank line of credit, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.
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 September 30, 2019, we had $98.5 million in cash and cash equivalents.
Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate a positive cash flow.
Credit Facilities. As of September 30, 2019, we had no borrowings under our $50.0 million bank line of credit, which is available until February 10, 2022. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.
Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, our cash flows from operations may be substantially affected. See also related risks listed below under “Item 1A. “Risk Factors.”
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated:
40.0
81.3
(20.6)
(15.6)
(12.6)
(13.4)
6.8
52.3
Cash provided by operating activities was $40.0 million in the nine months ended September 30, 2019. Cash flow provided by operations in the nine months ended September 30, 2019 resulted primarily from net income before depreciation and amortization, an increase in accrued expenses, and a decrease in prepaid expenses. These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in accounts receivable and inventory, which grew by $31.4 million and $6.9 million, respectively, compared with the prior year-end balance. Days sales outstanding increased to 52 days at September 30, 2019, compared to 50 days at September 30, 2018. Inventory increased from the prior year-end balance 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 September 30, 2019 compared to December 31, 2018. Inventory turns decreased to 16 for the third quarter of 2019 compared to 22 turns for the prior year quarter. This decrease was driven by a higher inventory balance in the current period, primarily related to committed customer orders not yet shipped as of the end of the quarter.
Cash used in investing activities in the nine months ended September 30, 2019 represented $20.6 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 $15.6 million of purchases of property and equipment in the prior year.
Cash used in financing activities in the nine months ended September 30, 2019 consisted primarily of an $8.5 million payment of a special $0.32 per share dividend and $4.4 million for the purchase of treasury shares. In the prior year period, financing activities primarily represented a $9.1 million payment of a special $0.34 per share dividend and $4.4 million for the purchase of treasury shares.
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.
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 (5.00% at September 30, 2019). The one-month LIBOR rate at September 30, 2019 was 2.02%. In addition, we have the option to increase the facility by an additional $30.0 million to meet additional borrowing requirements. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At September 30, 2019, $50.0 million was available for borrowing under the facility.
Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the line of credit are classified as current.
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, 2018 have not materially changed since the report was filed.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.
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 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 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 nine months ended September 30, 2019 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 2019. Future decreases in our consolidated Adjusted EBITDA, could limit our potential borrowings under the credit facility.
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 $443.0 million at September 30, 2019, whereas our consolidated stockholders’ equity at that date was $583.1 million.
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.
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.
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. No material changes have occurred in our market risks since December 31, 2018.
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 September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by 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
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26
PART II - OTHER INFORMATION
Item 1A - Risk Factors
In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial position, and results of operations. We did not identify any additional risks in the current period that are not included in our Annual Report. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the SEC, and those incorporated by reference in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended September 30, 2019.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)(in thousands)
July 1 - July 31, 2019
23,891
August 1 - August 31, 2019
September 1 - September 30, 2019
23,472
36.73
23,029
In December 2018, our Board of Directors announced a new share repurchase program of our common stock authorizing up to $25 million in share repurchases to be added to our previous publicly-announced share repurchase programs. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions.
(2)
We have repurchased approximately 2.3 million shares of our common stock for approximately $32 million pursuant to Board-approved programs.
Item 6 - Exhibits
ExhibitNumber
Description
10.1
*
Amendment No. 1, dated April 16, 2015, to Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3336 Progress Way, Building 11, Wilmington, OH
Amendment No. 2, dated August 29, 2019, to Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3336 Progress Way, Building 11, Wilmington, OH
31.1
Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Company’s President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
**
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document.
101.PRE
XBRL Taxonomy Presentation Linkbase Document.
* Filed herewith.
** Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019 and September 30, 2018, (iii) Condensed Consolidated Statements of Stockholders’ Equity at September 30, 2019 and December 31, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 2018, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
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.
Date:
October 30, 2019
By:
/s/ TIMOTHY J. MCGRATH
Timothy J. McGrath
President and Chief Executive Officer
(Duly Authorized Officer)
/s/ THOMAS C. BAKER
Thomas C. Baker
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)