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, 2024
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 23, 2024 was 26,289,480.
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, 2024 and December 31, 2023
1
Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2024 and 2023
2
Condensed Consolidated Statements of Other Comprehensive Income–Three and Nine Months Ended September 30, 2024 and 2023
3
Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2024 and 2023
4
Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2024 and 2023
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
Unregistered Sales of Equity Securities and Use of Proceeds
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,
2024
2023
ASSETS
Current Assets:
Cash and cash equivalents
$
167,511
144,954
Short-term investments
261,603
152,232
Accounts receivable, net
585,076
606,834
Inventories, net
113,691
124,179
Income taxes receivable
7,088
4,348
Prepaid expenses and other current assets
16,757
16,092
Total current assets
1,151,726
1,048,639
Property and equipment, net
53,255
56,658
Right-of-use assets
3,460
4,340
Goodwill
73,602
Intangibles, net
2,514
3,428
Other assets
1,188
1,714
Total Assets
1,285,745
1,188,381
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
293,158
263,682
Accrued payroll
28,131
20,440
Accrued expenses and other liabilities
46,164
43,843
Total current liabilities
367,453
327,965
Deferred income taxes
18,383
15,844
Noncurrent operating lease liabilities
2,030
3,181
Other liabilities
517
624
Total Liabilities
388,383
347,614
Stockholders’ Equity:
Common stock
293
Additional paid-in capital
136,326
130,878
Retained earnings
819,372
760,898
Accumulated other comprehensive income
477
81
Treasury stock, at cost
(59,106)
(51,383)
Total Stockholders’ Equity
897,362
840,767
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
724,717
693,086
2,093,221
2,154,178
Cost of sales
589,311
561,198
1,703,201
1,772,217
Gross profit
135,406
131,888
390,020
381,961
Selling, general and administrative expenses
105,365
99,822
315,181
304,064
Restructuring and other charges
—
44
415
2,687
Income from operations
30,041
32,022
74,424
75,210
Interest income, net
4,837
2,688
14,053
5,848
Other income
1,700
Income before taxes
36,578
34,710
90,177
81,058
Income tax provision
(9,519)
(9,112)
(23,803)
(21,565)
Net income
27,059
25,598
66,374
59,493
Earnings per common share:
Basic
1.03
0.97
2.52
2.26
Diluted
1.02
2.50
2.25
Shares used in computation of earnings per common share:
26,292
26,262
26,334
26,281
26,501
26,434
26,518
26,406
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Other comprehensive income:
Unrealized gains on available-for-sale investments, net of tax of $(154) and $(105) for the three and nine months ended September 30, 2024, respectively, and net of tax of $(41) for the three and nine months ended September 30, 2023, respectively
580
154
396
Comprehensive income
27,639
25,752
66,770
59,647
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2024
Common Stock
Additional
Retained
Accumulated Other
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Comprehensive Income (Loss)
Total
Balance - June 30, 2024
29,294
134,967
794,942
(103)
(2,962)
(55,171)
874,928
Stock-based compensation expense
1,999
Restricted stock units vested
16
Shares withheld for taxes paid on stock awards
(640)
Repurchase of common stock for treasury
(59)
(3,935)
Dividend declaration ($0.10 per share)
(2,629)
Other comprehensive income, net of tax
Balance - September 30, 2024
29,310
(3,021)
Nine Months Ended September 30, 2024
Balance - December 31, 2023
29,262
(2,902)
6,196
39
(1,285)
(119)
(7,723)
Issuance of common stock under Employee Stock Purchase Plan
9
537
(7,900)
Three Months Ended September 30, 2023
Balance - June 30, 2023
29,158
291
129,486
715,726
794,120
1,789
(1)
(399)
Dividend declaration ($0.08 per share)
(2,101)
Balance - September 30, 2023
29,174
292
130,875
739,223
819,161
Nine Months Ended September 30, 2023
Balance - December 31, 2022
29,123
125,784
686,037
(2,773)
(45,937)
766,175
5,425
38
(870)
(129)
(5,446)
13
(6,307)
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
9,818
9,456
Adjustments to credit losses reserve
830
1,814
2,434
Amortization of discount on short-term investments
(4,402)
Loss on disposal of fixed assets
49
563
Changes in assets and liabilities:
Accounts receivable
20,928
20,869
Inventories
10,488
66,439
Prepaid expenses, income tax receivable, and other current assets
(3,405)
(9,556)
Other non-current assets
526
234
29,141
31,648
9,643
(720)
Net cash provided by operating activities
148,620
185,665
Cash Flows used in Investing Activities:
Purchases of short-term investments
(255,075)
(48,699)
Maturities of short-term investments
150,607
Purchases of property and equipment
(5,215)
(7,355)
Net cash used in investing activities
(109,683)
(56,054)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
25,204
70,877
Repayment of short-term borrowings
(25,204)
(70,877)
Purchase of common stock for treasury shares
(7,732)
(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
(16,380)
(12,032)
Increase in cash and cash equivalents
22,557
117,579
Cash and cash equivalents, beginning of period
122,930
Cash and cash equivalents, end of period
240,509
Non-cash Investing and Financing Activities:
Accrued purchases of property and equipment
425
408
Accrued excise tax on treasury purchases
45
54
Supplemental Cash Flow Information:
Income taxes paid
24,533
34,251
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, 2023, 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, 2023.
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, 2024 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2024.
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 and Investments
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.
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 on the condensed consolidated balance sheets.
Included in interest income, net on the condensed consolidated statements of income is interest income on cash equivalents and short-term investments of $4,840 and $14,060 for the three and nine months ended September 30, 2024, respectively, and $2,684 and $5,866 for the three and nine months ended September 30, 2023, respectively.
Treasury Stock, at Cost
The total repurchases for the nine months ended September 30, 2024 and 2023 were recorded as treasury stock of $7,723 and $5,446, respectively. Such costs reflect 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, 2024 and 2023 were primarily related to an involuntary reduction in the Company’s headquarter workforce and included cash severance and other related termination benefits. No amounts related to these costs are included in accrued expenses and other liabilities as all such amounts have been paid as of September 30, 2024.
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
Recently Issued Financial Accounting Standards
In November 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This guidance is intended to improve segment reporting disclosures on both an interim and annual basis, primarily through enhanced disclosures about significant segment expenses. This ASU is effective for the Company’s annual reporting periods beginning January 1, 2024, and for interim reporting periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to improve the transparency of income tax disclosures through, among other things, enhancement of the disclosure requirements within the rate reconciliation, as well as increased income tax disaggregation disclosures. This ASU is effective for the Company’s annual reporting periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statement disclosures.
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.
7
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended September 30, 2024 and 2023, along with the segment for each category (in thousands).
EnterpriseSolutions
BusinessSolutions
Public SectorSolutions
Notebooks/Mobility
90,233
91,757
77,264
259,254
Desktops
44,846
17,543
15,193
77,582
Software
29,847
34,478
21,706
86,031
Servers/Storage
11,866
23,106
8,696
43,668
Net/Com Products
24,530
21,186
10,340
56,056
Displays and Sound
38,316
20,682
15,981
74,979
Accessories
35,962
27,020
16,978
79,960
Other Hardware/Services
21,370
16,859
8,958
47,187
Total net sales
296,970
252,631
175,116
91,643
82,777
46,898
221,318
32,822
17,695
16,281
66,798
34,863
13,287
77,308
13,153
25,863
11,307
50,323
25,699
38,672
17,964
82,335
26,175
24,299
20,367
70,841
32,501
26,335
12,590
71,426
25,415
18,517
8,805
52,737
276,566
269,021
147,499
The following tables represent a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2024 and 2023, along with the segment for each category (in thousands).
270,266
281,754
185,962
737,982
135,563
55,766
36,732
228,061
78,595
102,905
36,827
218,327
39,924
78,773
30,842
149,539
63,599
62,876
30,257
156,732
106,845
62,415
43,329
212,589
116,139
86,056
36,044
238,239
67,506
56,153
28,093
151,752
878,437
786,698
428,086
293,551
265,777
172,903
732,231
96,536
55,468
48,669
200,673
85,953
103,267
36,263
225,483
44,365
72,759
33,253
150,377
74,958
95,560
53,517
224,035
80,217
70,766
50,354
201,337
121,190
81,576
42,551
245,317
80,892
57,989
35,844
174,725
877,662
803,162
473,354
8
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of September 30, 2024 and December 31, 2023 (in thousands).
September 30, 2024
December 31, 2023
Contract liabilities, which are included in "Accrued expenses and other liabilities"
8,520
4,206
Changes in the contract liability balances during the nine months ended September 30, 2024 and 2023 are as follows (in thousands):
Balance at December 31, 2023
Cash received in advance and not recognized as revenue
18,544
Amounts recognized as revenue as performance obligations satisfied
(14,230)
Balance at September 30, 2024
Balance at December 31, 2022
4,266
15,207
(15,647)
Balance at September 30, 2023
3,826
Note 3–Fair Value Measurements
Cash equivalents and short-term investments as of September 30, 2024 and December 31, 2023 consist of the following (in thousands):
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Cash equivalents:
Money market funds
144,729
Short-term investments:
U.S. Government treasury securities
260,999
604
405,728
406,332
129,123
152,129
103
281,252
281,355
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 on 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:
As of September 30, 2024 and December 31, 2023, 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 for the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share data):
Numerator:
Denominator:
Denominator for basic earnings per share
Dilutive effect of employee stock awards
209
172
184
125
Denominator for diluted earnings per share
Earnings per share:
For the three and nine months ended September 30, 2024 and 2023, 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.
10
Note 5–Leases
The Company leases certain facilities from a related party, which is a company affiliated with it through common ownership.
As of September 30, 2024, there were no additional significant 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, 2024 and 2023 (dollars in thousands):
Related Parties
Others
Lease Cost
Capitalized operating lease cost
501
1,445
Short-term lease cost
420
140
560
1,261
421
1,682
Total lease cost
641
1,061
1,866
3,127
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
550
1,527
Weighted-average remaining lease term (in years):
Capitalized operating leases
2.22
Weighted-average discount rate:
4.27%
313
500
813
940
1,799
2,739
107
161
268
321
297
618
661
1,081
2,096
3,357
542
855
1,787
2,727
0.17
3.15
3.04
3.92%
4.07%
4.05%
11
As of September 30, 2024, future lease payments over the remaining term of capitalized operating leases were as follows (in thousands):
For the Years Ended December 31,
2024, excluding the nine months ended September 30, 2024
556
2025
1,980
2026
1,205
2027
237
2028
Thereafter
4,139
Imputed interest
(187)
Lease liability balance at September 30, 2024
3,952
As of September 30, 2024, the right-of-use, or ROU, asset had a balance of $3,460. The long-term lease liability was $2,030 and the short-term lease liability, which is included in accrued expenses and other liabilities on the condensed consolidated balance sheets, was $1,922. As of December 31, 2023, the ROU asset had a balance of $4,340. The long-term lease liability was $3,181 and the short-term lease liability, which is included in accrued expenses and other liabilities on the condensed consolidated balance sheets, was $1,733.
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 Enterprise Solutions segment, which serves primarily medium-to-large corporations; the Business Solutions segment, which serves primarily small- to medium-sized businesses; 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, 2024 and 2023 is shown below (in thousands):
Net sales:
Enterprise Solutions
Business Solutions
Public Sector Solutions
Operating income (loss):
10,280
11,230
26,357
25,263
20,065
21,040
58,083
56,424
4,342
4,117
1,706
5,796
Headquarters/Other
(4,646)
(4,365)
(11,722)
(12,273)
Total operating income
Selected operating expense:
Depreciation and amortization:
215
391
1,238
155
156
465
473
22
68
61
2,887
2,720
8,644
7,684
Total depreciation and amortization
3,279
3,289
Total assets:
717,143
676,694
553,881
481,483
117,728
110,919
(103,007)
(87,669)
Total assets
1,181,427
The assets of the Company’s three operating segments presented above consist primarily of accounts receivable, net intercompany receivables, goodwill, and other intangibles, net. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash and cash equivalents, short-term investments, inventories, property and equipment, ROU assets, and intercompany balance, net. As of September 30, 2024 and 2023, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $64,994 and $58,864, 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–Accumulated Other Comprehensive Income
Accumulated other comprehensive income, which is included as a component of stockholders’ equity, is comprised of unrealized gains on short-term investments, net of tax. The changes in accumulated other comprehensive income were as follows (in thousands):
Other comprehensive income before reclassifications, net of tax
Less amounts reclassified from accumulated other comprehensive income, net of tax
Net other comprehensive income
September 30, 2023
Note 8–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 9–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 (8.00% at September 30, 2024). 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, 2024, 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, 2024 and 2023, the Company borrowed incremental amounts that were each repaid in full. These borrowings for the nine months ended September 30, 2024 and 2023 totaled $25,204 and $70,877, respectively; 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, 2024 or 2023, and accordingly, the entire $50,000 credit facility was available for borrowings on such date.
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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, or the Exchange Act. Forward-looking statements generally relate to future events or our future financial or operating performance and include statements concerning, among other things, our future financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), liabilities, impairment charges, competition, and the expected 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 and are based on assumptions as of the date of this report. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. 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), the execution of our business plans (including our inventory management, cost structure and 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, 2023, 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 caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the other subsequent filings we make with the Securities and Exchange Commission from time to time.
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. 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 except as required by law.
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 Organization, or TSO, 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 Enterprise Solutions, Connection Business Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to enterprise, small- to medium-sized businesses, 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 inside sales and field sales contacts by sales representatives focused on the business, educational, healthcare, retail, manufacturing, 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, Dell Inc., Hewlett-Packard Inc., Hewlett-Packard Enterprise, Intel, Lenovo, Microsoft Corporation, 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 products. We are dependent on our suppliers—manufacturers and distributors that historically have only sold to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, sold or attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to and, in some cases successfully, 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 our 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 TSO, 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 major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we have invested and expect to continue to invest 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 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 infrastructure 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):
724.7
693.1
2,093.2
2,154.2
Gross margin
18.7
%
19.0
18.6
17.7
14.5
14.4
15.1
14.1
4.1
4.6
3.6
3.5
Net sales of $724.7 million for the third quarter of 2024 reflected an increase of $31.6 million, or 4.6% compared to the third quarter of 2023. The increase was primarily driven by increases in net sales of notebooks/mobility, desktops, software, accessories, and displays and sound of $37.9 million, $10.8 million, $8.7 million, $8.5 million, and $4.1 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to our Unaudited Condensed Consolidated Financial Statements. These increases were partially offset by decreases in net sales of advanced technology categories including net/com products, servers/storage, and other hardware/services of $26.3 million, $6.7 million, and $5.6 million, respectively. Gross profit for the third quarter of 2024 increased year-over-year by $3.5 million, or 2.7%, to $135.4 million as illustrated in the table and the discussion beginning on page 19 of this Quarterly Report on Form 10-Q. Gross margin decreased to 18.7% from 19.0% a year ago. The decrease in gross margin was primarily driven by a shift in product mix to lower-margin sales of endpoint devices including notebooks/mobility and desktops as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements and the product mix table on page 18. This decrease was partially offset by an increase in the amount of software sales recognized on a net basis. SG&A expenses increased year-over-year by $5.6 million, or 5.6%, to $105.4 million. SG&A expenses as a percentage of net sales increased to 14.5% compared to 14.4% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to increases in personnel costs related to investments in resources designed to strengthen our sales, technical sales, and services capabilities, advertising, and service contracts/subscriptions as shown in the table on page 18 of this Quarterly Report on Form 10-Q combined with the increase in net sales as discussed above. Operating income for the third quarter of 2024 decreased year-over-year both in dollars and as a percentage of net sales by $2.0 million and 50 basis points, respectively, primarily as a result of the increase in SG&A expenses as discussed above.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix for the periods indicated:
Operating Segment
41
40
42
35
37
24
21
20
100
Product Mix
36
34
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, for the periods indicated:
15.6
16.0
15.4
14.7
25.0
23.3
24.1
22.9
14.9
16.9
15.2
Total Company
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated (dollars in millions):
Personnel costs
79.9
77.5
239.5
233.5
Advertising
6.2
18.8
16.5
Service contracts/subscriptions
6.4
5.1
18.1
15.5
Professional fees
3.3
2.6
9.8
9.3
9.5
Facilities operations
1.9
2.0
5.6
Credit card fees
1.8
2.1
5.3
Other
8.5
8.3
Total SG&A expense
105.4
99.8
315.2
304.1
As a percentage of net sales
During the nine months ended September 30, 2024 and the three and nine months ended September 30, 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other
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charges of $0.4 million for the nine months ended September 30, 2024 compared to restructuring and other charges of less than $0.1 million and $2.7 million for the three and nine months ended September 30, 2023, respectively, which were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. We did not incur any restructuring charges in the three months ended September 30, 2024.
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, 2024 and the three months ended September 30, 2023; and changes between the nine months ended September 30, 2024 and the nine months ended September 30, 2023.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
% of
Net Sales
Change
Net Sales:
297.0
41.0
276.6
39.9
20.4
7.4
252.6
34.9
269.0
38.8
(16.4)
(6.1)
175.1
147.5
21.3
27.6
100.0
31.6
Gross Profit:
46.2
44.2
4.4
63.1
62.7
0.4
0.7
26.1
1.1
135.4
131.9
2.7
Net sales increased for the third quarter of 2024 compared to the third quarter of 2023, as explained by the year-over-year changes discussed below:
Gross profit and gross margin for the third quarter of 2024 increased year-over-year, as explained by the year-over-year changes discussed below:
Selling, general and administrative expenses for the third quarter of 2024 increased in dollars but remained substantially the same as a percentage of net sales compared to the third quarter of 2023. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):
Segment Net
Sales
35.9
12.1
33.0
11.9
2.9
8.8
43.1
17.1
41.6
1.5
21.7
12.4
20.9
0.8
Headquarters/Other, unallocated
4.7
4.3
7.5
Restructuring and other charges were not incurred during the third quarter of 2024. Restructuring and other charges for the third quarter of 2023 were less than $0.1 million. The restructuring and other charges were primarily related to expenses incurred in connection with the involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.
Income from operations for the third quarter of 2024 decreased to $30.0 million, compared to $32.0 million for the third quarter of 2023, primarily due to the increase in SG&A expenses, partially offset by the increase in gross profit, as discussed above. Income from operations as a percentage of net sales was 4.1% for the third quarter of 2024, compared to 4.6% for the prior year quarter, primarily due to the increase in net sales, as discussed above.
Interest income, net for the third quarter of 2024 increased to $4.8 million, compared to $2.7 million for the third quarter of 2023, primarily due to an increase in interest income of $2.2 million as a result of higher cash equivalent balances and interest rates on short-term investments.
Other income for the third quarter of 2024 was $1.7 million as a result of a legal settlement received.
Income taxes. Our provision for income taxes for the third quarter of 2024 increased to $9.5 million, compared to $9.1 million for the third quarter of 2023. Our effective tax rate decreased to 26.0% for the quarter ended September 30, 2024, compared to 26.3% for the quarter ended September 30, 2023, primarily due to non-recurring benefits included in the current year.
Net income for the third quarter of 2024 increased to $27.1 million, compared to $25.6 million for the third quarter of 2023, primarily due to a $2.1 million increase in interest income, net and other income of $1.7 million, partially offset by a decrease in income from operations of $2.0 million and an increase in the provision for income taxes of $0.4 million.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
878.4
42.0
877.7
40.7
0.1
786.7
37.6
803.2
37.3
(16.5)
(2.0)
428.1
473.3
22.0
(45.2)
(9.6)
(61.0)
(2.8)
135.0
129.3
5.7
189.8
183.9
5.9
3.2
65.2
68.8
(3.6)
(5.2)
390.0
382.0
8.0
Net sales decreased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, as explained by the year-over-year changes discussed below:
Gross profit and gross margin for the nine months ended September 30, 2024 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, 2024 increased both in dollars and as a percentage of net sales compared to the nine months ended September 30, 2023. 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):
108.6
102.9
11.7
131.8
16.8
127.5
15.9
63.5
14.8
62.9
13.3
0.6
1.0
11.3
10.8
0.5
4.9
11.1
3.7
Restructuring and other charges for the nine months ended September 30, 2024 were $0.4 million, compared to $2.7 million for the nine months ended September 30, 2023. The restructuring and other charges were primarily related to expenses incurred in connection with the involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.
Income from operations for the nine months ended September 30, 2024 decreased to $74.4 million, compared to $75.2 million for the nine months ended September 30, 2023, primarily due to the increase in SG&A expenses, partially offset by the increase in gross profit and decrease in restructuring and other charges, as discussed above. Income from operations as a percentage of net sales was 3.6% for the nine months ended September 30, 2024, compared to 3.5% for the nine months ended September 30, 2023, primarily due to the decrease in net sales discussed above.
Interest income, net for the nine months ended September 30, 2024 increased to $14.1 million, compared to $5.8 million for the nine months ended September 30, 2023, primarily due to an increase in interest income of $8.3 million as a result of higher cash equivalent balances and interest rates on short-term investments.
Other income for the nine months ended September 30, 2024 was $1.7 million as a result of a legal settlement received.
Income taxes. Our provision for income taxes for the nine months ended September 30, 2024 increased to $23.8 million, compared to $21.6 million for the nine months ended September 30, 2023. Our effective tax rate decreased to 26.4% for the nine months ended September 30, 2024, compared to 26.6% for the nine months ended September 30, 2023, primarily due to non-recurring benefits included in the current year.
Net income for the nine months ended September 30, 2024 increased to $66.4 million, compared to $59.5 million for the nine months ended September 30, 2023, primarily due to a $8.3 million increase in interest income, net and other income of $1.7 million, partially offset by a $2.2 million increase in the provision for income taxes.
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.
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We believe that funds generated from operations, short-term investments, and the available capacity under our credit facility will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months and beyond such twelve calendar month period. 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 2024 dividend activity for our common stock is as follows:
Dividend Amount
Declaration Date
Record Date
Payment Date
0.10
February 12, 2024
February 27, 2024
March 15, 2024
April 30, 2024
May 14, 2024
May 29, 2024
July 30, 2024
August 13, 2024
August 30, 2024
On October 30, 2024, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.10 per share. The dividend will be paid on November 29, 2024 to all stockholders of record as of the close of business on November 12, 2024. 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, 2024 and 2023, 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):
148.7
185.7
(109.7)
(56.1)
(12.0)
22.6
117.6
Cash provided by operating activities was $148.7 million for the nine months ended September 30, 2024. Cash provided by operating activities resulted primarily from $66.4 million of net income, an increase in accounts payable of $29.1 million, and a decrease in accounts receivable of $20.9 million. A decrease in inventory of $10.5 million, an increase in accrued expenses and other liabilities of $9.6 million, and depreciation and amortization and stock-based compensation expense added back to net income of $9.8 million and $6.2 million, respectively, also contributed to the positive inflow of cash for the nine months ended September 30, 2024. These inflows were partially offset by the amortization of discounts on short-term investments of $4.4 million subtracted from net income. The increase in accounts payable and decrease in accounts receivable were primarily driven by the timing of payments. For the nine months ended September 30, 2023, cash provided by operating activities resulted primarily from net income adjusted for non-cash charges of $76.8 million, a decrease in inventory of $66.4 million, an increase in accounts payable of $31.6 million, and a decrease in accounts receivable of $20.9 million, partially offset by an increase in prepaid expenses, income tax receivable, and other current assets of $9.6 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)
67
71
Days of supply in inventory (DIO)(2)
Days of purchases outstanding (DPO)(3)
(45)
(43)
Cash conversion cycle
51
The cash conversion cycle decreased to 40 days at September 30, 2024, compared to 51 days at September 30, 2023. The decrease in DSO is consistent with the increase in net sales for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in DIO is consistent with the decrease in inventory for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in DPO is consistent with the increase in accounts payable as of September 30, 2024 compared to September 30, 2023.
Cash used in investing activities for the nine months ended September 30, 2024 consisted of $255.1 million of purchases of U.S. Government treasury securities, $150.6 million of maturities of U.S. Government treasury securities, and $5.2 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, investing activities consisted of $48.7 million of purchases of U.S. Government treasury securities and $7.4 million of purchases of property and equipment.
Cash used in financing activities for the nine months ended September 30, 2024 consisted of $25.2 million of aggregate borrowings and repayments, $7.7 million of treasury purchases, $7.9 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $1.3 million payments of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily 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.
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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 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, 2024, 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 (8.00% at September 30, 2024), (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 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, 2024.
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 sheets. As of September 30, 2024, 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. See “Item 2. Properties” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding our operating leases.
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, 2024, 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 credit facility contains two financial tests:
Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the 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.
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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, 2023.
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, 2023. No material changes related to our market risks have occurred since December 31, 2023.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. 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 a 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. Our 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, our 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 were no changes 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II ―OTHER INFORMATION
Item 1. Legal Proceedings
For information related to legal proceedings, see the discussion in Note 8 - “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, you should carefully consider Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, 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, 2023, 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 September 30, 2024 (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 millions) (1)(2)
07/01/24-07/31/24
44,770
64.74
65.6
08/01/24-08/31/24
8,716
70.27
65.0
09/01/24-09/30/24
5,706
69.58
64.6
59,192
66.02
Item 5. Other Information
Director and Officer Trading Arrangements
None of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted or terminated a Rule 10b5-1 trading agreement or a non-Rule 10b5-1 trading agreement (as each term is defined in Item 408(c) of Regulation S-K) during the third quarter of 2024.
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).
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, 2024 and December 31, 2023, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023, (iii) Condensed Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2024 and 2023, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023, 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:
October 30, 2024
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)