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, 2022
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 29, 2022 was 26,267,049.
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, 2022 and December 31, 2021
1
Condensed Consolidated Statements of Income–Three Months Ended March 31, 2022 and 2021
2
Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2022 and 2021
3
Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2022 and 2021
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,
2022
2021
ASSETS
Current Assets:
Cash and cash equivalents
$
67,409
108,310
Accounts receivable, net
634,142
607,532
Inventories, net
234,601
206,555
Prepaid expenses and other current assets
14,588
10,016
Total current assets
950,740
932,413
Property and equipment, net
60,835
61,011
Right-of-use assets
9,201
9,579
Goodwill
73,602
Intangibles, net
5,563
5,868
Other assets
878
910
Total Assets
1,100,819
1,083,383
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
271,411
281,836
Accrued payroll
26,839
30,966
Accrued expenses and other liabilities
71,553
61,830
Total current liabilities
369,803
374,632
Deferred income taxes
19,278
Noncurrent operating lease liabilities
6,077
6,789
Other liabilities
179
211
Total Liabilities
395,337
400,910
Stockholders’ Equity:
290
Additional paid-in capital
123,571
122,354
Retained earnings
627,558
605,766
Treasury stock, at cost
(45,937)
Total Stockholders’ Equity
705,482
682,473
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
788,344
636,892
Cost of sales
660,038
536,372
Gross profit
128,306
100,520
Selling, general and administrative expenses
98,172
86,400
Income from operations
30,134
14,120
Other expenses, net
(3)
(7)
Income before taxes
30,131
14,113
Income tax provision
(8,339)
(3,929)
Net income
21,792
10,184
Earnings per common share:
Basic
0.83
0.39
Diluted
Shares used in computation of earnings per common share:
26,255
26,172
26,405
26,360
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2022
Additional
Retained
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Total
Balance - December 31, 2021
29,025
(2,773)
Stock-based compensation expense
—
1,382
Restricted stock units vested
9
Shares withheld for taxes paid on stock awards
(165)
Balance - March 31, 2022
29,034
Three Months Ended March 31, 2021
Balance - December 31, 2020
28,943
289
119,891
562,084
636,327
1,066
(82)
Balance - March 31, 2021
28,948
120,875
572,268
647,495
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows (used in) provided by Operating Activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
2,991
3,165
Adjustments to credit losses reserve
567
(70)
Loss on disposal of fixed assets
10
Changes in assets and liabilities:
Accounts receivable
(27,177)
54,895
Inventories
(28,046)
333
(4,572)
(3,927)
Other non-current assets
32
(356)
(10,494)
(60,862)
5,230
1,534
Net cash (used in) provided by operating activities
(38,285)
5,962
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
(2,451)
(2,403)
Proceeds from life insurance
1,500
Net cash used in investing activities
(903)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
1,385
Repayment of short-term borrowings
(1,385)
Dividend payments
(8,375)
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(8,457)
Decrease in cash and cash equivalents
(40,901)
(3,398)
Cash and cash equivalents, beginning of year
95,655
Cash and cash equivalents, end of year
92,257
Non-cash Investing and Financing Activities:
Accrued capital expenditures
266
714
Supplemental Cash Flow Information:
Income taxes paid
287
261
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 (the “SEC”) regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). 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, 2021, filed with 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, 2022 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2022.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP 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. Actual results could differ from those estimates and assumptions.
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, 2022 and 2021, along with the reportable segment for each category.
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
130,434
121,339
56,850
308,623
Desktops
23,559
44,864
17,988
86,411
Software
34,908
21,010
5,269
61,187
Servers/Storage
22,164
15,371
9,630
47,165
Net/Com Products
22,627
22,191
8,027
52,845
Displays and Sound
32,824
37,079
13,423
83,326
Accessories
32,241
48,007
12,932
93,180
Other Hardware/Services
21,687
25,535
8,385
55,607
Total net sales
320,444
335,396
132,504
94,435
82,191
56,974
233,600
21,159
30,351
7,850
59,360
27,162
22,505
7,209
56,876
20,573
17,156
6,647
44,376
18,404
19,826
10,361
48,591
19,774
23,405
13,993
57,172
25,847
43,876
10,821
80,544
18,980
25,975
11,418
56,373
246,334
265,285
125,273
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of March 31, 2022 and December 31, 2021.
March 31, 2022
December 31, 2021
Contract liabilities, which are included in "Accrued expenses and other liabilities"
7,043
8,628
Changes in the contract liability balances during the three months ended March 31, 2022 and 2021 are as follows:
Balance at December 31, 2021
Cash received in advance and not recognized as revenue
3,870
Amounts recognized as revenue as performance obligations satisfied
(5,455)
Balance at March 31, 2022
Balance at December 31, 2020
3,509
5,259
(2,500)
Balance at March 31, 2021
6,268
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
150
188
Denominator for diluted earnings per share
Earnings per share:
For the three months ended March 31, 2022 and 2021, 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, 2022 was $2,025 and a corresponding lease liability of $2,025 associated with related party leases.
As of March 31, 2022, 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, 2022 and 2021:
Related Parties
Others
Lease Cost
Capitalized operating lease cost
313
709
1,022
777
1,090
Short-term lease cost
107
128
130
Total lease cost
420
730
1,150
800
1,220
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
687
1,000
770
1,083
Weighted-average remaining lease term (in years):
Capitalized operating leases
1.67
4.34
3.79
2.67
5.32
4.65
Weighted-average discount rate:
3.92%
3.91%
7
As of March 31, 2022, future lease payments over the remaining term of capitalized operating leases were as follows:
For the Years Ended December 31,
2022, excluding the three months ended March 31, 2022
940
2,159
3,099
2023
1,149
2,136
3,285
2024
1,644
2025
1,577
2026
888
Thereafter
2,089
8,405
10,494
Imputed interest
(640)
Lease liability balance at March 31, 2022
9,854
As of March 31, 2022, the ROU asset had a balance of $9,201. The long-term lease liability was $6,077 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,777. 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.
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 the Company’s 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 the Company’s reportable operating segments for the three months ended March 31, 2022 and 2021 is shown below:
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
20,673
8,420
14,314
12,543
(1,126)
(2,753)
Headquarters/Other
(3,727)
(4,090)
Total operating income
Selected operating expense:
Depreciation and amortization:
167
159
534
716
20
14
2,270
2,276
Total depreciation and amortization
Total assets:
426,103
362,694
651,905
568,221
94,540
94,103
(71,729)
(66,632)
Total assets
958,386
The assets of the Company’s 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, ROU assets, and intercompany balance, net. As of March 31, 2022 and 2021, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $50,234, and $48,026, respectively. The Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of the Company’s segments, to varying degrees, and accordingly, the 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. The outcome of such matters is not expected to have a material, adverse effect on the Company’s 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 the Company’s financial position, results of operations, and/or cash flows.
Note 7–Bank Borrowings
The Company has a $50,000 credit facility collateralized by its account receivables that expires March 31, 2025. This facility can be increased, at the Company’s option, to $80,000 for permitted acquisitions or other uses authorized by
the lender on substantially the same terms. Amounts outstanding under this facility bear interest at greatest of (i) the prime rate (3.50% on March 31, 2022), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, plus 1.00% per annum, provided that the Alternate Base Rate shall at no time be less than 0% per annum. 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 for a given quarter to consolidated trailing twelve months Adjusted Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges (Adjusted EBITDA). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in the Company’s consolidated trailing twelve months Adjusted EBITDA could limit its potential borrowing capacity under the credit facility. As of March 31, 2022, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
On February 3, 2022, the Company borrowed $1,385 under the credit facility, which was fully repaid on February 4, 2022. The Company had no outstanding bank borrowings for the quarter ended March 31, 2022 or 2021, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility on such date.
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 Securities Exchange Act of 1934, as amended, or 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:
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, 2021. 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 Fortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology. Our dedicated account managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center, or TIDC, with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of incountry suppliers in over 150 countries.
The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, or SMBs, enterprise, and public sector markets.
Financial results for each of our segments are included in the financial statements attached hereto. 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 offer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, and VMware, and we partner with more than 2,500 suppliers. We are able to leverage our state-of-the art logistic capabilities to rapidly ship product to customers.
12
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, sold or 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 and, in some cases, 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 TSG, 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.
To support future growth, we continue to expand our IT solutions business, which requires 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
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, global supply chain disruptions have limited our ability to acquire products in a timely manner, and we anticipate these global supply chain challenges will persist through the foreseeable future. In response to the delays we are experiencing in acquiring products, we increased our inventory levels during the quarter ended March 31, 2022 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. We also experienced an increase in our backlog as global supply chain challenges delayed our ability to fill customer orders. We continue to monitor the effects on our customers, suppliers, and the economy as a whole and will continue to 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:
Three Months Ended March 31,
Net sales (in millions)
788.3
636.9
Gross margin
16.3
%
15.8
12.5
13.6
3.8
2.2
13
Net sales of $788.3 million for the first quarter of 2022 reflected an increase of $151.5 million compared to the first quarter of 2021, which was driven by higher net sales across all three of our business segments. The increase in net sales was primarily driven by our ability to meet the continued demand from our customers. In addition, we saw revenue growth across all our vertical markets. Gross profit increased year-over-year by $27.8 million, primarily due to the changes in product mix and increases in total net sales. SG&A expenses increased year-over-year by $11.8 million, driven primarily by increased personnel cost of $9.3 million associated with higher variable compensation due to the higher gross profit. The higher SG&A expenses were also attributable to an increase in marketing expenses of $1.2 million. Operating income in the first quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $16.0 million and 160 basis points, respectively, primarily as a result of the increase in net sales.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Sales Segment
42
41
39
17
100
Product Mix
37
Net/Com Product
Displays and sound
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
14.6
14.1
19.4
19.2
13.1
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
($ in millions)
Personnel costs
74.1
64.8
Advertising
4.6
3.4
Service contracts/subscriptions
4.9
Professional fees
3.9
4.7
3.0
3.2
Facilities operations
2.1
Credit card fees
1.7
1.4
Other
Total SG&A expense
98.2
86.4
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, 2022 and the three months ended March 31, 2021.
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
% of
Net Sales
Change
Net Sales:
335.4
42.5
265.3
41.4
26.4
320.4
40.6
246.3
38.8
30.1
132.5
16.9
125.3
19.8
5.8
100.0
23.8
Gross Profit:
48.9
37.5
30.3
62.1
47.4
31.2
17.3
15.6
10.5
128.3
100.5
27.6
Net sales increased in the first quarter of 2022 compared to the first quarter of 2021, as explained below:
15
Gross profit for the first quarter of 2022 increased year-over-year in dollars and also as a percentage of net sales (gross margin), as explained below:
Selling, general and administrative expenses in the first quarter of 2022 increased in dollars but decreased as a percentage of net sales compared to the first quarter of 2021. 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):
Segment Net
Sales
34.6
10.3
25.0
9.4
38.5
41.5
13.0
38.9
6.4
18.4
13.9
14.7
0.1
Headquarters/Other, unallocated
3.7
4.1
(8.9)
16
Income from operations for the first quarter of 2022 increased to $30.1 million, compared to $14.1 million for the first quarter of 2021, primarily due to the increases in net sales and gross profit. Income from operations as a percentage of net sales was 3.8% for the first quarter of 2022, compared to 2.2% for the prior year quarter, primarily driven by higher net sales as well as lower SG&A expenses as a percentage of net sales.
Income taxes. Our provision for income taxes in the first quarter of 2022 was $8.3 million, compared to $3.9 million for the first quarter of 2021, primarily due to the increases of operating income. Our effective tax rate was 27.7% for the quarter ended March 31, 2022, compared to 27.8% for the quarter ended March 31, 2021.
Net income for the first quarter of 2022 increased to $21.8 million, compared to $10.2 million for the first quarter of 2021, primarily due to higher 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 the next twelve calendar months and beyond. 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 are materially adversely impacted by the developing macroeconomic trends characterized by inflation and increased interest rates, our cash flows from operations may be substantially affected.
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated:
(38.3)
6.0
(2.5)
(0.9)
(0.2)
(8.5)
(41.0)
(3.4)
Cash used in operating activities was $38.3 million in the three months ended March 31, 2022. Cash used in operations during the three months ended March 31, 2022, resulted primarily from (i) a $28.0 million increase in inventory, primarily driven by an increase in advanced inventory purchases for anticipated future customer rollouts; (ii) a $27.2 million increase in accounts receivable, primarily driven by higher levels of business activity in the quarter compared to the prior year; and (iii) a $10.5 million decrease in accounts payable compared to the prior period. Those cash outflow factors were partially offset by (i) net income $21.8 million; (ii) other non-cash charges adding back in the amount of $5.0 million; and (iii) an increase in accrued expenses and other liabilities of $5.3 million. Cash provided by operating activities of $6.0 million for the three months ended March 31, 2021 was primarily due to net income before depreciation and amortization, a $54.9 million decrease in accounts receivable, and a $60.9 million decreases in accounts payable.
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)
69
74
Days of supply in inventory (DIO)(2)
Days of purchases outstanding (DPO)(3)
(37)
(35)
Cash conversion cycle
64
63
(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 slightly to 64 days at March 31, 2022, compared to 63 days at March 31, 2021. The increase is primarily due to the 8-day increase of DIO, and partially offset by the 5-day decrease of DSO. The higher DIO was driven by the increased in advanced inventory purchases due to anticipated future customer rollouts. The decrease of DSO was primarily due to the higher levels of business activity in the first quarter of 2022.
Cash used in investing activities for the three months ended March 31, 2022 represented $2.5 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 of $2.4 million in purchases of property and equipment.
Cash used in financing activities for the three months ended March 31, 2022 consisted of $0.2 million payment of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily represented an $8.4 million payment of a special $0.32 per share dividend.
18
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 on Form 10-Q.
Credit facility. Our credit facility extends until March 31, 2025 and is collateralized by our accounts receivable. As of March 31, 2022, our borrowing capacity under the credit facility was up to $50.0 million. Amounts outstanding under the credit facility accrue interest at the greatest of (i) the prime rate (3.50% at March 31, 2022), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, or LIBOR, plus 1.00% per annum, provided that the rate shall at no time be less than 0% per annum. We have the option to increase our borrowing capacity under the credit facility by an additional $30.0 million, provided we meet certain additional borrowing requirements and obtain the consent of the administrative agent. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” We did not have any amounts outstanding under the credit facility at March 31, 2022.
Factors Affecting Sources of Liquidity
Cash Generated from Operations. The key factors affecting our cash generated from operations are our ability to minimize costs, fully achieve our operating efficiencies, timely collect our customer receivables, and manage of our inventory levels.
Credit Facility. Our credit facility extends until March 31, 2025 and is collateralized by our accounts receivable. As of March 31, 2022, we did not have any borrowings outstanding under the 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. Any failure to comply with these 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 tests:
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. In addition, market volatility, inflation and interest rate fluctuations may increase our cost of financing or restrict our access to potential sources of future liquidity.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
19
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, 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 year ended December 31, 2021. No other material changes have occurred in our market risks since December 31, 2021.
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, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under 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, 2022 that has materially affected, or is 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” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, 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, 2021, which could materially affect our business, financial position, and results of operations. 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 other public filings with the SEC, and those contained in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, incorporated by reference herein.
Item 6 - Exhibits
ExhibitNumber
Description
3.1
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, as amended)
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 May 3, 2022, by and between PC Connection, Inc. and Timothy McGrath, as amended.
10.2
Incentive and Retention agreement, dated as of May 3, 2022, by and between PC Connection, Inc. and Thomas Baker, as amended.
31.1
Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021, 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 5, 2022
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)