Table of Contents
b
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*
For the quarterly period ended September 30, 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, $0.01 par value
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 October 28, 2022 was 26,288,356.
PC CONNECTION, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
ITEM 1.
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets–September 30, 2022 and December 31, 2021
1
Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2022 and 2021
2
Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2022 and 2021
3
Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2022 and 2021
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
27
ITEM 4.
Controls and Procedures
28
PART II OTHER INFORMATION
Legal Proceedings
29
ITEM 1A.
Risk Factors
ITEM 6.
Exhibits
30
SIGNATURES
31
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
September 30,
December 31,
2022
2021
ASSETS
Current Assets:
Cash and cash equivalents
$
116,190
108,310
Accounts receivable, net
646,656
607,532
Inventories, net
213,316
206,555
Prepaid expenses and other current assets
10,095
10,016
Total current assets
986,257
932,413
Property and equipment, net
59,913
61,011
Right-of-use assets
8,495
9,579
Goodwill
73,602
Intangibles, net
4,953
5,868
Other assets
905
910
Total Assets
1,134,125
1,083,383
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
258,596
281,836
Accrued payroll
31,478
30,966
Accrued expenses and other liabilities
62,846
61,830
Total current liabilities
352,920
374,632
Deferred income taxes
19,278
Noncurrent operating lease liabilities
5,620
6,789
Other liabilities
200
211
Total Liabilities
378,018
400,910
Stockholders’ Equity:
Common Stock
291
290
Additional paid-in capital
125,591
122,354
Retained earnings
676,162
605,766
Treasury stock, at cost
(45,937)
Total Stockholders’ Equity
756,107
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
Nine Months Ended
Net sales
775,692
751,368
2,392,545
2,092,421
Cost of sales
639,066
630,671
1,990,712
1,754,877
Gross profit
136,626
120,697
401,833
337,544
Selling, general and administrative expenses
104,887
93,369
305,189
272,332
Income from operations
31,739
27,328
96,644
65,212
Other income, net
308
—
319
7
Income before taxes
32,047
96,963
65,219
Income tax provision
(8,841)
(7,283)
(26,567)
(17,698)
Net income
23,206
20,045
70,396
47,521
Earnings per common share:
Basic
0.88
0.77
2.68
1.81
Diluted
0.76
2.66
1.80
Shares used in computation of earnings per common share:
26,279
26,197
26,267
26,186
26,455
26,368
26,432
26,362
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2022
Additional
Retained
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Total
Balance - June 30, 2022
29,045
124,690
652,956
(2,773)
731,999
Stock-based compensation expense
1,282
Restricted stock units vested
16
(1)
Shares withheld for taxes paid on stock awards
(380)
Balance - September 30, 2022
29,061
Nine Months Ended September 30, 2022
Balance - December 31, 2021
29,025
4,072
36
(834)
Three Months Ended September 30, 2021
Balance - June 30, 2021
28,960
289
121,659
589,560
665,571
1,026
18
(470)
Balance - September 30, 2021
28,978
122,214
609,605
686,172
Nine Months Ended September 30, 2021
Balance - December 31, 2020
28,943
119,891
562,084
636,327
3,118
35
(794)
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows provided by Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
9,000
9,165
Adjustments to credit losses reserve
2,658
1,704
Loss on disposal of fixed assets
Changes in assets and liabilities:
Accounts receivable
(41,782)
22,437
Inventories
(6,761)
(34,507)
(79)
(360)
Other non-current assets
314
(23,268)
(49,997)
1,432
9,437
Net cash provided by operating activities
15,689
8,834
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
(6,975)
(7,092)
Proceeds from life insurance
1,500
Net cash used in investing activities
(5,592)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
36,463
Repayment of short-term borrowings
(36,463)
Dividend payments
(8,375)
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(9,169)
Increase (decrease) in cash and cash equivalents
7,880
(5,927)
Cash and cash equivalents, beginning of year
95,655
Cash and cash equivalents, end of period
89,728
Non-cash Investing and Financing Activities:
Accrued capital expenditures
362
394
Supplemental Cash Flow Information:
Income taxes paid
30,759
20,600
Interest paid
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 for the year ended December 31, 2021.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three and nine months ended September 30, 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 September 30, 2022 and 2021, along with the reportable segment for each category.
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
120,689
95,017
60,960
276,666
Desktops
21,151
37,045
13,113
71,309
Software
36,965
36,996
12,186
86,147
Servers/Storage
27,016
15,857
12,213
55,086
Net/Com Products
27,732
19,625
8,189
55,546
Displays and Sound
28,377
30,011
20,633
79,021
Accessories
33,007
46,051
17,808
96,866
Other Hardware/Services
20,879
24,908
9,264
55,051
Total net sales
315,816
305,510
154,366
109,910
117,017
77,192
304,119
22,329
34,473
11,319
68,121
28,761
22,829
9,678
61,268
25,775
12,560
13,407
51,742
21,091
23,887
8,259
53,237
26,321
33,490
15,287
75,098
28,865
43,207
14,320
86,392
18,373
22,259
10,759
51,391
281,425
309,722
160,221
The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2022 and 2021, along with the reportable segment for each category.
374,298
333,764
185,021
893,083
68,459
134,541
44,368
247,368
111,440
79,578
27,963
218,981
78,878
43,085
31,441
153,404
74,789
66,060
22,856
163,705
92,170
104,822
53,263
250,255
100,904
151,786
46,423
299,113
63,672
76,225
26,739
166,636
964,610
989,861
438,074
301,746
293,680
196,667
792,093
64,095
103,740
27,696
195,531
89,025
71,496
28,745
189,266
67,434
56,822
27,689
151,945
61,855
64,404
25,831
152,090
71,920
86,238
42,023
200,181
82,192
131,394
34,250
247,836
56,750
74,394
32,335
163,479
795,017
882,168
415,236
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of September 30, 2022 and December 31, 2021.
September 30, 2022
December 31, 2021
Contract liabilities, which are included in "Accrued expenses and other liabilities"
5,027
8,628
Changes in the contract liability balances during the nine months ended September 30, 2022 and 2021 are as follows:
Balance at December 31, 2021
Cash received in advance and not recognized as revenue
18,943
Amounts recognized as revenue as performance obligations satisfied
(22,544)
Balance at September 30, 2022
Balance at December 31, 2020
3,509
19,838
(15,524)
Balance at September 30, 2021
7,823
Note 3–Earnings Per Share
Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive.
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30,
Nine Months Ended September 30,
Numerator:
Denominator:
Denominator for basic earnings per share
Dilutive effect of employee stock awards
176
171
165
Denominator for diluted earnings per share
Earnings per share:
8
For the three and nine months ended September 30, 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 September 30, 2022 was $1,432 and a corresponding lease liability of $1,432 associated with related party leases.
As of September 30, 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 and nine months ended September 30, 2022 and 2021:
Related Parties
Others
Lease Cost
Capitalized operating lease cost
313
693
1,006
940
2,112
3,052
Short-term lease cost
107
58
321
100
421
Total lease cost
420
751
1,171
1,261
2,212
3,473
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
713
2,147
3,087
Weighted-average remaining lease term (in years):
Capitalized operating leases
1.17
4.26
3.78
Weighted-average discount rate:
3.92%
4.03%
4.02%
753
1,066
2,304
3,244
21
128
320
63
383
774
1,194
1,260
2,367
3,627
807
1,120
2,404
3,344
2.17
4.66
4.06
9
As of September 30, 2022, future lease payments over the remaining term of capitalized operating leases were as follows:
For the Years Ended December 31,
2022, excluding the nine months ended September 30, 2022
699
1,012
2023
1,149
2,260
3,409
2024
1,860
2025
1,798
2026
1,115
Thereafter
575
1,462
8,307
9,769
Imputed interest
(678)
Lease liability balance at September 30, 2022
9,091
As of September 30, 2022, the ROU asset had a balance of $8,495. The long-term lease liability was $5,620 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,471. As of September 30, 2021, the ROU asset had a balance of $10,218. The long-term lease liability was $7,353 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,502.
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.
10
Segment information applicable to the Company’s reportable operating segments for the three and nine months ended September 30, 2022 and 2021 is shown below:
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
12,774
62,230
29,559
12,401
19,151
42,103
52,203
4,211
619
4,156
(4,250)
Headquarters/Other
(4,151)
(5,216)
(11,845)
(12,300)
Total operating income
Other expenses, net
Selected operating expense:
Depreciation and amortization:
167
169
502
487
482
560
1,517
1,888
20
19
59
43
2,351
2,199
6,922
6,747
Total depreciation and amortization
3,020
2,947
Total assets:
451,872
375,557
647,592
603,173
113,820
91,227
(79,159)
(56,031)
Total assets
1,013,926
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 and cash equivalents, inventories, property and equipment, ROU assets, and intercompany balance, net. As of September 30, 2022 and 2021, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $62,154, and $39,209, 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, 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
11
the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (6.25% at September 30, 2022). 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 September 30, 2022, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
During the nine months ended September 30, 2022, the Company borrowed $36,463 under the credit facility, which was fully repaid prior to September 30, 2022. The Company had no outstanding borrowings under the credit facility as of September 30, 2022 or 2021, and accordingly, the entire $50,000 credit facility was available for borrowings on such date.
12
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 COVID-19 and its variants. 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 in-country 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.
14
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 successfully, eliminating 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 customers’ individual 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.
COVID-19 Update / Recent Developments
The effects of the COVID-19 and its variants as well as the current economic and geopolitical conditions, such as persistent inflation and rising interest rates 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. As expected, cost inflation has been more significant in 2022 than in 2021, however, the impact of cost inflation has been effectively managed by pricing actions in the current year. As we were able to successfully manage our inflation, on a consolidated basis our gross profit increased by $64.3 million, or 19.0% for the nine months ended September 30, 2022 compared to the same period a year ago. However, there is no certainty that we will be able to do so in future periods. During the quarter, we saw improvement in the supply chain which resulted in a decrease in our backlog compared to the second quarter of 2022, although our backlog remains elevated compared to 2021. We continue to expect some supply chain challenges, will persist through at least the balance of the year into the first quarter of 2023. We continue to monitor the effects these issues are having 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.
15
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 (dollars in millions)
775.7
751.4
2,392.5
2,092.4
Gross margin
17.6
%
16.1
16.8
13.5
12.4
12.8
13.0
4.1
3.6
4.0
3.1
Net sales of $775.7 million for the third quarter of 2022 reflected an increase of $24.3 million, or 3.2% compared to the third quarter of 2021, which was primarily driven by a $24.9 million increase in software sales, recognized on a net basis. As shown in the table in Note 2, the $27.5 million decrease in notebooks/mobility products were offset by general increases in all other product categories excluding software when compared to the same quarter in 2021 resulting in the net increases in software as the primary driver for the increase in net sales. Gross profit increased year-over-year by $15.9 million, or 13.2%, to $136.6 million as illustrated in the table and discussion on page 17 in this Form 10-Q. Gross margin increased to 17.6% from 16.1%. This increase in gross margin is primarily driven by increased net sales of higher margin software and services which are recognized as revenue on a net basis. In addition, increased net sales in servers/storage and net/com products also contributed to the increase in gross margin. Selling, general and administrative expenses (“SG&A expenses”) increased year-over-year by $11.5 million, or 12.3%, to $104.9 million. The increase in SG&A was primarily driven by $9.8 million increase in personnel cost. The increased personnel cost was due to an increase in variable compensation as a result of higher levels of gross profit and an investment in incremental headcount focused on building our technical and sales organizations. SG&A as a percentage of net sales increased to 13.5% compared to 12.4% a year ago. The increase in SG&A as a percentage of net sales is primarily due to the shift in product mix toward software and services recognized on a net basis. Operating income in the third quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $4.4 million and 50 basis points, respectively, primarily as a result of the increase in gross profit.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Sales Segment
39
41
42
38
40
Product Mix
37
Net/Com Product
Displays and sound
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
15.8
14.7
14.9
14.8
20.0
19.4
19.8
19.3
16.3
12.7
14.4
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
($ in millions)
Personnel costs
80.4
70.5
231.3
205.6
Advertising
5.4
4.2
15.6
10.7
Service contracts/subscriptions
4.7
14.5
Professional fees
3.7
3.8
11.5
3.0
2.9
9.0
9.2
Facilities operations
2.3
2.1
6.6
6.4
Credit card fees
2.0
2.2
5.3
Other
3.4
3.5
11.3
9.1
Total SG&A expense
104.9
93.4
305.2
272.3
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 September 30, 2022
17
and the three months ended September 30, 2021; and changes between the nine months ended September 30, 2022 and the nine months ended September 30, 2021.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
% of
Change of
Net Sales
Net Sales:
305.5
39.4
309.7
41.2
(4.2)
(1.4)
315.8
40.7
281.4
37.5
34.4
12.2
154.4
19.9
160.3
21.3
(5.9)
(3.7)
100.0
24.3
3.2
Gross Profit:
48.2
45.7
2.5
5.7
63.3
54.7
8.6
15.7
25.1
20.3
4.8
23.3
136.6
120.7
15.9
13.2
Net sales increased in the third quarter of 2022 compared to the third quarter of 2021, as explained by the year-over-year changes discussed below:
Gross profit for the third quarter of 2022 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:
Page 17. Gross margin increased by 110 basis points primarily due to an increase in sales of higher margin software and services products recognized as revenue on a net basis. Additionally, gross margin benefited from increased sales of higher margin datacenter solutions including $3.3 million increase in net sales of servers/storage products compared to the same quarter of the prior year.
Selling, general and administrative expenses in the third quarter of 2022 increased in dollars as well as a percentage of net sales compared to the third 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
35.9
11.7
26.5
9.4
35.3
44.0
13.9
41.9
4.9
20.9
19.7
12.3
1.2
5.9
Headquarters/Other, unallocated
(1.2)
(20.4)
Income from operations for the third quarter of 2022 increased to $31.7 million, compared to $27.3 million for the third quarter of 2021, primarily related to higher sales of software and service products recognized as revenue on a net
basis. Income from operations as a percentage of net sales was 4.1% for the third quarter of 2022, compared to 3.6% for the prior year quarter, primarily driven by $15.9 million, or 13.2% increase in gross profit.
Income taxes. Our provision for income taxes in the third quarter of 2022 was $8.8 million, compared to $7.3 million for the third quarter of 2021, primarily due to the increases of operating income. Our effective tax rate was 27.6% for the quarter ended September 30, 2022, compared to 26.6% for the quarter ended September 30, 2021. The increase in our effective tax rate is attributable to $0.3 million R&D tax credits recognized in the prior year quarter.
Net income for the third quarter of 2022 increased to $23.2 million, compared to $20.0 million for the third quarter of 2021, primarily due to the $4.4 million, or 16.1% increase in operating income.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
989.8
41.4
882.2
42.2
107.6
964.6
40.3
795.0
38.0
169.6
438.1
18.3
415.2
22.9
5.5
300.1
14.3
147.7
130.1
190.9
153.4
24.5
63.2
54.0
17.0
401.8
337.5
64.3
19.0
Net sales increased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, as explained by the year-over-year changes discussed below:
Gross profit for the nine months ended September 30, 2022 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:
Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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):
105.6
78.0
8.8
27.6
35.5
128.7
13.3
123.8
3.9
59.0
58.2
14.0
0.8
1.3
11.9
(0.4)
32.9
12.1
Income from operations for the nine months ended September 30, 2022 increased to $96.6 million, compared to $65.2 million for the nine months ended September 30, 2021 primarily due to the increases in net sales and gross profit. Income from operations as a percentage of net sales increased to 4.0% for the nine months ended September 30, 2022, compared to 3.1% of net sales for the prior year, primarily due to the increase in net sales of $300.1 million and the decrease of 20 basis points in SG&A expenses as a percentage of net sales year-over-year.
Income taxes. Our provision for income taxes for the nine months ended September 30, 2022 was $26.6 million, compared to $17.7 million for the same period of 2021, primarily due to the increases of operating income. Our effective tax rate was 27.4% for the nine months ended September 30, 2022, which is relatively flat to 27.1% for the same period of 2021.
Net income for the nine months ended September 30, 2022 increased to $70.4 million, compared to $47.5 million for the nine months ended September 30, 2021, primarily due to higher net sales and gross profit, combined with lower operating expenses as a percentage of net sales, as compared to the same period of 2021.
22
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
Cash flows from operating, investing and financing activities for the nine months ended September 30, 2022 and 2021, as reflected in the unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Form 10-Q, are summarized in the following table (dollars in millions):
(7.0)
(5.5)
(0.8)
(9.2)
7.9
23
Cash provided by operating activities are summarized as follows (dollars in millions):
Change
70.4
47.5
Adjustments for the impact of non-cash items
1.7
Net income adjusted for the impact of non-cash items
86.1
61.5
24.6
(41.8)
22.4
(64.2)
(6.8)
(34.5)
27.7
(23.3)
(50.0)
26.7
1.5
(7.9)
6.9
Net cash provided by operating activities increased by $6.9 million to $15.7 million for the nine months ended September 30, 2022 from $8.8 million during the same period in 2021. Net income adjusted for non-cash charges accounted for $24.6 million of the increase in operating cash flow offset by $17.8 million related to the changes in current assets and current liabilities. For the nine-months ended September 30, 2022, our trade accounts receivable grew $50 million from September 30, 2021. This increase was the result of improved collections partially offset by increased customer billings. For the comparative nine months period ended September 30, 2021, trade accounts receivable decreased $11.8 million from December 31, 2020 as a result of collections from those customers offered extended payments terms due to the COVID-19 pandemic. Customer billings increased $400.0 million to $3.2 billion during the trailing 12-month period ended September 30, 2022 compared to $2.8 billion for the trailing 12-month ended September 30, 2021. While billings increased during these comparative periods, trade accounts receivable as a percentage of net sales fell 1.1% to 18.5% from 19.6% for the trailing 12-months ended on September 30, 2022 and September 30, 2021, respectively, due to improved collections over the comparable 12-month periods.
Additional drivers that impacted cash from operating activities were related to the timing of payments to vendors and inventory purchases. Inventory also grew $6.8 million during the nine months ended September 30, 2022 as a result of purchases in advance of large project rollouts. Accounts payable disbursements are dependent on the timing of inventory receipts which were more heavily weighted in the fourth quarter of 2021 than experienced during the nine months ended September 30, 2022.
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)
70
66
Days of supply in inventory (DIO)(2)
25
Days of purchases outstanding (DPO)(3)
(37)
(31)
Cash conversion cycle
60
(2) Represents the inventory balance at the end of the quarter divided by average daily cost of sales for the same three-month period.
(3) Represents the accounts payable balance at the end of the quarter divided by average daily cost of sales for the same three-month period.
The cash conversion cycle increased slightly to 63 days at September 30, 2022, compared to 60 days at September 30, 2021. The higher software net sales for the quarter ended September 30, 2022 have an unfavorable impact to DSO and a favorable impact to DPO as the corresponding receivables and payables reflect the gross amounts due from
24
customers and due to vendors while the corresponding sales and cost of sales are reflected on a net basis. As such, DSO increased 4 days and DPO increased 6 days as shown in the table above. The increase of DIO was driven by the increased in advanced inventory purchases due to anticipated future customer rollouts.
Cash used in investing activities for the nine months ended September 30, 2022 represents $7.0 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 $7.1 million in purchases of property and equipment.
Cash used in financing activities for the nine months ended September 30, 2022 consisted of $0.8 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.
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 September 30, 2022, our borrowing capacity under the credit facility was up to $50.0 million. Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (6.25% at September 30, 2022). 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 September 30, 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 September 30, 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.
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.
26
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 material changes related to our market risks have occurred 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 September 30, 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 September 30, 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
Amended and Restated Certificate of Incorporation of PC Connection, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s registration statement on Form S-4 (333-63272) filed on June 19, 2001).
Amended and Restated Bylaws of PC Connection, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K, filed on January 9, 2008).
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 September 30, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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:
November 4, 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)