10-Q 1 cnxn-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2022

OR

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

For the transition period from                     to                    

Commission file number: 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0513618

(State or other jurisdiction of

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

incorporation or organization)

730 Milford Road

Merrimack, New Hampshire

03054

(Address of principal executive offices)

(Zip Code)

(603) 683-2000

(Registrant's telephone number, including area code)

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

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

C

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

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 29, 2022 was 26,267,049.

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, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Income–Three Months Ended March 31, 2022 and 2021

2

Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2022 and 2021

3

Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2022 and 2021

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

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

March 31, 

December 31, 

    

2022

    

2021

 

ASSETS

Current Assets:

Cash and cash equivalents

$

67,409

$

108,310

Accounts receivable, net

 

634,142

 

607,532

Inventories, net

 

234,601

 

206,555

Prepaid expenses and other current assets

 

14,588

 

10,016

Total current assets

 

950,740

 

932,413

Property and equipment, net

 

60,835

 

61,011

Right-of-use assets

9,201

9,579

Goodwill

 

73,602

 

73,602

Intangibles, net

 

5,563

 

5,868

Other assets

 

878

 

910

Total Assets

$

1,100,819

$

1,083,383

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

271,411

$

281,836

Accrued payroll

 

26,839

 

30,966

Accrued expenses and other liabilities

 

71,553

 

61,830

Total current liabilities

 

369,803

 

374,632

Deferred income taxes

 

19,278

 

19,278

Noncurrent operating lease liabilities

6,077

6,789

Other liabilities

 

179

 

211

Total Liabilities

 

395,337

 

400,910

Stockholders’ Equity:

Common Stock

 

290

 

290

Additional paid-in capital

 

123,571

 

122,354

Retained earnings

 

627,558

 

605,766

Treasury stock, at cost

(45,937)

(45,937)

Total Stockholders’ Equity

 

705,482

 

682,473

Total Liabilities and Stockholders’ Equity

$

1,100,819

$

1,083,383

See notes to unaudited condensed consolidated financial statements.

1

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)

Three Months Ended

March 31, 

    

2022

    

2021

 

Net sales

$

788,344

$

636,892

Cost of sales

 

660,038

 

536,372

Gross profit

 

128,306

 

100,520

Selling, general and administrative expenses

 

98,172

 

86,400

Income from operations

 

30,134

 

14,120

Other expenses, net

 

(3)

 

(7)

Income before taxes

 

30,131

 

14,113

Income tax provision

 

(8,339)

 

(3,929)

Net income

$

21,792

$

10,184

Earnings per common share:

Basic

$

0.83

$

0.39

Diluted

$

0.83

$

0.39

Shares used in computation of earnings per common share:

Basic

 

26,255

 

26,172

Diluted

 

26,405

 

26,360

See notes to unaudited condensed consolidated financial statements.

2

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Three Months Ended March 31, 2022

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2021

 

29,025

$

290

$

122,354

$

605,766

 

(2,773)

$

(45,937)

$

682,473

Stock-based compensation expense

 

 

 

1,382

 

 

 

 

1,382

Restricted stock units vested

 

9

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(165)

 

 

 

 

(165)

Net income

 

 

 

 

21,792

 

 

 

21,792

Balance - March 31, 2022

 

29,034

$

290

$

123,571

$

627,558

 

(2,773)

$

(45,937)

$

705,482

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

See notes to unaudited condensed consolidated financial statements.

3

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Three Months Ended

March 31, 

    

2022

    

2021

 

Cash Flows (used in) provided by Operating Activities:

Net income

$

21,792

$

10,184

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization

 

2,991

 

3,165

Adjustments to credit losses reserve

 

567

 

(70)

Stock-based compensation expense

 

1,382

 

1,066

Loss on disposal of fixed assets

 

10

 

Changes in assets and liabilities:

Accounts receivable

 

(27,177)

 

54,895

Inventories

 

(28,046)

 

333

Prepaid expenses and other current assets

 

(4,572)

 

(3,927)

Other non-current assets

 

32

 

(356)

Accounts payable

 

(10,494)

 

(60,862)

Accrued expenses and other liabilities

 

5,230

 

1,534

Net cash (used in) provided by operating activities

 

(38,285)

 

5,962

Cash Flows used in Investing Activities:

Purchases of equipment and capitalized software

(2,451)

(2,403)

Proceeds from life insurance

1,500

Net cash used in investing activities

 

(2,451)

 

(903)

Cash Flows used in Financing Activities:

Proceeds from short-term borrowings

 

1,385

 

Repayment of short-term borrowings

(1,385)

Dividend payments

 

 

(8,375)

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

 

(165)

 

(82)

Net cash used in financing activities

 

(165)

 

(8,457)

Decrease in cash and cash equivalents

 

(40,901)

 

(3,398)

Cash and cash equivalents, beginning of year

 

108,310

 

95,655

Cash and cash equivalents, end of year

$

67,409

$

92,257

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$

266

$

714

Supplemental Cash Flow Information:

Income taxes paid

$

287

$

261

See notes to unaudited condensed consolidated financial statements.

4

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 (the “SEC”) regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Such principles were applied on a basis consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K.

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, 2022 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2022.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period. Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances. By nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates and assumptions.

Recently Issued Financial Accounting Standards

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

5

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, 2022 and 2021, along with the reportable segment for each category.

Three Months Ended March 31, 2022

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

130,434

$

121,339

$

56,850

$

308,623

Desktops

23,559

44,864

17,988

86,411

Software

34,908

21,010

5,269

61,187

Servers/Storage

22,164

15,371

9,630

47,165

Net/Com Products

22,627

22,191

8,027

52,845

Displays and Sound

 

32,824

 

37,079

 

13,423

 

83,326

Accessories

 

32,241

 

48,007

 

12,932

 

93,180

Other Hardware/Services

 

21,687

 

25,535

 

8,385

 

55,607

Total net sales

$

320,444

$

335,396

$

132,504

$

788,344

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

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of March 31, 2022 and December 31, 2021.

    

March 31, 2022

    

December 31, 2021

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

$

7,043

$

8,628

Changes in the contract liability balances during the three months ended March 31, 2022 and 2021 are as follows:

    

2022

Balance at December 31, 2021

$

8,628

Cash received in advance and not recognized as revenue

 

3,870

Amounts recognized as revenue as performance obligations satisfied

 

(5,455)

Balance at March 31, 2022

$

7,043

2021

Balance 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)

Balance at March 31, 2021

$

6,268

6

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 ,

    

2022

    

2021

 

Numerator:

Net income

$

21,792

$

10,184

Denominator:

Denominator for basic earnings per share

 

26,255

 

26,172

Dilutive effect of employee stock awards

 

150

 

188

Denominator for diluted earnings per share

 

26,405

 

26,360

Earnings per share:

Basic

$

0.83

$

0.39

Diluted

$

0.83

$

0.39

For the three months ended March 31, 2022 and 2021, the Company had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

k

Note 4-Leases

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset (“ROU asset”) as of March 31, 2022 was $2,025 and a corresponding lease liability of $2,025 associated with related party leases.

As of March 31, 2022, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022

 

Three Months Ended March 31, 2021

 

Related Parties

Others

Total

 

Related Parties

Others

Total

 

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

313

$

709

$

1,022

$

313

$

777

$

1,090

Short-term lease cost

 

107

 

21

 

128

 

107

 

23

 

130

Total lease cost

$

420

$

730

$

1,150

$

420

$

800

$

1,220

Other Information

 

  

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

 

 

Operating cash flows

$

313

$

687

$

1,000

$

313

$

770

$

1,083

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating leases

1.67

4.34

3.79

2.67

5.32

4.65

Weighted-average discount rate:

Capitalized operating leases

3.92%

3.91%

3.92%

3.92%

3.92%

3.92%

7

As of March 31, 2022, future lease payments over the remaining term of capitalized operating leases were as follows:

For the Years Ended December 31, 

    

Related Parties

    

Others

    

Total

2022, excluding the three months ended March 31, 2022

$

940

$

2,159

$

3,099

2023

 

1,149

 

2,136

 

3,285

2024

 

 

1,644

 

1,644

2025

 

 

1,577

 

1,577

2026

888

888

Thereafter

1

1

$

2,089

$

8,405

$

10,494

Imputed interest

(640)

Lease liability balance at March 31, 2022

$

9,854

As of March 31, 2022, the ROU asset had a balance of $9,201. The long-term lease liability was $6,077 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,777. 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.

Note 5–Segment Information

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

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

8

Segment information applicable to the Company’s reportable operating segments for the three months ended March 31, 2022 and 2021 is shown below:

Three Months Ended

March 31, 

March 31, 

    

2022

    

2021

 

Net sales:

Business Solutions

$

320,444

$

246,334

Enterprise Solutions

 

335,396

 

265,285

Public Sector Solutions

 

132,504

 

125,273

Total net sales

$

788,344

$

636,892

Operating income (loss):

Business Solutions

$

20,673

$

8,420

Enterprise Solutions

 

14,314

 

12,543

Public Sector Solutions

 

(1,126)

 

(2,753)

Headquarters/Other

 

(3,727)

 

(4,090)

Total operating income

 

30,134

 

14,120

Other expenses, net

 

(3)

 

(7)

Income before taxes

$

30,131

$

14,113

Selected operating expense:

Depreciation and amortization:

Business Solutions

$

167

$

159

Enterprise Solutions

 

534

 

716

Public Sector Solutions

 

20

 

14

Headquarters/Other

 

2,270

 

2,276

Total depreciation and amortization

$

2,991

$

3,165

Total assets:

Business Solutions

$

426,103

$

362,694

Enterprise Solutions

 

651,905

 

568,221

Public Sector Solutions

 

94,540

 

94,103

Headquarters/Other

 

(71,729)

 

(66,632)

Total assets

$

1,100,819

$

958,386

The assets of the Company’s three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment, ROU assets, and intercompany balance, net. As of March 31, 2022 and 2021, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $50,234, and $48,026, respectively. The Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of the Company’s segments, to varying degrees, and accordingly, the CODM does not evaluate capital expenditures on a segment-by-segment basis.

Note 6–Commitments and Contingencies

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

The Company is subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, but such outcomes are not expected to have a material, adverse impact on the Company’s financial position, results of operations, and/or cash flows.

Note 7–Bank Borrowings

The Company has a $50,000 credit facility collateralized by its account receivables that expires March 31, 2025. This facility can be increased, at the Company’s option, to $80,000 for permitted acquisitions or other uses authorized by

9

the lender on substantially the same terms. Amounts outstanding under this facility bear interest at greatest of (i) the prime rate (3.50% on March 31, 2022), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, plus 1.00% per annum, provided that the Alternate Base Rate shall at no time be less than 0% per annum. The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility for a given quarter to consolidated trailing twelve months Adjusted Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges (Adjusted EBITDA). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in the Company’s consolidated trailing twelve months Adjusted EBITDA could limit its potential borrowing capacity under the credit facility. As of March 31, 2022, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.

On February 3, 2022, the Company borrowed $1,385 under the credit facility, which was fully repaid on February 4, 2022. The Company had no outstanding bank borrowings for the quarter ended March 31, 2022 or 2021, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility on such date.

10

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 Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

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;
disruptions impacting the global supply chain, including those attributable to the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine;
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;

11

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.
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, 2021. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

OVERVIEW

We are a Fortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology. Our dedicated account managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center, or TIDC, with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of incountry suppliers in over 150 countries.

The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, or SMBs, enterprise, and public sector markets.

Financial results for each of our segments are included in the financial statements attached hereto. We generate sales through (i)outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We offer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, and VMware, and we partner with more than 2,500 suppliers. We are able to leverage our state-of-the art logistic capabilities to rapidly ship product to customers.

12

As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, sold or attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to and, in some cases, 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 TSG, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

To support future growth, we continue to expand our IT solutions business, which requires highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.

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

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

EFFECTS OF COVID-19

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, global supply chain disruptions have limited our ability to acquire products in a timely manner, and we anticipate these global supply chain challenges will persist through the foreseeable future. In response to the delays we are experiencing in acquiring products, we increased our inventory levels during the quarter ended March 31, 2022 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. We also experienced an increase in our backlog as global supply chain challenges delayed our ability to fill customer orders. We continue to monitor the effects on our customers, suppliers, and the economy as a whole and will continue to adjust our business practices, as necessary, to respond to the changing demand for, and supply of, our products.

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 March 31, 

2022

    

2021

  

Net sales (in millions)

$

788.3

$

636.9

Gross margin

16.3

%  

15.8

Selling, general and administrative expenses

 

12.5

%  

 

13.6

%

Income from operations

 

3.8

%  

 

2.2

%

13

Net sales of $788.3 million for the first quarter of 2022 reflected an increase of $151.5 million compared to the first quarter of 2021, which was driven by higher net sales across all three of our business segments. The increase in net sales was primarily driven by our ability to meet the continued demand from our customers. In addition, we saw revenue growth across all our vertical markets. Gross profit increased year-over-year by $27.8 million, primarily due to the changes in product mix and increases in total net sales. SG&A expenses increased year-over-year by $11.8 million, driven primarily by increased personnel cost of $9.3 million associated with higher variable compensation due to the higher gross profit. The higher SG&A expenses were also attributable to an increase in marketing expenses of $1.2 million. Operating income in the first quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $16.0 million and 160 basis points, respectively, primarily as a result of the increase in net sales.

Net Sales Distribution

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

Three Months Ended March 31, 

2022

    

2021

Sales Segment

Enterprise Solutions

42

%  

41

%  

Business Solutions

41

39

Public Sector Solutions

17

 

20

 

Total

100

%  

100

%  

Product Mix

Notebooks/Mobility

39

%  

37

%  

Desktops

11

9

Software

8

9

Servers/Storage

6

7

 

Net/Com Product

7

 

8

 

Displays and sound

11

9

 

Accessories

12

13

Other Hardware/Services

6

 

8

 

Total

100

%  

100

%  

Gross Profit Margin

The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:

Three Months Ended March 31, 

2022

    

2021

Sales Segment

Enterprise Solutions

14.6

%  

14.1

%  

Business Solutions

19.4

19.2

Public Sector Solutions

13.1

 

12.5

 

Total Company

16.3

%  

15.8

%  

14

Operating Expenses

The following table reflects our SG&A expenses for the periods indicated:

Three Months Ended March 31, 

($ in millions)

2022

2021

Personnel costs

$

74.1

$

64.8

Advertising

 

4.6

 

3.4

Service contracts/subscriptions

4.9

4.6

Professional fees

 

3.9

 

4.7

Depreciation and amortization

 

3.0

 

3.2

Facilities operations

 

2.1

 

2.2

Credit card fees

 

1.7

 

1.4

Other

 

3.9

 

2.1

Total SG&A expense

$

98.2

$

86.4

As a percentage of net sales

12.5

%  

13.6

%  

Year-Over-Year Comparisons

In this section and elsewhere in this Quarterly Report on Form 10-Q we refer to changes in year-over-year results. Unless context otherwise requires, such references refer to changes between the three months ended March 31, 2022 and the three months ended March 31, 2021.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):

Three Months Ended March 31, 

2022

2021

% of

% of

%

    

Amount

    

Net Sales

    

Amount

    

Net Sales

    

Change

    

Net Sales: