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 March 31, 2021
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 the 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 April 30, 2021 was 26,187,175.
PC CONNECTION, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
ITEM 1.
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets–March 31, 2021 and December 31, 2020
1
Condensed Consolidated Statements of Income–Three Months Ended March 31, 2021 and 2020
2
Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2021 and 2020
3
Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2021 and 2020
4
Notes to Unaudited Condensed Consolidated Financial Statements
5
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
11
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
21
ITEM 4.
Controls and Procedures
22
PART II OTHER INFORMATION
ITEM 1
Legal Proceedings
23
ITEM 1A
Risk Factors
ITEM 6.
Exhibits
24
SIGNATURES
25
PART I. FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
March 31,
December 31,
2021
2020
ASSETS
Current Assets:
Cash and cash equivalents
$
92,257
95,655
Accounts receivable, net
554,696
611,021
Inventories, net
140,534
140,867
Prepaid expenses and other current assets
15,364
11,437
Total current assets
802,851
858,980
Property and equipment, net
61,592
61,537
Right-of-use assets
11,857
12,821
Goodwill
73,602
Intangibles assets, net
6,783
7,088
Other assets
1,701
1,345
Total Assets
958,386
1,015,373
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
206,542
266,846
Accrued payroll
18,171
17,828
Accrued expenses and other liabilities
50,231
57,586
Total current liabilities
274,944
342,260
Deferred income taxes
18,525
Noncurrent operating lease liabilities
8,792
9,631
Other liabilities
8,630
Total Liabilities
310,891
379,046
Stockholders’ Equity:
289
Additional paid-in capital
120,875
119,891
Retained earnings
572,268
562,084
Treasury stock, at cost
(45,937)
Total Stockholders’ Equity
647,495
636,327
Total Liabilities and Stockholders’ Equity
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Three Months Ended
Net sales
636,892
711,850
Cost of sales
536,372
598,732
Gross profit
100,520
113,118
Selling, general and administrative expenses
86,400
92,468
Income from operations
14,120
20,650
Other (expenses) income, net
(7)
92
Income before taxes
14,113
20,742
Income tax provision
(3,929)
(5,846)
Net income
10,184
14,896
Earnings per common share:
Basic
0.39
0.57
Diluted
0.56
Shares used in computation of earnings per common share:
26,172
26,236
26,360
26,421
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended March 31, 2021
Additional
Retained
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Total
Balance - December 31, 2020
28,943
(2,773)
Stock-based compensation expense
—
1,066
Restricted stock units vested
Shares withheld for taxes paid on stock awards
(82)
Balance - March 31, 2021
28,948
Three months ended March 31, 2020
Balance - December 31, 2019
28,870
288
118,045
514,694
(2,526)
(35,715)
597,312
624
(49)
Repurchase of common stock for treasury
(247)
(10,222)
Balance - March 31, 2020
28,874
118,620
529,590
602,562
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
3,165
3,147
Adjustments to credit losses reserve
(70)
2,833
Changes in assets and liabilities:
Accounts receivable
54,895
61,477
Inventories
333
(12,319)
Prepaid expenses, income tax receivables and other current assets
(3,927)
(3,300)
Other non-current assets
(356)
(98)
(60,862)
(15,499)
1,534
(7,205)
Net cash provided by operating activities
5,962
44,556
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
(2,403)
(4,595)
Proceeds from life insurance
1,500
Net cash used in investing activities
(903)
Cash Flows (used in) provided by Financing Activities:
Purchase of treasury shares
Dividend payments
(8,375)
(8,427)
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(8,457)
(18,698)
(Decrease) increase in cash and cash equivalents
(3,398)
21,263
Cash and cash equivalents, beginning of year
90,060
Cash and cash equivalents, end of year
111,323
Non-cash Investing and Financing Activities:
Accrued capital expenditures
714
1,237
Supplemental Cash Flow Information:
Income taxes paid
261
369
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”) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the 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, 2021 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2021.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period. Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances. By nature, estimates are subject to an inherent degree of uncertainty, including uncertainty in the current economic environment due to the coronavirus pandemic (“COVID-19 pandemic”). Actual results could differ from those estimates and assumptions, including the impact of the COVID-19 pandemic.
Recently Issued Financial Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.
Note 2–Revenue
The Company disaggregates revenue from its arrangements with customers by type of products and services, as it 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, 2021 and 2020, along with the reportable segment for each category.
Three Months Ended March 31, 2021
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
94,435
82,191
56,974
233,600
Desktops
21,159
30,351
7,850
59,360
Software
27,162
22,505
7,209
56,876
Servers/Storage
20,573
17,156
6,647
44,376
Net/Com Products
18,404
19,826
10,361
48,591
Displays and Sound
19,774
23,405
13,993
57,172
Accessories
25,847
43,876
10,821
80,544
Other Hardware/Services
18,980
25,975
11,418
56,373
Total net sales
246,334
265,285
125,273
Three Months Ended March 31, 2020
91,613
79,316
28,966
199,895
33,294
34,209
10,472
77,975
36,398
26,182
7,295
69,875
25,830
16,234
11,746
53,810
21,012
24,946
9,810
55,768
23,946
23,568
11,443
58,957
28,021
90,974
8,809
127,804
18,671
37,989
11,106
67,766
278,785
333,418
99,647
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of March 31, 2021 and December 31, 2020.
March 31, 2021
December 31, 2020
Contract liabilities, which are included in "Accrued expenses and other liabilities"
6,268
3,509
Changes in the contract liability balances during the three months ended March 31, 2021 and 2020 are as follows (in thousands):
Balances at December 31, 2020
Cash received in advance and not recognized as revenue
5,259
Amounts recognized as revenue as performance obligations satisfied
(2,500)
Balances at March 31, 2021
Balances at December 31, 2019
5,942
4,852
(8,262)
Balances at March 31, 2020
2,532
6
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 ,
Numerator:
Denominator:
Denominator for basic earnings per share
Dilutive effect of employee stock awards
188
185
Denominator for diluted earnings per share
Earnings per share:
For the three months ended March 31, 2021 and 2020, the Company 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—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 (“ROU asset”) as of March 31, 2021 was $3,179 and a corresponding lease liability of $3,179 associated with related party leases.
As of March 31, 2021, 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 for the three months ended March 31, 2021 and 2020:
Related Parties
Others
Lease Cost
Capitalized operating lease cost
313
777
1,090
379
784
1,163
Short-term lease cost
107
130
41
43
Total lease cost
420
800
1,220
786
1,206
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
770
1,083
781
1,160
Weighted-average remaining lease term (in years):
Capitalized operating leases
2.67
5.32
4.65
3.65
6.29
5.60
Weighted-average discount rate:
3.92%
7
As of March 31, 2021, future lease payments over the remaining term of capitalized operating leases were as follows:
For the Years Ended December 31,
2021, excluding the three months ended March 31, 2021
940
2,322
3,262
2022
1,253
2,111
3,364
2023
1,149
1,675
2,824
2024
1,699
2025
1,594
Thereafter
888
3,342
10,289
13,631
Imputed interest
(1,027)
Lease liability balance at March 31, 2021
12,604
As of March 31, 2021, the ROU asset had a balance of $11,857. The long-term lease liability was $8,792 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,812. 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 Information
The internal reporting structure used by the Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. The Company’s CODM is its Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
The Company’s 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. The Company reports these charges to the operating segments as “Allocations.” Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.
8
Segment information applicable to our reportable operating segments for the three months ended March 31, 2021 and 2020 is shown below:
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
8,420
11,301
12,543
16,722
(2,753)
(3,322)
Headquarters/Other
(4,090)
(4,051)
Total operating income
Selected operating expense:
Depreciation and amortization:
159
716
681
14
15
2,276
2,292
Total depreciation and amortization
Total assets:
362,694
319,909
568,221
536,672
94,103
52,285
(66,632)
4,326
Total assets
913,192
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, 2021 and 2020, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $48,026 and $7,024, 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-by-segment basis.
Note 6–Commitments and Contingencies
The Company is 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.
The Company is subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, but such outcomes are not expected to have a material, adverse impact on our financial position, results of operations, and/or cash flows.
Note 7–Bank Borrowings
The Company has 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
9
on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR (0.11% at March 31, 2021), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at March 31, 2021). 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. The Company had no outstanding bank borrowings at March 31, 2021 or 2020, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility. As of March 31, 2021, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
10
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
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. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
• we have experienced variability in sales and may not be able to maintain profitable operations;
• substantial competition could reduce our market share and may negatively affect our business;
• we face and will continue to face significant price competition, which could result in a reduction of our profit margins;
• the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;
• instability in economic conditions and government spending may adversely affect our business and reduce our operating results;
• the loss of any of our major vendors could have a material adverse effect on our business;
• virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;
• the methods of distributing IT products are changing, and such changes may negatively impact us and our business;
• we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;
• we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;
• we may experience a reduction in the incentive programs offered to us by our vendors;
• should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;
• we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;
• we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;
• we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;
• cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.
• we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.
• the failure to comply with our public sector contracts could result in, among other things, fines or liabilities; and
• we are controlled by one principal stockholder
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. 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, 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” in 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, 2020. 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 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.
12
The primary challenges we continue to face in effectively managing our business, especially in the current economic environment, 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 have expanded, and expect to continue to expand, 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 and economic conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.
EFFECTS OF COVID-19
In the year 2021, the COVID-19 pandemic continued to cause material disruptions to the business and operations of our customers. We have experienced, and may continue to experience, decreases in orders as a result of the COVID-19 pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future.
As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future. However, we continue to monitor the effects on our customers, suppliers, and the economy as a whole and will adjust our business practices, as necessary, to respond to the changing demand for, and supply of, our products.
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
Net sales (in millions)
636.9
711.9
Gross margin
15.8
%
15.9
13.6
13.0
2.2
2.9
Net sales of $636.9 million for the first quarter of 2021 reflected a decrease of $75.0 million compared to the first quarter of 2020, which was driven by lower net sales in our Enterprise Solutions and Business Solutions Segments. The decrease was partially offset by growth in our Public Sector Solutions segment. The decrease in net sales was primarily due to the supply chain constraints in the first quarter of 2021 and strong comparative results in the same quarter a year ago. Gross profit decreased year-over-year by $12.6 million, primarily due to the increase of lower margin sales and the decline in total net sales. SG&A expenses decreased year-over-year by $6.1 million, driven primarily by decreased personnel cost of $4.6 million associated with reduced headcount and lower variable compensation, a decrease in bad debt expenses of $2.9 million and a decrease in advertising expenses of $1.3 million, which were partially offset by an increase in professional fees of $2.1 million. Operating income in the first quarter of 2021 decreased year-over-year both in dollars and as a percentage of net sales by $6.5 million and 68 basis points, respectively, primarily as a result of the decrease in net sales.
13
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Sales Segment
47
39
20
100
Product Mix
37
28
Net/Com Product
Displays and sound
18
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
14.1
13.9
19.2
18.8
12.5
14.5
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
Personnel costs
64.8
69.4
Advertising
3.4
4.6
Facilities operations
6.8
5.1
Professional fees
4.7
2.6
Credit card fees
1.4
1.7
3.2
3.1
Other
2.1
6.0
Total SG&A expense
86.4
92.5
As a percentage of net sales
Year-Over-Year Comparisons
In this section and elsewhere in this Quarterly Report on Form 10-Q we refer to changes in year-over-year results. Unless context otherwise requires, such references refer to changes between the three months ended March 31, 2021 and the three months ended March 31, 2020.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Changes in net sales and gross profit by segment are shown in the following table:
Three Months Ended March 31,
% of
Net Sales
Change
Net Sales:
265.3
41.4
333.4
46.8
(20.4)
246.3
38.8
278.8
39.2
(11.7)
125.3
19.8
99.7
14.0
25.7
100.0
(10.5)
Gross Profit:
37.5
46.2
(18.8)
47.4
52.5
(9.7)
15.6
14.4
8.3
100.5
113.1
(11.1)
Net sales decreased in the first quarter of 2021 compared to the first quarter of 2020, as explained below:
Gross profit for the first quarter of 2021decreased year-over-year in dollars, but stayed relatively flat as a percentage of net sales (gross margin), as explained below:
Selling, general and administrative expenses decreased in dollars but increased as a percentage of net sales in the first quarter of 2021 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
25.0
9.4
29.5
8.8
(15.3)
38.9
41.2
14.8
(5.6)
18.4
14.7
17.7
17.8
4.0
Headquarters/Other, unallocated
4.1
(6.6)
16
Income from operations for the first quarter of 2021 decreased to $14.1 million, compared to $20.7 million for the first quarter of 2020, primarily due to the decreases in net sales and gross profit. Income from operations as a percentage of net sales was 2.2% for the first quarter of 2021, compared to 2.9% of net sales for the prior year quarter, primarily driven by higher SG&A expenses as a percentage of net sales.
Our provision for income taxes in the three months ended March 31, 2021 was $3.9 million, compared to $5.8 million for the first quarter of 2020.
Net income for the first quarter of 2021 decreased to $10.2 million, compared to $14.9 million for the first quarter of 2020, primarily due to lower net sales and gross profit.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our credit facility. 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 credit facility, 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 credit facility, as follows:
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.
17
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated:
44.6
(0.9)
(4.6)
(8.5)
(18.7)
(3.4)
21.3
Cash provided by operating activities was $6.0 million in the three months ended March 31, 2021. Cash flow provided by operations in the three months ended March 31, 2021 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, which decreased by $54.9 million in the current year and was driven primarily by the timing of collections. These factors that contributed to the positive inflow of cash from operating activities were partially offset by decreases in accounts payable of $60.9 million in the current year, primarily due to the timing of payments. Operating cash flow in the three months ended March 31, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, and partially offset by increases in inventory and decreases in accounts payable and other accrued expenses.
In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:
(in days)
Days of sales outstanding (DSO)(1)
74
58
Days of supply in inventory (DIO)(2)
Days of purchases outstanding (DPO)(3)
(35)
(33)
Cash conversion cycle
63
46
(1) Represents the rolling three-month average of the balance of accounts receivable, net at the end of the period, divided by average daily net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.
(2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period.
(3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period.
The cash conversion cycle increased to 63 days at March 31, 2021, compared to 46 days at March 31, 2020. The increase is primarily due to the 16 day increase of DSO and the 3 day increase of DIO, and partially offset by the 2 days increase of DPO. The increase in DSO was primarily due to payment terms extended to our customers in the prior year.
Cash used in investing activities in the three months ended March 31, 2021 represented $2.4 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. In the prior year, we made similar investments with $4.6 million in purchases of property and equipment. Cash used for capital expenditures for the first quarter of 2021 was partially offset by $1.5 million of cash proceeds from life insurance.
Cash used in financing activities in the three months ended March 31, 2021 consisted primarily of an $8.4 million payment of a special $0.32 per share dividend. In the prior year period, financing activities primarily represented an $8.4 million payment of a special $0.32 per share dividend and $10.2 million for the purchase of treasury shares.
Debt Instruments, Contractual Agreements, and Related Covenants
Below is a summary of certain provisions of our credit facility 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 credit facility 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 (3.25% at March 31, 2021). The one-month LIBOR rate at March 31, 2021 was 0.11%. 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, 2021, $50.0 million was available for borrowing under the facility.
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.
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 credit facility. This credit facility contains two financial covenants:
Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.
19
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, 2020. No other material changes have occurred in our market risks since December 31, 2020.
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, 2021. 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 March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
For information related to legal proceedings, see the discussion in Note 6 - Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which information is incorporated by reference into this Part II, Item 1.
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, 2020, 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, 2020.
Item 6 - Exhibits
ExhibitNumber
Description
Amended and Restated Certificate of Incorporation of PC Connection, Inc., as amended (incorporated by reference from the exhibits filed with the company’s registration statement (333-63272) on Form-4 filed under the security act of 1933)
Amended and Restated Bylaws of PC Connection, Inc. (incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9, 2008).
10.1
*
Incentive and Retention agreement, dated as of March 15, 2021, between the Registrant and Timothy McGrath.
10.2
Incentive and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker.
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
**
Inline XBRL Instance Document* - The Instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
* 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, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020, (iii) Condensed Consolidated Statements of Stockholders’ Equity for three months ended March 31, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, 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:
May 7, 2021
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)