Company Quick10K Filing
PC Connection
10-Q 2021-03-31 Filed 2021-05-07
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8-K 2020-12-29
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8-K 2018-05-30
8-K 2018-05-03
8-K 2018-03-26
8-K 2018-02-15

CNXN 10Q Quarterly Report

Part I. Financial Information
Item 1Financial Statements
Part I―Financial Information
Item 1―Financial Statements
Note 1 - Basis of Presentation
Note 2 - Revenue
Note 3 - Earnings per Share
Note 4 - Leases
Note 5 - Segment Information
Note 6 - Commitments and Contingencies
Note 7 - Bank Borrowings
Part I―Financial Information
Item 2 - Management'S Discussion and Analysis of Financial Condition
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Part I―Financial Information
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 6 - Exhibits
EX-10.1 cnxn-20210331xex10d1.htm
EX-10.2 cnxn-20210331xex10d2.htm
EX-31.1 cnxn-20210331xex31d1.htm
EX-31.2 cnxn-20210331xex31d2.htm
EX-32.1 cnxn-20210331xex32d1.htm
EX-32.2 cnxn-20210331xex32d2.htm

PC Connection Earnings 2021-03-31

Balance SheetIncome StatementCash Flow

Accelerated Filerus-gaap:AccruedLiabilitiesAndOtherLiabilitiesOne-month 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number: 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0513618

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

730 Milford Road

Merrimack, New Hampshire

03054

(Address of principal executive offices)

(Zip Code)

(603) 683-2000

(Registrant's telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:

C

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

CNXN

Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No  

The number of shares outstanding of the issuer’s common stock as of April 30, 2021 was 26,187,175.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Page

ITEM 1.

Unaudited Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets–March 31, 2021 and December 31, 2020

1

Condensed Consolidated Statements of Income–Three Months Ended March 31, 2021 and 2020

2

Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2021 and 2020

3

Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2021 and 2020

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

11

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

21

ITEM 4.

Controls and Procedures

22

PART II OTHER INFORMATION

ITEM 1

Legal Proceedings

23

ITEM 1A

Risk Factors

23

ITEM 6.

Exhibits

24

SIGNATURES

25

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

March 31, 

December 31, 

    

2021

    

2020

 

ASSETS

Current Assets:

Cash and cash equivalents

$

92,257

$

95,655

Accounts receivable, net

 

554,696

 

611,021

Inventories, net

 

140,534

 

140,867

Prepaid expenses and other current assets

 

15,364

 

11,437

Total current assets

 

802,851

 

858,980

Property and equipment, net

 

61,592

 

61,537

Right-of-use assets

11,857

12,821

Goodwill

 

73,602

 

73,602

Intangibles assets, net

 

6,783

 

7,088

Other assets

 

1,701

 

1,345

Total Assets

$

958,386

$

1,015,373

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

206,542

$

266,846

Accrued payroll

 

18,171

 

17,828

Accrued expenses and other liabilities

 

50,231

 

57,586

Total current liabilities

 

274,944

 

342,260

Deferred income taxes

 

18,525

 

18,525

Noncurrent operating lease liabilities

8,792

9,631

Other liabilities

 

8,630

 

8,630

Total Liabilities

 

310,891

 

379,046

Stockholders’ Equity:

Common Stock

 

289

 

289

Additional paid-in capital

 

120,875

 

119,891

Retained earnings

 

572,268

 

562,084

Treasury stock, at cost

(45,937)

(45,937)

Total Stockholders’ Equity

 

647,495

 

636,327

Total Liabilities and Stockholders’ Equity

$

958,386

$

1,015,373

See notes to unaudited condensed consolidated financial statements.

1

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)

Three Months Ended

March 31, 

    

2021

    

2020

 

Net sales

$

636,892

$

711,850

Cost of sales

 

536,372

 

598,732

Gross profit

 

100,520

 

113,118

Selling, general and administrative expenses

 

86,400

 

92,468

Income from operations

 

14,120

 

20,650

Other (expenses) income, net

 

(7)

 

92

Income before taxes

 

14,113

 

20,742

Income tax provision

 

(3,929)

 

(5,846)

Net income

$

10,184

$

14,896

Earnings per common share:

Basic

$

0.39

$

0.57

Diluted

$

0.39

$

0.56

Shares used in computation of earnings per common share:

Basic

 

26,172

 

26,236

Diluted

 

26,360

 

26,421

See notes to unaudited condensed consolidated financial statements.

2

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Three months ended March 31, 2021

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2020

 

28,943

$

289

$

119,891

$

562,084

 

(2,773)

$

(45,937)

$

636,327

Stock-based compensation expense

 

 

 

1,066

 

 

 

 

1,066

Restricted stock units vested

 

5

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(82)

 

 

 

 

(82)

Net income

 

 

 

 

10,184

 

 

 

10,184

Balance - March 31, 2021

 

28,948

$

289

$

120,875

$

572,268

 

(2,773)

$

(45,937)

$

647,495

Three months ended March 31, 2020

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2019

 

28,870

$

288

$

118,045

$

514,694

 

(2,526)

$

(35,715)

$

597,312

Stock-based compensation expense

 

 

 

624

 

 

 

 

624

Restricted stock units vested

 

4

 

1

 

 

 

 

 

1

Shares withheld for taxes paid on stock awards

 

 

 

(49)

 

 

 

 

(49)

Repurchase of common stock for treasury

 

 

 

 

 

(247)

 

(10,222)

 

(10,222)

Net income

 

 

 

 

14,896

 

 

 

14,896

Balance - March 31, 2020

 

28,874

$

289

$

118,620

$

529,590

 

(2,773)

$

(45,937)

$

602,562

See notes to unaudited condensed consolidated financial statements.

3

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Three Months Ended

March 31, 

 

2021

    

2020

 

Cash Flows provided by Operating Activities:

Net income

$

10,184

$

14,896

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

3,165

 

3,147

Adjustments to credit losses reserve

 

(70)

 

2,833

Stock-based compensation expense

 

1,066

 

624

Changes in assets and liabilities:

Accounts receivable

 

54,895

 

61,477

Inventories

 

333

 

(12,319)

Prepaid expenses, income tax receivables and other current assets

 

(3,927)

 

(3,300)

Other non-current assets

 

(356)

 

(98)

Accounts payable

 

(60,862)

 

(15,499)

Accrued expenses and other liabilities

 

1,534

 

(7,205)

Net cash provided by operating activities

 

5,962

 

44,556

Cash Flows used in Investing Activities:

Purchases of equipment and capitalized software

(2,403)

(4,595)

Proceeds from life insurance

1,500

Net cash used in investing activities

 

(903)

 

(4,595)

Cash Flows (used in) provided by Financing Activities:

Purchase of treasury shares

 

 

(10,222)

Dividend payments

 

(8,375)

 

(8,427)

Payment of payroll taxes on stock-based compensation through shares withheld

 

(82)

 

(49)

Net cash used in financing activities

 

(8,457)

 

(18,698)

(Decrease) increase in cash and cash equivalents

 

(3,398)

 

21,263

Cash and cash equivalents, beginning of year

 

95,655

 

90,060

Cash and cash equivalents, end of year

$

92,257

$

111,323

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$

714

$

1,237

Supplemental Cash Flow Information:

Income taxes paid

$

261

$

369

See notes to unaudited condensed consolidated financial statements.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. 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, 2020, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three months ended March 31, 2021 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2021.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, including uncertainty in the current economic environment due to the coronavirus pandemic (“COVID-19 pandemic”). Actual results could differ from those estimates and assumptions, including the impact of the COVID-19 pandemic.

Recently Issued Financial Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.

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Note 2–Revenue

The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended March 31, 2021 and 2020, along with the reportable segment for each category.

Three Months Ended March 31, 2021

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

94,435

$

82,191

$

56,974

$

233,600

Desktops

21,159

30,351

7,850

59,360

Software

27,162

22,505

7,209

56,876

Servers/Storage

20,573

17,156

6,647

44,376

Net/Com Products

18,404

19,826

10,361

48,591

Displays and Sound

 

19,774

 

23,405

 

13,993

 

57,172

Accessories

 

25,847

 

43,876

 

10,821

 

80,544

Other Hardware/Services

 

18,980

 

25,975

 

11,418

 

56,373

Total net sales

$

246,334

$

265,285

$

125,273

$

636,892

Three Months Ended March 31, 2020

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

91,613

$

79,316

$

28,966

$

199,895

Desktops

33,294

34,209

10,472

77,975

Software

36,398

26,182

7,295

69,875

Servers/Storage

25,830

16,234

11,746

53,810

Net/Com Products

21,012

24,946

9,810

55,768

Displays and Sound

 

23,946

 

23,568

 

11,443

 

58,957

Accessories

 

28,021

 

90,974

 

8,809

 

127,804

Other Hardware/Services

 

18,671

 

37,989

 

11,106

 

67,766

Total net sales

$

278,785

$

333,418

$

99,647

$

711,850

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of March 31, 2021 and December 31, 2020.

    

March 31, 2021

    

December 31, 2020

Contract liabilities, which are included in "Accrued expenses and other liabilities"

$

6,268

$

3,509

Changes in the contract liability balances during the three months ended March 31, 2021 and 2020 are as follows (in thousands):

    

2021

Balances at December 31, 2020

$

3,509

Cash received in advance and not recognized as revenue

 

5,259

Amounts recognized as revenue as performance obligations satisfied

 

(2,500)

Balances at March 31, 2021

$

6,268

2020

Balances at December 31, 2019

$

5,942

Cash received in advance and not recognized as revenue

 

4,852

Amounts recognized as revenue as performance obligations satisfied

 

(8,262)

Balances at March 31, 2020

$

2,532

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Note 3–Earnings Per Share

Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive.

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended March 31 ,

    

2021

    

2020

 

Numerator:

Net income

$

10,184

$

14,896

Denominator:

Denominator for basic earnings per share

 

26,172

 

26,236

Dilutive effect of employee stock awards

 

188

 

185

Denominator for diluted earnings per share

 

26,360

 

26,421

Earnings per share:

Basic

$

0.39

$

0.57

Diluted

$

0.39

$

0.56

For the three months ended March 31, 2021 and 2020, the Company had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

k

Note 4—Leases

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset (“ROU asset”) as of March 31, 2021 was $3,179 and a corresponding lease liability of $3,179 associated with related party leases.

As of March 31, 2021, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases for the three months ended March 31, 2021 and 2020:

Three months ended March 31, 2021

 

Three months ended March 31, 2020

 

Related Parties

Others

Total

 

Related Parties

Others

Total

 

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

313

$

777

$

1,090

$

379

$

784

$

1,163

Short-term lease cost

 

107

 

23

 

130

 

41

 

2

 

43

Total lease cost

$

420

$

800

$

1,220

$

420

$

786

$

1,206

Other Information

 

  

 

  

 

  

 

  

 

  

 

  

Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:

 

 

 

 

 

 

Operating cash flows

$

313

$

770

$

1,083

$

379

$

781

$

1,160

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating leases

2.67

5.32

4.65

3.65

6.29

5.60

Weighted-average discount rate:

Capitalized operating leases

3.92%

3.92%

3.92%

3.92%

3.92%

3.92%

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As of March 31, 2021, future lease payments over the remaining term of capitalized operating leases were as follows:

For the Years Ended December 31, 

    

Related Parties

    

Others

    

Total

2021, excluding the three months ended March 31, 2021

$

940

$

2,322

$

3,262

2022

 

1,253

 

2,111

 

3,364

2023

 

1,149

 

1,675

 

2,824

2024

 

 

1,699

 

1,699

2025

1,594

1,594

Thereafter

888

888

$

3,342

$

10,289

$

13,631

Imputed interest

(1,027)

Lease liability balance at March 31, 2021

$

12,604

As of March 31, 2021, the ROU asset had a balance of $11,857. The long-term lease liability was $8,792 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,812. As of March 31, 2020, the ROU asset had a balance of $15,776. The long-term lease liability was $12,551 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $4,062.

Note 5–Segment Information

The internal reporting structure used by the Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. The Company’s CODM is its Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.

The Company’s operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. The Company reports these charges to the operating segments as “Allocations.” Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.

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Segment information applicable to our reportable operating segments for the three months ended March 31, 2021 and 2020 is shown below:

Three Months Ended

March 31, 

March 31, 

    

2021

    

2020

 

Net sales:

Business Solutions

$

246,334

$

278,785

Enterprise Solutions

 

265,285

 

333,418

Public Sector Solutions

 

125,273

 

99,647

Total net sales

$

636,892

$

711,850

Operating income (loss):

Business Solutions

$

8,420

$

11,301

Enterprise Solutions

 

12,543

 

16,722

Public Sector Solutions

 

(2,753)

 

(3,322)

Headquarters/Other

 

(4,090)

 

(4,051)

Total operating income

 

14,120

 

20,650

Other (expenses) income, net

 

(7)

 

92

Income before taxes

$

14,113

$

20,742

Selected operating expense:

Depreciation and amortization:

Business Solutions

$

159

$

159

Enterprise Solutions

 

716

 

681

Public Sector Solutions

 

14

 

15

Headquarters/Other

 

2,276

 

2,292

Total depreciation and amortization

$

3,165

$

3,147

Total assets:

Business Solutions

$

362,694

$

319,909

Enterprise Solutions

 

568,221

 

536,672

Public Sector Solutions

 

94,103

 

52,285

Headquarters/Other

 

(66,632)

 

4,326

Total assets

$

958,386

$

913,192

The assets of our three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment, right-of-use assets, and intercompany balance, net. As of March 31, 2021 and 2020, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $48,026 and $7,024, respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segment-by-segment basis.

Note 6–Commitments and Contingencies

The Company is subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business. In the opinion of management, the outcome of such matters is not expected to have a material, adverse effect on our 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 our financial position, results of operations, and/or cash flows.

Note 7–Bank Borrowings

The Company has a $50,000 credit facility collateralized by our account receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for permitted acquisitions or other uses authorized by the lender

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on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR (0.11% at March 31, 2021), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at March 31, 2021). 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 to trailing twelve months Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. The Company had no outstanding bank borrowings at March 31, 2021 or 2020, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility. As of March 31, 2021, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

• we have experienced variability in sales and may not be able to maintain profitable operations;

• substantial competition could reduce our market share and may negatively affect our business;

• we face and will continue to face significant price competition, which could result in a reduction of our profit margins;

• the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;

• instability in economic conditions and government spending may adversely affect our business and reduce our operating results;

• the loss of any of our major vendors could have a material adverse effect on our business;

• virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;

• the methods of distributing IT products are changing, and such changes may negatively impact us and our business;

• we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;

• we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;

• we may experience a reduction in the incentive programs offered to us by our vendors;

• should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;

• we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;

• we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;

• we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;

• cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.

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• we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.

• the failure to comply with our public sector contracts could result in, among other things, fines or liabilities; and

• we are controlled by one principal stockholder

These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

OVERVIEW

We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by third-party service providers. We operate through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.

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 seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

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, 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 eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

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The primary challenges we continue to face in effectively managing our business, especially in the current economic environment, are (1) increasing our 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 expanded, and expect to continue to expand, 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 service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.

Market and economic conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.

Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.

EFFECTS OF COVID-19

In the year 2021, the COVID-19 pandemic continued to cause material disruptions to the business and operations of our customers. We have experienced, and may continue to experience, decreases in orders as a result of the COVID-19 pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future.

As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future. However, we continue to monitor the effects on our customers, suppliers, and the economy as a whole and will adjust our business practices, as necessary, to respond to the changing demand for, and supply of, our products.

RESULTS OF OPERATIONS

The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:

Three Months Ended

2021

    

2020

  

Net sales (in millions)

$

636.9

$

711.9

Gross margin

15.8

%  

15.9

Selling, general and administrative expenses

 

13.6

%  

 

13.0

%

Income from operations

 

2.2

%  

 

2.9

%

Net sales of $636.9 million for the first quarter of 2021 reflected a decrease of $75.0 million compared to the first quarter of 2020, which was driven by lower net sales in our Enterprise Solutions and Business Solutions Segments. The decrease was partially offset by growth in our Public Sector Solutions segment. The decrease in net sales was primarily due to the supply chain constraints in the first quarter of 2021 and strong comparative results in the same quarter a year ago. Gross profit decreased year-over-year by $12.6 million, primarily due to the increase of lower margin sales and the decline in total net sales. SG&A expenses decreased year-over-year by $6.1 million, driven primarily by decreased personnel cost of $4.6 million associated with reduced headcount and lower variable compensation, a decrease in bad debt expenses of $2.9 million and a decrease in advertising expenses of $1.3 million, which were partially offset by an increase in professional fees of $2.1 million. Operating income in the first quarter of 2021 decreased year-over-year both in dollars and as a percentage of net sales by $6.5 million and 68 basis points, respectively, primarily as a result of the decrease in net sales.

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Net Sales Distribution

The following table sets forth our percentage of net sales by segment and product mix:

Three Months Ended

2021

    

2020

Sales Segment

Enterprise Solutions

41

%  

47

%  

Business Solutions

39

39

Public Sector Solutions

20

 

14

 

Total

100

%  

100

%  

​</