Table of Contents
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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, 2023
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 April 27, 2023 was 26,277,597.
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, 2023 and December 31, 2022
1
Condensed Consolidated Statements of Income–Three Months Ended March 31, 2023 and 2022
2
Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2023 and 2022
3
Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2023 and 2022
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
Legal Proceedings
23
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits
24
SIGNATURES
25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
March 31,
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
$
134,810
122,930
Accounts receivable, net
621,844
610,280
Inventories, net
199,317
208,682
Prepaid expenses and other current assets
18,145
11,900
Total current assets
974,116
953,792
Property and equipment, net
58,372
59,171
Right-of-use assets
6,611
7,558
Goodwill
73,602
Intangibles, net
4,343
4,648
Other assets
1,013
1,055
Total Assets
1,118,057
1,099,826
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
239,058
232,638
Accrued payroll
24,304
24,071
Accrued expenses and other liabilities
54,947
53,808
Total current liabilities
318,309
310,517
Deferred income taxes
17,970
Noncurrent operating lease liabilities
4,623
4,994
Other liabilities
672
170
Total Liabilities
341,574
333,651
Stockholders’ Equity:
Common Stock
291
Additional paid-in capital
127,424
125,784
Retained earnings
698,128
686,037
Treasury stock, at cost
(49,360)
(45,937)
Total Stockholders’ Equity
776,483
766,175
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
727,545
788,344
Cost of sales
605,249
660,038
Gross profit
122,296
128,306
Selling, general and administrative expenses
103,282
98,172
Restructuring and other charges
897
—
Income from operations
18,117
30,134
Other income (expense), net
1,286
(3)
Income before taxes
19,403
30,131
Income tax provision
(5,205)
(8,339)
Net income
14,198
21,792
Earnings per common share:
Basic
0.54
0.83
Diluted
Shares used in computation of earnings per common share:
26,325
26,255
26,436
26,405
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2023
Additional
Retained
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Total
Balance - December 31, 2022
29,123
(2,773)
Stock-based compensation expense
1,853
Restricted stock units vested
10
Shares withheld for taxes paid on stock awards
(213)
Repurchase of common stock for treasury
(79)
(3,423)
Dividend declaration ($0.08 per share)
(2,107)
Balance - March 31, 2023
29,133
(2,852)
Three Months Ended March 31, 2022
Balance - December 31, 2021
29,025
290
122,354
605,766
682,473
1,382
9
(165)
Balance - March 31, 2022
29,034
123,571
627,558
705,482
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows provided by (used in) Operating Activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
3,073
2,991
Adjustments to credit losses reserve
(99)
567
Loss on disposal of fixed assets
474
Changes in assets and liabilities:
Accounts receivable
(11,465)
(27,177)
Inventories
9,365
(28,046)
(6,245)
(4,572)
Other non-current assets
42
32
5,859
(10,494)
2,450
5,230
Net cash provided by (used in) operating activities
19,505
(38,285)
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
(1,882)
(2,451)
Net cash used in investing activities
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
59,310
1,385
Repayment of short-term borrowings
(59,310)
(1,385)
Purchase of common stock for treasury shares
Dividend payments
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(5,743)
Increase (decrease) in cash and cash equivalents
11,880
(40,901)
Cash and cash equivalents, beginning of year
108,310
Cash and cash equivalents, end of period
67,409
Non-cash Investing and Financing Activities:
Accrued capital expenditures
753
266
Supplemental Cash Flow Information:
Income taxes paid
7,279
287
Interest paid
17
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, or the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America, or 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, 2022, 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, 2022.
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, 2023 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2023.
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.
Restructuring and Other Charges
The restructuring and other charges recorded in the first quarter of 2023 were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses as of March 31, 2023.
Restructuring and other charges are presented separately from selling, general and administrative expenses. Costs incurred were as follows (in thousands):
Three Months Ended March 31,
Employee separations
698
Other charges
199
Total restructuring and other charges
Included in accrued expenses and other liabilities as of March 31, 2023 was $308 related to unpaid termination benefits.
Recently Issued Financial Accounting Standards
In March 2020, the Financial Accounting Standards Board 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, or 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 amendments are effective as of March 12, 2020 through December 31, 2022; however, ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 has extended the effective date through December 31, 2024. 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, 2023 and 2022, along with the segment for each category (in thousands).
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
94,919
114,318
51,774
261,011
Desktops
18,762
30,142
14,417
63,321
Software
34,576
39,234
9,917
83,727
Servers/Storage
24,291
12,507
9,987
46,785
Net/Com Products
28,304
20,532
13,320
62,156
Displays and Sound
22,813
26,720
13,202
62,735
Accessories
28,735
47,594
13,473
89,802
Other Hardware/Services
20,714
22,896
14,398
58,008
Total net sales
273,114
313,943
140,488
130,434
121,339
56,850
308,623
23,559
44,864
17,988
86,411
34,908
21,010
5,269
61,187
22,164
15,371
9,630
47,165
22,627
22,191
8,027
52,845
32,824
37,079
13,423
83,326
32,241
48,007
12,932
93,180
21,687
25,535
8,385
55,607
320,444
335,396
132,504
6
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of March 31, 2023 and December 31, 2022 (in thousands).
March 31, 2023
December 31, 2022
Contract liabilities, which are included in "Accrued expenses and other liabilities"
7,534
4,266
Changes in the contract liability balances during the three months ended March 31, 2023 and 2022 are as follows (in thousands):
Balance at December 31, 2022
Cash received in advance and not recognized as revenue
7,656
Amounts recognized as revenue as performance obligations satisfied
(4,388)
Balance at March 31, 2023
Balance at December 31, 2021
8,628
3,870
(5,455)
Balance at March 31, 2022
7,043
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 (in thousands, except per share data):
Numerator:
Denominator:
Denominator for basic earnings per share
Dilutive effect of employee stock awards
111
150
Denominator for diluted earnings per share
Earnings per share:
For the three months ended March 31, 2023 and 2022, 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, or ROU, asset as of March 31, 2023 was $826 and a corresponding lease liability of $826 associated with related party leases.
7
As of March 31, 2023, 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, 2023 and 2022 (dollars in thousands):
Related Parties
Others
Lease Cost
Capitalized operating lease cost
313
709
1,022
Short-term lease cost
107
128
Total lease cost
420
730
1,150
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
643
956
687
1,000
Weighted-average remaining lease term (in years):
Capitalized operating leases
0.67
3.81
3.45
1.67
4.34
3.79
Weighted-average discount rate:
3.92%
4.06%
4.04%
3.91%
As of March 31, 2023, future lease payments over the remaining term of capitalized operating leases were as follows (in thousands):
For the Years Ended December 31,
2023, excluding the three months ended March 31, 2023
958
1,495
2,453
2024
163
1,697
1,860
2025
1,635
1,798
2026
952
1,115
2027
232
233
Thereafter
340
1,448
6,351
7,799
Imputed interest
(516)
Lease liability balance at March 31, 2023
7,283
As of March 31, 2023, the ROU asset had a balance of $6,611. The long-term lease liability was $4,623 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $2,660. 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.
Note 5–Segment Information
The internal reporting structure used by the Company’s chief operating decision maker, or CODM, to assess performance and allocate resources determines the basis for the Company’s 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 segments—the Business Solutions segment, which serves primarily small- to 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 government and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human
8
resources, information technology, or IT, 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.
Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the three months ended March 31, 2023 and 2022 is shown below (in thousands):
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
16,553
20,673
6,522
14,314
29
(1,126)
Headquarters/Other
(4,987)
(3,727)
Total operating income
Selected operating expense:
Depreciation and amortization:
159
167
424
534
19
20
2,471
2,270
Total depreciation and amortization
Total assets:
467,444
426,103
661,670
651,905
104,880
94,540
(115,937)
(71,729)
Total assets
1,100,819
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 March 31, 2023 and 2022, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $60,176 and $50,234, respectively. The Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade its 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 the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on the Company’s funded debt ratio, or in the absence of LIBOR, the prime rate (8.00% at March 31, 2023). 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, or 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, 2023, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
During the three months ended March 31, 2023, the Company borrowed $59,310 under the credit facility, which was fully repaid prior to March 31, 2023. The Company had no outstanding borrowings under the credit facility as of March 31, 2023 or 2022, and accordingly, the entire $50,000 credit facility was available for borrowings on such date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “would,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “anticipates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.
Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including
Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.
Unless the context otherwise requires, we use the terms “Connection”, the “Company”, “we”, “us”, and “our” in this Quarterly Report on Form 10-Q to refer to PC Connection, Inc. and its subsidiaries.
OVERVIEW
We are a Fortune 1000 Global Solutions Provider that simplifies the IT customer 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 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, 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.
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 case successfully, eliminate our role. We believe that the success of these direct sales efforts by manufacturers will depend on their ability to meet our customers’ ongoing demands and provide solutions to meet their needs. We believe more of our customers are seeking out comprehensive and integrated IT solutions, rather than the ability to acquire specific IT products on a one-off basis. 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 gross margin improvements in this competitive environment.
The primary challenges we continue to face in effectively managing our business are (1) increasing our product and service revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general and administrative, or SG&A, expenses while making investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we are investing in our IT solutions business, which requires the addition of highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add additional 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
12
functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
Net sales (dollars in millions)
727.5
788.3
Gross margin
16.8
%
16.3
14.2
12.5
2.5
3.8
Net sales of $727.5 million for the first quarter of 2023 reflected a decrease of $60.8 million, or 7.7% compared to the first quarter of 2022. The decrease was primarily driven by decreases in sales of notebooks/mobility, desktops, and displays and sound of $47.6 million, $23.1 million, and $20.6 million, respectively, as shown in the table in Note 2. These decreases were partially offset by increases in sales of software and net/com products of $22.5 million and $9.3 million, respectively. Gross profit decreased year-over-year by $6.0 million, or 4.7%, to $122.3 million as illustrated in the table and discussion beginning on page 15 of this Form 10-Q. Gross margin increased to 16.8% from 16.3% a year ago. The increase in gross margin was primarily driven by increased net sales of higher margin software, security, and networking solutions. SG&A expenses increased year-over-year by $5.1 million, or 5.2%, to $103.3 million. The increase in SG&A expenses was primarily driven by a $5.1 million increase in personnel cost related to investments in resources to strengthen our sales, technical sales, IT, and services organizations. SG&A expenses as a percentage of net sales increased to 14.2% compared to 12.5% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to the decrease in net sales, as discussed above. Operating income in the first quarter of 2023 decreased year-over-year both in dollars and as a percentage of net sales by $12.0 million and 130 basis points, respectively, primarily as a result of the decrease in gross profit combined with the increase in SG&A expenses.
13
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Operating Segment
43
38
41
100
Product Mix
36
39
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
13.4
14.6
21.9
19.4
14.5
13.1
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
($ in millions)
Personnel costs
79.2
74.1
Advertising
6.6
4.6
Service contracts/subscriptions
5.2
4.9
Professional fees
3.9
3.1
3.0
Facilities operations
2.2
2.1
Credit card fees
1.5
1.7
Other
Total SG&A expense
103.3
98.2
As a percentage of net sales
In the first quarter of 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other charges of $0.9 million in the first quarter of 2023, which were primarily related to an
14
involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses and other liabilities as of March 31, 2023. There were no restructuring and other charges recorded in the first quarter of 2022. The Company is currently evaluating additional restructuring activities for the second quarter of 2023 and beyond.
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, 2023 and the three months ended March 31, 2022.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
% of
Net Sales
Change
Net Sales:
313.9
43.2
335.4
42.5
(21.5)
(6.4)
273.1
37.5
320.4
40.6
(47.3)
(14.8)
140.5
19.3
132.5
16.9
8.0
6.0
100.0
(60.8)
(7.7)
Gross Profit:
42.1
48.9
(6.8)
(13.9)
59.9
62.1
(2.2)
(3.6)
20.3
17.3
17.5
122.3
128.3
(6.0)
(4.7)
Net sales decreased in the first quarter of 2023 compared to the first quarter of 2022, as explained by the year-over-year changes discussed below:
Gross profit for the first quarter of 2023 decreased year-over-year, while gross margin for the first quarter of 2023 increased year-over-year, as explained by the year-over-year changes discussed below:
15
Selling, general and administrative expenses in the first quarter of 2023 increased in dollars as well as a percentage of net sales compared to the first quarter of 2022. 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
35.5
11.3
34.6
10.3
0.9
2.9
43.4
15.9
41.5
13.0
1.9
14.4
18.4
13.9
10.1
Headquarters/Other, unallocated
4.1
3.7
0.4
9.8
5.1
16
Restructuring and other charges incurred in the first quarter of 2023 were $0.9 million, which were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. There were no such charges incurred in the first quarter of 2022.
Income from operations for the first quarter of 2023 decreased to $18.1 million, compared to $30.1 million for the first quarter of 2022, primarily due to a decrease in gross profit combined with an increase in SG&A expenses. Income from operations as a percentage of net sales was 2.5% for the first quarter of 2023, compared to 3.8% for the prior year quarter, primarily due to a 4.7% decrease in gross profit combined with a 5.2% increase in SG&A expenses.
Income taxes. Our provision for income taxes in the first quarter of 2023 was $5.2 million, compared to $8.3 million for the first quarter of 2022, primarily due to the decrease in operating income. Our effective tax rate was 26.8% for the quarter ended March 31, 2023, compared to 27.7% for the quarter ended March 31, 2022. The decrease in our effective tax rate is primarily attributable to changes in state apportionment factors.
Net income for the first quarter of 2023 decreased to $14.2 million, compared to $21.8 million for the first quarter of 2022, primarily due to the $12.0 million, or 39.9%, decrease in operating income.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have historically used and expect to use in the future 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, repurchases of common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.
We believe that funds generated from operations, together with available credit under our bank line of credit, will be sufficient to finance our working capital, capital expenditures, and other requirements for the next twelve calendar months. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.
We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our bank line of credit, as follows:
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.
Dividends
A summary of 2023 dividend activity for our common stock is as follows:
Dividend Amount
Declaration Date
Record Date
Payment Date
0.08
February 9, 2023
February 21, 2023
March 10, 2023
On May 4, 2023, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.08 per share. The dividend will be paid on June 2, 2023 to all stockholders of record as of the close of business on May 16, 2023. The declaration and payment of any future dividends is at the discretion of our Board of Directors and will depend upon our financial position, strategic plans, general business conditions and any other factors deemed relevant by our Board of Directors.
Summary of Sources and Uses of Cash
Cash flows from operating, investing and financing activities for the three months ended March 31, 2023 and 2022, 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):
19.5
(38.3)
(1.9)
(2.5)
(5.7)
(0.2)
11.9
(41.0)
Cash provided by operating activities was $19.5 million for the three months ended March 31, 2023. Cash provided by operating activities resulted primarily from $14.2 million of net income and $5.3 million of other non-cash items added back to net income, including $3.1 million of depreciation and amortization and $1.9 million of stock-based compensation expense. A decrease in inventory of $9.4 million and increases in accounts payable and accrued expenses and other liabilities of $5.9 million and $2.5 million, respectively, also contributed to the positive inflow of cash. These inflows were partially offset by increases in accounts receivable and prepaid expenses and other current assets of $11.5 million and $6.2 million, respectively. The decrease in inventory was primarily due to a decrease in the amount of inventory we purchased during the first quarter of 2023. The increases in accounts payable and accounts receivable were primarily driven by the timing of payments and receipts, respectively. For the three months ended March 31, 2022, cash used in operating activities resulted primarily from a $28.0 million increase in inventory, a $27.2 million increase in accounts receivable, and a $10.5 million decrease in accounts payable. These cash outflows were partially offset by net income of $21.8 million, non-cash items added back to net income of $5.0 million, and an increase in accrued expenses and other liabilities of $5.3 million.
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)
71
69
Days of supply in inventory (DIO)(2)
30
Days of purchases outstanding (DPO)(3)
(36)
(37)
Cash conversion cycle
65
64
18
The cash conversion cycle increased slightly to 65 days at March 31, 2023, compared to 64 days at March 31, 2022. The increase in DSO is primarily a function of netted products recorded in accounts receivable on a gross basis, while the revenue is recorded on a net basis. The decrease in DIO is consistent with the decrease in inventory for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022. The decrease in DPO is consistent with the decrease in accounts payable for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022.
Cash used in investing activities for the three months ended March 31, 2023 represents $1.9 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 period, we made similar investments of $2.5 million in purchases of property and equipment.
Cash used in financing activities for the three months ended March 31, 2023 consisted of $59.3 million of borrowings and repayments, $3.4 million of treasury purchases, a $2.1 million payment of a special $0.08 per share dividend, and $0.2 million payment of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily consisted of $0.2 million payment of payroll taxes on stock-based compensation through shares withheld.
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.
Bank Line of Credit. Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable. As of March 31, 2023, our borrowing capacity under the bank line of credit was up to $50.0 million. Amounts outstanding under this facility bear interest at the greatest of (i) the prime rate (8.00% at March 31, 2023), (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 rate shall at no time be less than 0% per annum. In addition, we have the ability to increase our borrowing capacity under the bank line of credit by an additional $30.0 million provided that 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 borrowings outstanding under the credit facility as of March 31, 2023.
Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the line of credit are classified as current. As of March 31, 2023, the entire $50.0 million facility was available for borrowing.
Operating Leases. We lease facilities from a related party, which is a company affiliated with us through common ownership, and facilities from third parties under non-cancelable operating leases. Certain leases require us to pay real estate taxes, insurance, and common area maintenance charges.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to manage costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.
Bank line of Credit. Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable. As of March 31, 2023, the entire $50.0 million facility was available for borrowing. 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 would constitute a default and could prevent us from borrowing additional funds under this line of credit. This line of credit 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 IT 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, 2022.
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, 2022. No material changes related to our market risks have occurred since December 31, 2022.
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, 2023. 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, 2023 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, 2022, 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, 2022, incorporated by reference herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases under our stock repurchase program are made from time to time at management’s discretion in accordance with applicable federal securities laws. All repurchases of our common stock have been recorded as treasury stock. The following table summarizes information relating to purchases of common stock made by or on our behalf during the quarter ended March 31, 2023 (dollars in thousands, except per share data):
Issuer Purchases of Equity Securities
Total Number of
Approximate Dollar Value
Shares Purchased as
of Shares that May Yet Be
Total Number
Part of Publicly
Purchased Under the Plans
of Shares
Average Price Paid
Announced Plans or
or Programs
Period
Purchased
Per Share
Programs (1)
(in thousands) (1)(2)
01/01/23-01/31/23
37,692
02/01/23-02/28/23
52,902
43.02
35,416
03/01/23-03/31/23
26,295
43.63
34,269
79,197
43.22
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).
3.2
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).
*
Director Compensation and Executive Bonus Plan, 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.
31.2
Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Company’s President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
**
Inline XBRL Instance Document* - The Instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
* Filed herewith.
** Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 2023 and 2022, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022, 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 4, 2023
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)