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, 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 October 25, 2023 was 26,271,521.
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, 2023 and December 31, 2022
1
Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2023 and 2022
2
Condensed Consolidated Statements of Other Comprehensive Income–Three and Nine Months Ended September 30, 2023 and 2022
3
Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2023 and 2022
4
Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2023 and 2022
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
28
ITEM 4.
Controls and Procedures
29
PART II OTHER INFORMATION
Legal Proceedings
30
ITEM 1A.
Risk Factors
ITEM 5.
Other Information
ITEM 6.
Exhibits
31
SIGNATURES
32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
September 30,
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
$
240,509
122,930
Short-term investments
48,894
—
Accounts receivable, net
587,597
610,280
Inventories, net
142,243
208,682
Income taxes receivable
7,388
Prepaid expenses and other current assets
14,068
11,900
Total current assets
1,040,699
953,792
Property and equipment, net
57,638
59,171
Right-of-use assets
4,934
7,558
Goodwill
73,602
Intangibles, net
3,733
4,648
Other assets
821
1,055
Total Assets
1,181,427
1,099,826
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
264,502
232,638
Accrued payroll
26,363
24,071
Accrued expenses and other liabilities
49,098
53,808
Total current liabilities
339,963
310,517
Deferred income taxes
18,011
17,970
Noncurrent operating lease liabilities
3,638
4,994
Other liabilities
654
170
Total Liabilities
362,266
333,651
Stockholders’ Equity:
Common Stock
292
291
Additional paid-in capital
130,875
125,784
Retained earnings
739,223
686,037
Accumulated other comprehensive income
154
Treasury stock, at cost
(51,383)
(45,937)
Total Stockholders’ Equity
819,161
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
Nine Months Ended
Net sales
693,086
775,692
2,154,178
2,392,545
Cost of sales
561,198
639,066
1,772,217
1,990,712
Gross profit
131,888
136,626
381,961
401,833
Selling, general and administrative expenses
99,822
104,887
304,064
305,189
Restructuring and other charges
44
2,687
Income from operations
32,022
31,739
75,210
96,644
Other income, net
2,688
308
5,848
319
Income before taxes
34,710
32,047
81,058
96,963
Income tax provision
(9,112)
(8,841)
(21,565)
(26,567)
Net income
25,598
23,206
59,493
70,396
Earnings per common share:
Basic
0.97
0.88
2.26
2.68
Diluted
2.25
2.66
Shares used in computation of earnings per common share:
26,262
26,279
26,281
26,267
26,434
26,455
26,406
26,432
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Other comprehensive income:
Unrealized gains on available-for-sale investments, net of tax of $(41)
Comprehensive income
25,752
59,647
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2023
Additional
Retained
Accumulated Other
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Comprehensive Income
Total
Balance - June 30, 2023
29,158
129,486
715,726
(2,902)
794,120
Stock-based compensation expense
1,789
Restricted stock units vested
16
(1)
Shares withheld for taxes paid on stock awards
(399)
Dividend declaration ($0.08 per share)
(2,101)
Other comprehensive income, net of tax
Balance - September 30, 2023
29,174
Nine Months Ended September 30, 2023
Balance - December 31, 2022
29,123
(2,773)
5,425
38
(870)
Repurchase of common stock for treasury
(129)
(5,446)
Issuance of common stock under Employee Stock Purchase Plan
13
537
(6,307)
Three Months Ended September 30, 2022
Balance - June 30, 2022
29,045
290
124,690
652,956
731,999
1,282
(380)
Balance - September 30, 2022
29,061
125,591
676,162
756,107
Nine Months Ended September 30, 2022
Balance - December 31, 2021
29,025
122,354
605,766
682,473
4,072
36
(834)
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
9,456
9,000
Adjustments to credit losses reserve
1,814
2,658
Loss on disposal of fixed assets
563
Changes in assets and liabilities:
Accounts receivable
20,869
(41,782)
Inventories
66,439
(6,761)
Prepaid expenses, income tax receivable, and other current assets
(9,556)
(79)
Other non-current assets
234
31,648
(23,268)
(720)
1,432
Net cash provided by operating activities
185,665
15,689
Cash Flows used in Investing Activities:
Purchases of short-term investments
(48,699)
Purchases of property and equipment
(7,355)
(6,975)
Net cash used in investing activities
(56,054)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
70,877
36,463
Repayment of short-term borrowings
(70,877)
(36,463)
Purchase of common stock for treasury shares
(5,392)
Dividend payments
Issuance of stock under Employee Stock Purchase Plan
Payment of payroll taxes on stock-based compensation through shares withheld
Net cash used in financing activities
(12,032)
Increase in cash and cash equivalents
117,579
7,880
Cash and cash equivalents, beginning of year
108,310
Cash and cash equivalents, end of period
116,190
Non-cash Investing and Financing Activities:
Accrued purchases of property and equipment
408
362
Accrued excise tax on treasury purchases
54
Supplemental Cash Flow Information:
Income taxes paid
34,251
30,759
Interest paid
19
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 unaudited 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 and nine months ended September 30, 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.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original maturities of 90 days or less to be cash equivalents. The carrying value of the Company’s cash equivalents approximates fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Investments
At the time of purchase, the Company determines the appropriate classification of investments based upon its intent with regard to such investments. All of the Company’s investments are classified as available-for-sale. The Company classifies investments as short-term when their remaining contractual maturities are one year or less from the balance sheet date, and as long-term when the investment has a remaining contractual maturity of more than one year from the balance sheet date. The Company records investments at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income.
Treasury Stock, at Cost
The total repurchases for the nine months ended September 30, 2023 were recorded as treasury stock of $5,446. Such cost reflects the applicable one percent excise tax imposed by the Inflation Reduction Act of 2022 on the net value of certain stock repurchases made after December 31, 2022.
Restructuring and Other Charges
The restructuring and other charges recorded for the three and nine months ended September 30, 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 and other liabilities in the consolidated balance sheets as of September 30, 2023. The Company is currently evaluating additional restructuring activities for the fourth quarter of 2023 and beyond.
Restructuring and other charges are presented separately from selling, general and administrative expenses. Costs incurred were as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Employee separations
17
2,416
Other charges
27
271
Total restructuring and other charges
Included in accrued expenses and other liabilities as of September 30, 2023 was $772 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 adopted this standard in the second quarter of 2023. The adoption of this ASU along with the related expedients did not have a material impact on the Company’s condensed 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, 2023 and 2022, along with the segment for each category (in thousands).
BusinessSolutions
EnterpriseSolutions
Public SectorSolutions
Notebooks/Mobility
82,777
91,643
46,898
221,318
Desktops
17,695
32,822
16,281
66,798
Software
34,863
13,287
77,308
Servers/Storage
25,863
13,153
11,307
50,323
Net/Com Products
38,672
25,699
17,964
82,335
Displays and Sound
24,299
26,175
20,367
70,841
Accessories
26,335
32,501
12,590
71,426
Other Hardware/Services
18,517
25,415
8,805
52,737
Total net sales
269,021
276,566
147,499
7
120,689
95,017
60,960
276,666
21,151
37,045
13,113
71,309
36,965
36,996
12,186
86,147
27,016
15,857
12,213
55,086
27,732
19,625
8,189
55,546
28,377
30,011
20,633
79,021
33,007
46,051
17,808
96,866
20,879
24,908
9,264
55,051
315,816
305,510
154,366
The following tables represent a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2023 and 2022, along with the segment for each category (in thousands).
265,777
293,551
172,903
732,231
55,468
96,536
48,669
200,673
103,267
85,953
36,263
225,483
72,759
44,365
33,253
150,377
95,560
74,958
53,517
224,035
70,766
80,217
50,354
201,337
81,576
121,190
42,551
245,317
57,989
80,892
35,844
174,725
803,162
877,662
473,354
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
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of September 30, 2023 and December 31, 2022 (in thousands).
September 30, 2023
December 31, 2022
Contract liabilities, which are included in "Accrued expenses and other liabilities"
3,826
4,266
8
Changes in the contract liability balances during the nine months ended September 30, 2023 and 2022 are as follows (in thousands):
Balance at December 31, 2022
Cash received in advance and not recognized as revenue
15,207
Amounts recognized as revenue as performance obligations satisfied
(15,647)
Balance at September 30, 2023
Balance at December 31, 2021
8,628
18,943
(22,544)
Balance at September 30, 2022
5,027
Note 3–Fair Value Measurements
Cash equivalents and short-term investments consist of the following (in thousands):
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Cash and cash equivalents:
Money market funds
167,852
U.S. Government treasury securities
49,368
Short-term investments:
48,699
195
265,919
266,114
96,386
Investments with maturities of 90 days or less from the date of purchase are classified as cash equivalents; investments with maturities of greater than 90 days from the date of purchase but less than one year are generally classified as short-term investments; and investments with maturities of one year or greater from the date of purchase are generally classified as long-term investments. All short-term investments had stated maturity dates of less than one year. The Company has recorded the securities at fair value in its condensed consolidated balance sheets and unrealized gains and losses are reported as a component of accumulated other comprehensive income. The amount of realized gains and losses reclassified into earnings and the related adjustments to deferred taxes are based on the specific identification of the securities sold or securities that reached maturity date.
The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques are classified based on a three-level hierarchy, as follows:
9
As of September 30, 2023 and December 31, 2022, the fair value of the Company’s investments were all measured using level 1 inputs.
Note 4–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
172
176
125
165
Denominator for diluted earnings per share
Earnings per share:
For the three and nine months ended September 30, 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.
Note 5–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 September 30, 2023 was $209 and a corresponding lease liability of $209 associated with related party leases.
10
As of September 30, 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 and nine months ended September 30, 2023 and 2022 (dollars in thousands):
Related Parties
Others
Lease Cost
Capitalized operating lease cost
313
500
813
940
1,799
2,739
Short-term lease cost
107
161
268
321
297
618
Total lease cost
420
661
1,081
1,261
2,096
3,357
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
542
855
1,787
2,727
Weighted-average remaining lease term (in years):
Capitalized operating leases
0.17
3.15
3.04
Weighted-average discount rate:
3.92%
4.07%
4.05%
693
1,006
2,112
3,052
58
100
421
751
1,171
2,212
3,473
713
1,026
2,147
3,087
1.17
4.26
3.78
4.03%
4.02%
11
As of September 30, 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 nine months ended September 30, 2023
315
373
688
2024
163
1,723
1,886
2025
1,650
1,813
2026
957
1,120
2027
236
237
Thereafter
805
5,100
5,905
Imputed interest
(355)
Lease liability balance at September 30, 2023
5,550
As of September 30, 2023, the ROU asset had a balance of $4,934. The long-term lease liability was $3,638 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $1,912. 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.
Note 6–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 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.
12
Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the three and nine months ended September 30, 2023 and 2022 is shown below (in thousands):
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Operating income (loss):
21,040
19,278
56,424
62,230
11,230
12,401
25,263
42,103
4,117
4,211
5,796
4,156
Headquarters/Other
(4,365)
(4,151)
(12,273)
(11,845)
Total operating income
Selected operating expense:
Depreciation and amortization:
156
167
473
502
391
482
1,238
1,517
22
20
61
59
2,720
2,351
7,684
6,922
Total depreciation and amortization
3,289
3,020
Total assets:
481,483
451,872
676,694
647,592
110,919
113,820
(87,669)
(79,159)
Total assets
1,134,125
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, 2023 and 2022, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $58,864 and $62,154, 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 7–Commitments and Contingencies
The Company is subject to various legal proceedings and claims, which have arisen during the ordinary course of business. The outcomes of such matters are 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 8–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 daily Bloomberg Short-Term Bank Yield Index, or BSBY Rate, plus a spread based on the Company’s funded debt ratio, or in the absence of BSBY Rate, the prime rate (8.50% at September 30, 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 September 30, 2023, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
Cash receipts are automatically applied against any outstanding borrowings. During the nine months ended September 30, 2023, the Company borrowed incremental amounts that were each repaid in full. These borrowings for the nine months ended September 30, 2023 totaled $70,877; however, at no time were the outstanding borrowings greater than the $50,000 limit under the credit facility. The Company had no outstanding borrowings under the credit facility as of September 30, 2023 or 2022, and accordingly, the entire $50,000 credit facility was available for borrowings on such date.
14
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 our 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
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 (dollars in millions):
693.1
775.7
2,154.2
2,392.5
Gross margin
19.0
%
17.6
17.7
16.8
14.4
13.5
14.1
12.8
4.6
4.1
3.5
4.0
Net sales of $693.1 million for the third quarter of 2023 reflected a decrease of $82.6 million, or 10.6% compared to the third quarter of 2022. The decrease was primarily driven by decreases in sales of notebooks/mobility, accessories, software, displays and sound, servers/storage, and desktops of $55.3 million, $25.4 million, $8.8 million, $8.2 million, $4.8 million, and $4.5 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to our Unaudited Condensed Consolidated Financial Statements. These decreases were partially offset by an increase in sales of net/com products of $26.8 million. Gross profit for the third quarter of 2023 decreased year-over-year by $4.7 million, or 3.5%, to $131.9 million as illustrated in the table and discussion beginning on page 19 of this Quarterly Report on Form 10-Q. Gross margin increased to 19.0% from 17.6% a year ago. The increase in gross margin was primarily driven by increased net sales of higher margin products, such as software and net/com products, relative to lower margin products, such as notebooks/mobility and desktops. SG&A expenses decreased year-over-year by $5.1 million, or 4.8%, to $99.8 million. The decrease in SG&A expenses was primarily driven by decreases in personnel costs, professional fees, and advertising of $2.9 million, $1.1 million, and $0.8 million, respectively. SG&A expenses as a percentage of net sales increased to 14.4% compared to 13.5% 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 for the third quarter of 2023 increased year-over-year both in dollars and as a percentage of net sales by $0.3 million and 50 basis points, respectively, primarily as a result of the decrease in SG&A expenses discussed above.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Operating Segment
40
39
41
42
37
21
18
Product Mix
34
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
16.0
15.8
14.7
14.9
23.3
20.0
22.9
19.8
16.9
16.3
14.5
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated (dollars in millions):
Personnel costs
77.5
80.4
233.5
231.3
Advertising
5.4
16.5
15.6
Service contracts/subscriptions
5.1
4.7
15.5
Professional fees
2.6
3.7
9.3
11.5
3.3
3.0
9.5
9.0
Facilities operations
2.0
2.3
6.2
6.6
Credit card fees
2.1
5.3
Other
3.4
8.3
11.3
Total SG&A expense
99.8
104.9
304.1
305.2
As a percentage of net sales
In the first nine months of 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other charges for the three and nine months ended September 30, 2023 of less
than $0.1 million and $2.7 million, respectively. These restructuring charges 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 and other liabilities as of September 30, 2023. There were no restructuring and other charges recorded for the three and nine months ended September 30, 2022. The Company is currently evaluating additional restructuring activities for the fourth 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 September 30, 2023 and the three months ended September 30, 2022; and changes between the nine months ended September 30, 2023 and the nine months ended September 30, 2022.
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 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:
276.6
39.9
305.5
39.4
(28.9)
(9.5)
269.0
38.8
315.8
40.7
(46.8)
(14.8)
147.5
21.3
154.4
19.9
(6.9)
(4.4)
100.0
(82.6)
(10.6)
Gross Profit:
44.2
48.2
(4.0)
(8.3)
62.7
63.3
(0.6)
(1.0)
25.0
25.1
(0.1)
(0.5)
131.9
136.6
(4.7)
(3.5)
Net sales decreased for the third quarter of 2023 compared to the third quarter of 2022, as explained by the year-over-year changes discussed below:
Gross profit for the third quarter of 2023 decreased year-over-year, while gross margin for the third quarter of 2023 increased year-over-year, as explained by the year-over-year changes discussed below:
Selling, general and administrative expenses for the third quarter of 2023 decreased in dollars but increased as a percentage of net sales compared to the third 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
33.0
11.9
35.9
11.7
(2.9)
(7.9)
41.6
44.0
13.9
(2.4)
(5.4)
20.9
Headquarters/Other, unallocated
4.3
0.2
(5.1)
(4.8)
Restructuring and other charges for the third quarter of 2023 were less than $0.1 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 for the third quarter of 2022.
Income from operations for the third quarter of 2023 increased to $32.0 million, compared to $31.7 million for the third quarter of 2022, primarily due to a decrease in SG&A expenses. Income from operations as a percentage of net sales was 4.6% for the third quarter of 2023, compared to 4.1% for the prior year quarter, primarily due to a 4.8% decrease in SG&A expenses.
Other income, net for the third quarter of 2023 increased to $2.7 million, compared to $0.3 million for the third quarter of 2022, primarily due to an increase in interest income resulting from higher cash balances and interest rates.
Income taxes. Our provision for income taxes for the third quarter of 2023 was $9.1 million, compared to $8.8 million for the third quarter of 2022, primarily due to the increase in other income, net. Our effective tax rate was 26.3% for the quarter ended September 30, 2023, compared to 27.6% for the quarter ended September 30, 2022.
Net income for the third quarter of 2023 increased to $25.6 million, compared to $23.2 million for the third quarter of 2022, primarily due to the $2.4 million increase in other income, net.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
877.7
989.8
41.4
(112.1)
(11.3)
803.2
37.3
964.6
40.3
(161.4)
(16.7)
473.3
22.0
438.1
18.3
35.2
8.1
(238.3)
(10.0)
129.3
147.7
(18.4)
(12.5)
183.9
190.9
(7.0)
(3.7)
68.8
63.2
5.6
8.8
382.0
401.8
(19.8)
(4.9)
Net sales decreased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, as explained by the year-over-year changes discussed below:
Gross profit for the nine months ended September 30, 2023 decreased year-over-year, while gross margin for the nine months ended September 30, 2023 increased year-over-year, as explained by the year-over-year changes discussed below:
Selling, general and administrative expenses for the nine months ended September 30, 2023 decreased in dollars but increased as a percentage of net sales compared to the nine months ended September 30, 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):
102.9
105.6
10.7
(2.7)
(2.6)
127.5
15.9
128.7
13.3
(1.2)
(0.9)
62.9
59.0
3.9
6.5
10.8
(1.1)
(9.0)
(0.4)
Restructuring and other charges for the nine months ended September 30, 2023 were $2.7 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 for the nine months ended September 30, 2022.
Income from operations for the nine months ended September 30, 2023 decreased to $75.2 million, compared to $96.6 million for the nine months ended September 30, 2022, primarily due to a decrease in gross profit. Income from operations as a percentage of net sales was 3.5% for the nine months ended September 30, 2023, compared to 4.0% for the nine months ended September 30, 2022, primarily due to a 4.9% decrease in gross profit.
Other income, net for the nine months ended September 30, 2023 increased to $5.8 million, compared to $0.3 million for the nine months ended September 30, 2022, primarily due to an increase in interest income resulting from higher cash balances and interest rates.
Income taxes. Our provision for income taxes for the nine months ended September 30, 2023 was $21.6 million, compared to $26.6 million for the nine months ended September 30, 2022, primarily due to the decrease in operating income. Our effective tax rate was 26.6% for the nine months ended September 30, 2023, compared to 27.4% for the nine months ended September 30, 2022.
Net income for the nine months ended September 30, 2023 decreased to $59.5 million, compared to $70.4 million for the nine months ended September 30, 2022, primarily due to the $21.4 million, or 22.2%, decrease in operating income.
Liquidity and Capital Resources
Our primary sources of liquidity are internally generated funds from operations, short-term investments, and borrowings under our credit facility. 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 our common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.
We believe that funds generated from operations, short-term investments, and the available credit under our credit facility will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next
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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 and beyond through a combination of cash on hand, short-term investments, 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.
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
May 4, 2023
May 16, 2023
June 2, 2023
August 2, 2023
August 15, 2023
September 1, 2023
On November 1, 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 December 1, 2023 to all stockholders of record as of the close of business on November 14, 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 nine months ended September 30, 2023 and 2022, as reflected in our Unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Quarterly Report on Form 10-Q, are summarized in the following table (in millions):
185.7
15.7
(56.1)
(12.0)
(0.8)
117.6
7.9
Cash provided by operating activities was $185.7 million for the nine months ended September 30, 2023. Cash provided by operating activities resulted primarily from $59.5 million of net income and a $66.4 million decrease in
24
inventory. An increase in accounts payable of $31.6 million, a decrease in accounts receivable of $20.9 million, and other non-cash activities added back to income of $17.3 million, including $9.5 million of depreciation and amortization and $5.4 million of stock-based compensation expense, also contributed to the positive inflow of cash for the nine months ended September 30, 2023. These inflows were partially offset by an increase in prepaid expenses, income tax receivable, and other current assets of $9.6 million. The decrease in inventory was primarily due to a decrease in the amount of inventory we purchased, combined with the delivery of inventory held associated with the continued fulfillment of orders in backlog during the first nine months of 2023. The increase in accounts payable was primarily driven by the timing of payments. The decrease in accounts receivable was primarily driven by the timing of receipts, combined with decreased levels of business activity. For the nine months ended September 30, 2022, cash provided by operating activities resulted primarily from net income adjusted for non-cash charges of $86.1 million, partially offset by increases in accounts receivable and inventory of $41.8 million and $6.8 million, respectively, as well as a decrease in accounts payable of $23.3 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
70
Days of supply in inventory (DIO)(2)
Days of purchases outstanding (DPO)(3)
(43)
(37)
Cash conversion cycle
51
63
The cash conversion cycle decreased to 51 days at September 30, 2023, compared to 63 days at September 30, 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 nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in DPO is consistent with the decrease in cost of sales for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022.
Cash used in investing activities for the nine months ended September 30, 2023 represents $48.7 million of purchases of U.S. Government treasury securities and $7.4 million of purchases of property and equipment. These property and equipment 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 property and equipment investments of $7.0 million.
Cash used in financing activities for the nine months ended September 30, 2023 consisted of $70.9 million of aggregate borrowings and repayments, $5.4 million of treasury purchases, $6.3 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $0.9 million payments of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily consisted of $0.8 million payments 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 credit facility, see “Factors Affecting Sources of Liquidity” below. For
25
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 2025 and is collateralized by our accounts receivable. As of September 30, 2023, our borrowing capacity under the credit facility was up to $50.0 million. Amounts outstanding under this facility bear interest at the greatest of (i) the prime rate (8.50% at September 30, 2023), (ii) the federal funds effective rate plus 0.50% per annum, and (iii) the daily BSBY 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 credit facility by up to 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 September 30, 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 credit facility are classified as current in our condensed consolidated balance sheet. As of September 30, 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.
Credit Facility. Our credit facility extends until March 2025 and is collateralized by our accounts receivable. As of September 30, 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.
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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to our 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 September 30, 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 September 30, 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 our 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 the other information set forth in this Quarterly Report on Form 10–Q, including the risk factor set forth below, you should carefully consider 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.
We use artificial intelligence in our business, as do certain of our business partners, and challenges with properly managing its use could result in reputational harm, competitive harm, significant unexpected expenses and legal liability, which may adversely affect our results of operations.
Our business utilizes artificial intelligence and machine learning technologies, which are offered by third parties, to add AI-based applications to our offerings. Our offerings utilize machine learning algorithms, predictive analytics, and other artificial intelligence technologies. If these artificial intelligence or machine learning models are incorrectly designed, the performance of our products, services, and business, as well as our reputation, could suffer or we could incur liability through the violation of laws or contracts to which we are a party. If we fail to deploy AI as intended, our competitors may incorporate AI technology into their products or services more successfully than we do, which may impair our ability to effectively compete in the market. In addition, market acceptance of artificial intelligence and machine learning technologies is uncertain.
Additionally, we are making, and plan to make in the future, investments in adopting artificial intelligence and machine learning technologies across our business. As a result, the integration of AI into our operations may not be successful despite expending significant time and monetary resources to attempt to do so. Our investments in deploying such technologies may be substantial and may be more expensive than anticipated.
As with many technological innovations, artificial intelligence presents risks and challenges that could affect its adoption, and therefore our business. Uncertainty in the legal regulatory regime relating to AI may require significant resources to modify and maintain business practices to comply with U.S. and non-U.S. laws, the nature of which cannot be determined at this time. Several jurisdictions around the globe, including Europe and certain U.S. states, have already proposed or enacted laws governing AI. For example, on October 30, 2023, the Biden administration issued an Executive Order to, among other things, establish extensive new standards for AI safety and security. Other jurisdictions may decide to adopt similar or more restrictive legislation that may render the use of such technologies challenging. These obligations may make it harder for us to conduct our business using AI, lead to regulatory fines or penalties, require us to change our product offerings or business practices, or prevent or limit our use of AI. If we cannot use AI, or that use is restricted, our business may be less efficient, or we may be at a competitive disadvantage. Any of these factors could adversely affect our business, financial condition, and results of operations.
Item 5. Other Information
Director and Officer Trading Arrangements
None of our directors or officers (as defined in Rule 16a-1(f)) adopted or terminated a Rule 10b5-1 trading agreement or a non-Rule 10b5-1 trading agreement (as defined in Item 408(c) of Regulation S-K) during the third quarter of 2023.
Item 6 - Exhibits
ExhibitNumber
Description
3.1
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).
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).
* 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, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2023 and 2022, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022, and (vi) 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 1, 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)