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, 2017~~March 31, 2021

☐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~~ number: 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)


~~DELAWARE~~Delaware	02-0513618
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)


730 Milford Road
~~730 MILFORD ROAD,~~Merrimack, New Hampshire
~~MERRIMACK, NEW HAMPSHIRE~~	03054
(Address of principal executive offices)	(Zip Code)


	(603) 683-2000
	~~(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 markwhether 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~~ Yes☑ NO No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files).

~~YES~~ Yes☑ NO 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 ☐
	~~(Do not check if 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~~ Yes ☐ NO No ☑

The number of shares outstanding of the issuer’s common stock as of ~~November 3, 2017~~ April 30, 2021 was ~~26,815,634.~~26,187,175.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


	PART I FINANCIAL INFORMATION

		Page
ITEM 11..	Unaudited Condensed Consolidated Financial ~~Statements~~Statements::

	Condensed Consolidated Balance Sheets–~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020	1


	Condensed Consolidated Statements of Income–Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	2


	Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2021 and 2020	3

	Condensed Consolidated Statements of Cash Flows–~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	3
		4

	Notes to Unaudited Condensed Consolidated Financial Statements	4 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.	~~Risk Factors~~Exhibits	23 24

~~ITEM 6~~SIGNATURES.		~~Exhibits~~	23
		25
~~SIGNATURES~~		24

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

~~PART I - FINANCIAL INFORMATION~~

~~Item 1 - Financial Statements~~

CONDENSED CONSOLIDATED BALANCE ~~SHEETS~~ SHEETS

(Unaudited)

(amounts in thousands)

September 30,

December 31,

2017

2016

ASSETS

Current Assets:

Cash and cash equivalents

$
62,338

$
49,180

Accounts receivable, net

382,666

411,883

Inventories

106,724

90,535

Prepaid expenses and other current assets

5,185

5,453

Income taxes receivable

4,579

2,120

Total current assets

561,492

559,171

Property and equipment, net

40,077

39,402

Goodwill

73,602

73,602

Other intangibles, net

11,393

12,586

Other assets

5,318

1,373

Total Assets

$
691,882

$
686,134

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$
164,883

$
177,862

Accrued expenses and other liabilities

18,294

31,047

Accrued payroll

16,938

21,345

Total current liabilities

200,115

230,254

Deferred income taxes

19,766

19,602

Other liabilities

2,083

2,836

Total Liabilities

221,964

252,692

Stockholders’ Equity:

Common stock

287

285

Additional paid-in capital

113,421

111,081

Retained earnings

372,072

337,938

Treasury stock, at cost

(15,862)

(15,862)

Total Stockholders’ Equity

469,918

433,442

Total Liabilities and Stockholders’ Equity

$
691,882

$
686,134


	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.

PC CONNECTION, INC. AND SUBSIDIARIES

~~PART I―FINANCIAL INFORMATION~~

~~Item 1―Financial Statements~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~ INCOME

(Unaudited)

(amounts in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2017

2016

2017

2016

Net sales

$
729,230

$
708,485

$
2,149,616

$
1,957,044

Cost of sales

633,087

611,518

1,867,070

1,684,010

Gross profit

96,143

96,967

282,546

273,034

Selling, general and administrative expenses

74,404

74,522

226,915

214,415

Income from operations

21,739

22,445

55,631

58,619

Interest income (expense)

(8)

(27)

20

(53)

Income before taxes

21,731

22,418

55,651

58,566

Income tax provision

(8,614)

(8,825)

(21,517)

(23,452)

Net income

$
13,117

$
13,593

$
34,134

$
35,114

Earnings per common share:

Basic

$
0.49

$
0.51

$
1.28

$
1.32

Diluted

$
0.49

$
0.51

$
1.27

$
1.32

Shares used in computation of earnings per common share:

Basic

26,802

26,542

26,754

26,514

Diluted

26,899

26,736

26,886

26,699


	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.

PC CONNECTION, INC. AND SUBSIDIARIES

~~PART I―FINANCIAL INFORMATION~~

~~Item 1―Financial Statements~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~ STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Nine Months Ended

September 30,

2017

2016

Cash Flows from Operating Activities:

Net income

$
34,134

$
35,114

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

Depreciation and amortization

8,645

7,504

Provision for doubtful accounts

1,116

239

Stock-based compensation expense

560

975

Deferred income taxes

164

165

Excess tax benefit from exercise of equity awards

—

(385)

Changes in assets and liabilities:

Accounts receivable

28,101

19,530

Inventories

(16,189)

954

Prepaid expenses and other current assets

(2,191)

506

Other non-current assets

(3,945)

(141)

Accounts payable

(13,162)

(20,922)

Accrued expenses and other liabilities

(8,872)

(3,757)

Net cash provided by operating activities

28,361

39,782

Cash Flows from Investing Activities:

Purchases of equipment

(7,944)

(8,746)

Cash paid for Softmart

—

(33,983)

Net cash used for investing activities

(7,944)

(42,729)

Cash Flows from Financing Activities:

Dividend payment

(9,041)

(10,591)

Exercise of stock options

1,679

—

Issuance of stock under Employee Stock Purchase Plan

603

473

Excess tax benefit from exercise of equity awards

—

385

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

(500)

(625)

Net cash used for financing activities

(7,259)

(10,358)

Increase (decrease) in cash and cash equivalents

13,158

(13,305)

Cash and cash equivalents, beginning of period

49,180

80,188

Cash and cash equivalents, end of period

$
62,338

$
66,883

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$
294

$
160

Supplemental Cash Flow Information:

Income taxes paid

$
24,293

$
23,953


	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.

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.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS~~ 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,” “we,” “us,” or “our”~~“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 ~~our~~the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~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 ~~our~~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 ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, ~~2017.~~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 ~~accompanying condensed consolidated financial statements.~~current economic environment due to the coronavirus pandemic (“COVID-19 pandemic”). Actual results could differ from those ~~estimates.~~

~~Comprehensive Income~~

~~We had no items of comprehensive income, other than our net income for each~~estimates and assumptions, including the impact of the ~~periods presented.~~COVID-19 pandemic.

Recently Issued Financial Accounting Standards

~~On May 28, 2014,~~In March 2020, the Financial Accounting Standards Board ~~or the FASB,~~(“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition. The core principle~~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 ~~that an entity should recognize revenue to depict~~applied prospectively and becomes effective immediately upon the ~~transfer of promised goods or services to customers in an amount that reflects the consideration to~~transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which ~~the entity expects~~is expected to be ~~entitled in exchange for those goods or services. In July 2015,~~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 ~~FASB voted to amend ASU 2014-09 by approving a one-year deferral~~effect of the ~~mandatory effective date as well as providing the option to early adopt the~~adoption of this standard on the ~~original effective date. Accordingly, the~~ Company, will adopt the standard in its first quarter of 2018. An entity may choose to adopt the new standard either through a full retrospective method with application to all periods presented or on a modified retrospective method through a cumulative effect adjustment as of the start of the first period for which it applies the new standard. We are in the process of determining the effect thatbut does not believe the adoption will have a material effect on ~~our~~its consolidated financial statements. Based on our analysis to date, we have reached the following tentative conclusions regarding the new standard and how we expect it to affect our consolidated financial statements and related disclosures:

~~We expect to adopt the standard in the first quarter of 2018 and will not early adopt.~~

We expect to use the full retrospective method. Such method provides that upon applying the new standard, prior periods will be retrospectively adjusted and the cumulative effect of the change recognized in the opening retained earnings and other accounts as of January 1, 2016.

~~Table of Contents~~

~~We believe that since substantially all of our revenue is contractual, substantially all of our revenue falls within the scope of ASU No. 2014-09, as amended.~~

Our hardware revenue is generally recognized on a gross basis upon delivery. Upon adoption of the new standard, we do expect to recognize revenue at an earlier point in time than we are recognizing under current accounting standards for contracts where shipping terms are FOB shipping point. However, we are continuing to analyze each of our other revenue streams, including software to determine any changes that may be required under the new standard.

We hold inventories not available for sale related to certain product sales transactions in which we are warehousing the product and will be deploying the product to our clients’ designated locations subsequent to period-end. We are currently evaluating the effect of the new standard on our inventories not available for sale to identify the differing performance obligations within the underlying contracts and to determine if a portion of revenue under the contracts should be recognized at an earlier point in time than we are recognizing under current accounting standards.

~~We expect that our disclosures in our notes to our consolidated financial statements related to revenue recognition will be significantly expanded under the new standard.~~

Our analysis and evaluation of the new standard will continue through its effective date in the first quarter of 2018. A substantial amount of work remains to be completed due to the complexity of the new standard, the application of judgment, and the requirement for the use of estimates in applying the new standard, as well as the volume of our client portfolio and the related terms and conditions of our contracts that must be reviewed.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently assessing the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment~~, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for us beginning January 1, 2020 for both interim and annual reporting periods. We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.

~~In July 2015, the FASB issued ASU 2015-11,~~ ~~Simplifying the Measurement of Inventory~~, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under prior standards, the market amount required consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. We adopted the standard in the first quarter of 2017 and applied the provisions prospectively. The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as

~~income tax expense or benefit in~~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 ~~income statement. This change eliminates the notion~~nature, amount, timing, and uncertainty of ~~the additional paid-in capital pool~~revenue and reduces the complexity in accounting for excess tax benefits and tax deficiencies. The primary impact of our adoption was the recognition of excess tax benefits related to equity compensation in our provision for income taxes rather than paid-in capital, which is a change required to be applied on a prospective basis in accordance with the new guidance. There were no unrecognized excess tax benefits at implementation. Accordingly, we recorded discrete income tax benefits in the consolidated statements of income of $995 during the nine months ended September 30, 2017, for excess tax benefits related to equity compensation. The corresponding cash flows are ~~reflected~~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 ~~cash provided by operating activities instead~~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

Table of financing activities, as was previously required. We adopted the cash flow presentation that requires presentation of excess tax benefits within operating activities on a prospective basis. Additionally, under ASU 2016-09, we have elected to continue to estimate equity award forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld shares also had no impact to any of the periods presented in our condensed consolidated statements of cash flows since such cash flows have historically been presented as a financing activity. Contents

Note 2–3–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 ~~nonvested~~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				Nine Months Ended
September 30,	2017		2016		2017		2016

									Three Months Ended March 31 ,
									2021		2020
Numerator:
Net income	$	13,117	$	13,593	$	34,134	$	35,114	$	10,184	$	14,896
Denominator:
Denominator for basic earnings per share		26,802		26,542		26,754		26,514		26,172		26,236
Dilutive effect of employee stock awards		97		194		132		185		188		185
Denominator for diluted earnings per share		26,899		26,736		26,886		26,699		26,360		26,421
Earnings per share:
Basic	$	0.49	$	0.51	$	1.28	$	1.32	$	0.39	$	0.57
Diluted	$	0.49	$	0.51	$	1.27	$	1.32	$	0.39	$	0.56

For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, the ~~following~~Company had 0 outstanding ~~nonvested~~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:~~effect.

Three Months Ended

Nine Months Ended

September 30,

2017

2016

2017

2016

Employee stock based awards

$
—

$
—

$
—

$
80

Note ~~3–Acquisitions~~4—Leases

~~Softmart Acquisition~~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.

~~On May 27, 2016, we acquired substantially all~~As of the assets of Softmart Inc. (“Softmart”), a global supplier of information technology and software services solutions. The purchase of Softmart is consistent with our strategy to expand our software services capabilities. Under the terms of the asset purchase agreement, we paid $31,889, net of cash acquired, and allocated the total purchase priceMarch 31, 2021, there were 0 additional operating leases that have not yet commenced. Refer to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The excess of the purchase price over the net assets acquired represents potential synergies from Softmart’s customer base and its assembled workforce of sales representatives and software service specialists that we acquired in the transaction. This excess of purchase price over the aggregate fair values was recorded as goodwill. We incurred $357 of transaction costs in 2016 related to the

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acquisition which we reported in selling, general and administrative expenses, or SG&A, in our consolidated statement of income for the year ended December 31, 2016. The operating results of Softmart have been included in the SMB and Large Accounts segments. The revenues and income from operations of Softmart were not material to our consolidated results, and accordingly, we have not presented Softmart’s revenues or operating results on a pro forma basis.

~~The~~ following table ~~reflects components of the net assets acquired and liabilities assumed at fair value as of the closing date.~~

Purchase Price

Allocation

Current assets

$
22,812

Fixed assets

343

Goodwill

14,314

Customer relationships

11,300

Total assets acquired

48,769

Acquired liabilities

(16,252)

Net assets acquired

32,517

Less cash acquired

(628)

Purchase price at closing, net of cash acquired

$
31,889

~~We recorded goodwill of $7,366 and $6,948 in our SMB and Large Account segments, respectively, and the aggregate is expected to be fully deductible~~ for ~~tax purposes.~~

~~GlobalServe Acquisition~~

On October 11, 2016, we acquired the outstanding common shares of GlobalServe, Inc. (“GlobalServe”), which has developed an internet portal tool that simplifies customers’ global IT procurement. Under the terms of the stock purchase agreement, we paid $11,101, net of cash acquired. The purchase of GlobalServe allows us to service our customers’ global IT needs through their OneSource internet portal with consistent delivery, reporting, pricing, and logistics. We allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition and recorded the excess of purchase price over the aggregate fair values as goodwill. In 2016 we incurred $118 of transaction costsquantitative information related to the ~~acquisition which we reported in SG&A expenses in our consolidated statement of income~~Company’s leases for the ~~year~~three months ended ~~December~~March 31, ~~2016. We have included the operating results of GlobalServe in the Large Account segment since the acquisition date. The revenues~~2021 and ~~income from operations of GlobalServe were not material to our consolidated results, and accordingly, we have not presented GlobalServe’s revenues or operating results on a pro forma basis.~~2020:

~~The following table reflects components of the net assets acquired and liabilities assumed at fair value as of the closing date.~~

Purchase Price

Allocation

Current assets

$
1,486

Fixed assets

4,609

Goodwill

8,012

Customer relationships

900

Total assets acquired

15,007

Acquired liabilities

(734)

Deferred taxes and unrecognized tax benefits

(2,390)

Net assets acquired

11,883

Less cash acquired

(782)

Purchase price at closing, net of cash acquired

$
11,101

~~We recorded $8,012 of goodwill as a result of our acquisition of GlobalServe in our Large Account segment. None of the goodwill related to this acquisition will be deductible for tax purposes.~~


	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%

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 4–5–Segment ~~and Related Disclosures~~Information

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

~~Our~~The Company’s operations are organized under ~~three~~3 reportable segments—the ~~SMB~~Business Solutions segment, which serves primarily small- and medium-sized businesses; the ~~Large Account~~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. ~~We report~~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.

In May 2016, we acquired Softmart. As initially reported in our third quarter results for 2016, the operating results of Softmart were included in the SMB segment. This segment allocation was revised in our results for the year as reported in our 2016 10-K. Under this revised reporting, the operating results of Softmart that were initially included in the SMB segment are now allocated between the SMB and Large Account segments and continue to be allocated between these two segments.

In October 2016, we acquired GlobalServe. We have included the operating results for GlobalServe in our Large Account segment. The external sales and operating results of GlobalServe were immaterial to our consolidated results.

Segment information applicable to our reportable operating segments for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 is shown below:


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2017		2016		2017		2016

									Three Months Ended
									March 31,		March 31,
									2021		2020
Net sales:
SMB	$	290,569	$	281,915	$	860,622	$	814,123
Large Account		268,022		254,273		823,017		723,864
Public Sector		170,639		172,297		465,977		419,057
Business Solutions									$	246,334	$	278,785
Enterprise Solutions										265,285		333,418
Public Sector Solutions										125,273		99,647
Total net sales	$	729,230	$	708,485	$	2,149,616	$	1,957,044	$	636,892	$	711,850
Operating income (loss):
SMB	$	9,543	$	9,989	$	29,430	$	32,104
Large Account		12,389		11,832		35,777		31,188
Public Sector		2,793		3,593		169		4,555
Business Solutions									$	8,420	$	11,301
Enterprise Solutions										12,543		16,722
Public Sector Solutions										(2,753)		(3,322)
Headquarters/Other		(2,986)		(2,969)		(9,745)		(9,228)		(4,090)		(4,051)
Total operating income		21,739		22,445		55,631		58,619		14,120		20,650
Interest income (expense)		(8)		(27)		20		(53)
Other (expenses) income, net										(7)		92
Income before taxes	$	21,731	$	22,418	$	55,651	$	58,566	$	14,113	$	20,742
Selected operating expense:
Depreciation and amortization:
SMB	$	145	$	184	$	448	$	252
Large Account		519		466		1,661		1,138
Public Sector		45		40		126		121
Business Solutions									$	159	$	159
Enterprise Solutions										716		681
Public Sector Solutions										14		15
Headquarters/Other		2,226		2,011		6,410		5,993		2,276		2,292
Total depreciation and amortization	$	2,935	$	2,701	$	8,645	$	7,504	$	3,165	$	3,147
Total assets:
SMB					$	241,030
Large Account						376,001
Public Sector						69,162
Business Solutions									$	362,694	$	319,909
Enterprise Solutions										568,221		536,672
Public Sector Solutions										94,103		52,285
Headquarters/Other						5,689				(66,632)		4,326
Total assets					$	691,882			$	958,386	$	913,192

The assets of our ~~three~~3 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, ~~and~~ property and ~~equipment. Total~~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 ~~$16,728 as of September 30, 2017.~~$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~~segment-by-segment basis.

Note 5–6–Commitments and Contingencies

~~We are~~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~~and/or cash flows.

~~We are~~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, ~~and~~but such outcomes ~~could~~are not expected to have a material, ~~negative~~adverse impact on our financial position, results of operations, ~~and~~and/or cash flows.

Note 7–Bank Borrowings

~~Note 6–Bank Borrowing~~

~~We have~~The Company has a $50,000 credit facility collateralized by our ~~accounts receivable~~account receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for ~~approved~~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 ~~London Interbank Offered Rate, or~~ 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 ~~(4.25%~~(3.25% at ~~September 30, 2017). The one-month LIBOR rate at September 30, 2017 was 1.23%~~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 ~~borrowings~~borrowing capacity under the credit facility. WeThe Company had no0 outstanding bank borrowings at ~~September 30, 2017~~March 31, 2021 or ~~December 31, 2016,~~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.

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 2 - MANAGEMENT'S DISCUSSION AND ~~ANALYSIS~~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~~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” ofin 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, ~~2016.~~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,~~segments: (a) the Business Solutions segment, which ~~serve primarily: (a)~~serves small- to medium-sized businesses, ~~or SMBs,~~ through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, ~~in our Large Account segment,~~ through our MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal, state, and local governmental and educational institutions, ~~in our Public Sector segment,~~ through our GovConnection subsidiary.

We generate sales ~~primarily~~ through (i) outbound telemarketing and field sales contacts by ~~account managers~~sales representatives focused on the business, ~~education,~~educational, healthcare, and government markets, (ii) our websites, and ~~inbound calls~~(iii) direct responses from customers responding to our ~~catalogs and other~~ 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~~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

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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 ~~Technology~~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 ~~solutions~~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 ~~are expanding~~have expanded, and expect to continue to expand, our IT ~~solution~~solutions business, which requires the addition of highly-skilled ~~advanced solution~~service engineers. Although we expect to realize the ultimate benefit of higher-margin ~~advanced solution services and product~~service revenues under this multi-year initiative, we believe that our cost of ~~sales may~~services will increase ~~significantly~~ as we add ~~such~~service engineers. If our ~~advanced solution~~service revenues do not grow enough to offset the cost of these headcount additions, our operating results may ~~decline.~~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~~Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest ~~more heavily~~on an ongoing basis in our own IT development to meet these new demands. ~~This investment includes significant planned expenditures to update our websites, as buying trends change and electronic commerce continues to grow.~~

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

EFFECTS OF COVID-19

In ~~October 2017,~~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 ~~began~~continue to monitor the effects on our customers, suppliers, and the economy as a ~~multi-year initiative~~whole and will adjust our business practices, as necessary, to ~~upgrade~~respond to the changing demand for, and supply of, our IT infrastructure, and accordingly we expect to increase our related capital investments over the next two to three years. This will also likely increase SG&A expenses as assets are placed into service and depreciated.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						Nine Months Ended
	2017			2016			2017			2016

													Three Months Ended
													2021			2020
Net sales (in millions)	$	729.2		$	708.5		$	2,149.6		$	1,957.0		$	636.9		$	711.9
Gross margin		13.2	%		13.7	%		13.1	%		14.0	%		15.8	%		15.9	%
Selling, general and administrative expenses		10.2	%		10.5	%		10.5	%		11.0	%		13.6	%		13.0	%
Income from operations		3.0	%		3.2	%		2.6	%		3.0	%		2.2	%		2.9	%

Net sales inof $636.9 million for the ~~third~~first quarter of ~~2017 increased year over year by $20.7~~2021 reflected a decrease of $75.0 million ~~or 2.9%,~~ compared to the ~~third~~first quarter of ~~2016, due to increased revenues~~2020, which was driven by lower net sales in ~~the Large Account~~our Enterprise Solutions and ~~SMB sales segments. Net sales of software and desktops grew year over year by 14% and 8%, respectively. SG&A expenses decreased year over year in dollars and as a percentage of net sales.~~Business Solutions Segments. The decrease ~~as a percentage of~~was partially offset by growth in our Public Sector Solutions segment. The decrease in net sales was primarily due to ~~higher net sales~~the supply chain constraints in the ~~third~~first quarter of ~~2017, compared to~~2021 and strong comparative results in the ~~prior~~same quarter a year ~~quarter.~~ago. Gross ~~margin~~profit decreased ~~due to a competitive demand environment and changes in vendor funding programs. The decrease in SG&A expenses in dollars was~~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 ~~costs due to~~cost of $4.6 million associated with reduced headcount and lower ~~gross profit~~variable compensation, a decrease in bad debt expenses of $2.9 million and ~~cost reductions implemented~~a decrease in ~~the second quarter~~advertising expenses of ~~2017.~~$1.3 million, which were partially offset by an increase in professional fees of $2.1 million. Operating income in the ~~third~~first quarter of ~~2017~~2021 decreased ~~year over year~~year-over-year both in dollars and as a percentage of net sales ~~compared to~~by $6.5 million and 68 basis points, respectively, primarily as a result of the ~~prior year period due to lower gross profit. Gross profit was adversely affected by lower invoice selling margins and lower vendor funding which reduces our cost of~~decrease in net sales.

Net Sales Distribution

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


	Three Months Ended				Nine Months Ended
	2017		2016		2017		2016

									Three Months Ended
									2021		2020
Sales Segment
SMB	40	%	40	%	40	%	42	%
Large Account	37		36		38		37
Public Sector	23		24		22		21
Enterprise Solutions									41	%	47	%
Business Solutions									39		39
Public Sector Solutions									20		14
Total	100	%	100	%	100	%	100	%	100	%	100	%


Product Mix
Notebooks/Mobility									37	%	28	%
Desktops									9		11
Software	24	%	21	%	22	%	20	%	9		10
Notebooks/Mobility	23		24		22		24
Servers/Storage	8		9		9		10		7		8
Net/Com Product	7		8		8		8		8		8
Displays and sound									9		8
Accessories									13		18
Other Hardware/Services	38		38		39		38		8		9
Total	100	%	100	%	100	%	100	%	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
	2021		2020
Sales Segment
Enterprise Solutions	14.1	%	13.9	%
Business Solutions	19.2		18.8
Public Sector Solutions	12.5		14.5
Total Company	15.8	%	15.9	%

Three Months Ended

Nine Months Ended

2017

2016

2017

2016

Sales Segment

SMB

14.9
%
15.5
%

15.3
%
15.8
%

Large Account

12.7

13.4

12.5

13.1

Public Sector

11.0

11.1

10.4

11.8

Total

13.2
%
13.7
%

13.1
%
14.0
%

Table of Contents

Operating Expenses

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


	Three Months Ended
	2021			2020
Personnel costs	$	64.8		$	69.4
Advertising		3.4			4.6
Facilities operations		6.8			5.1
Professional fees		4.7			2.6
Credit card fees		1.4			1.7
Depreciation and amortization		3.2			3.1
Other		2.1			6.0
Total SG&A expense	$	86.4		$	92.5
As a percentage of net sales		13.6	%		13.0	%

Year-Over-Year Comparisons

In this section and elsewhere in ~~millions):~~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, 2021 and the three months ended March 31, 2020.

Three Months Ended

Nine Months Ended

2017

2016

2017

2016

Personnel costs

$
57.4

$
58.6

$
175.4

$
167.2

Advertising

3.6

3.5

10.8

12.4

Facilities operations

3.7

3.5

11.1

10.1

Professional fees

2.0

1.8

6.4

5.4

Credit card fees

1.8

1.9

5.5

5.0

Depreciation and amortization

2.9

2.7

8.7

7.5

Other, net

3.0

2.5

9.0

6.8

Total

$
74.4

$
74.5

$
226.9

$
214.4

Percentage of net sales

10.2
%

10.5
%

10.6
%

11.0
%

~~Table of Contents~~

~~Year-Over-Year Comparisons~~

Three Months Ended ~~September 30, 2017~~March 31, 2021 Compared to Three Months Ended ~~September 30, 2016~~March 31, 2020

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

Three Months Ended September 30,

2017

2016

% of

% of

%


Amount

Net Sales

Amount

Net Sales

Change


Sales:

SMB

$
290.6

39.8
%
$
281.9

39.8
%
3.1
%

Large Account

268.0

36.8

254.3

35.9

5.4

Public Sector

170.6

23.4

172.3

24.3

(1.0)

Total

$
729.2

100.0
%
$
708.5

100.0
%
2.9
%

Gross Profit:

SMB

$
43.4

14.9
%
$
43.7

15.5
%
(0.6)
%

Large Account

34.0

12.7

34.1

13.4

(0.2)

Public Sector

18.7

11.0

19.2

11.1

(2.6)

Total

$
96.1

13.2
%
$
97.0

13.7
%
(0.8)
%


	Three Months Ended March 31,
	2021				2020
			% of				% of		%
	Amount		Net Sales		Amount		Net Sales		Change
Net Sales:
Enterprise Solutions	$	265.3	41.4	%	$	333.4	46.8	%	(20.4)	%
Business Solutions		246.3	38.8			278.8	39.2		(11.7)
Public Sector Solutions		125.3	19.8			99.7	14.0		25.7
Total	$	636.9	100.0	%	$	711.9	100.0	%	(10.5)	%
Gross Profit:
Enterprise Solutions	$	37.5	14.1	%	$	46.2	13.9	%	(18.8)	%
Business Solutions		47.4	19.2			52.5	18.8		(9.7)
Public Sector Solutions		15.6	12.5			14.4	14.5		8.3
Total	$	100.5	15.8	%	$	113.1	15.9	%	(11.1)	%

Net sales ~~increased~~decreased in the ~~third~~first quarter of ~~2017~~2021 compared to the ~~third~~first quarter of ~~2016,~~2020, as explained below:

●

Net sales of $265.3 million for the ~~SMB~~Enterprise Solutions segment ~~increased~~reflect a decrease of $68.1 million, or 20.4%, year-over-year. We experienced decreases in net sales across the majority of our product offerings primarily as a result of the supply chain constraints in the first quarter of 2021. The decrease in net sales was also due to the higher net sales in the first quarter of 2020 as a result of a shift to work-from-home strategy because of the outbreak of COVID-19 pandemic in the first quarter of 2020. We experienced decreases in net sales of accessory products, other hardware/services, net/com products, and desktops ~~and notebook/mobility products. Desktop sales increased by $6.7~~products of $47.1 million, $12.0 million, $5.1 million, and ~~notebook/~~$3.9 million respectively.

●

Net sales of $246.3 million for the Business Solutions segment reflect a decrease of $32.5 million, or 11.7%, year-over-year. The decrease was a result of the stronger net sales in the same period of prior year. The decrease in net sales was also driven by the supply chain constraints in the first quarter of 2021. We experienced a decrease in net sales of desktop products of $12.1 million, software products of $9.2 million, server/storage products of $5.3 million, and display and sound products of $4.2 million.

Table of Contents

●

Net sales of $125.3 million for the Public Sector Solutions segment reflect an increase of $25.6 million, or 25.7%, compared with the same period a year ago. The increase was primarily driven by a large project rollout to the federal government and an increase of sales in K-12 customers. Net sales of notebooks/mobility products increased by ~~$7.7~~$28.0 million ~~primarily driven by customer refresh of these client devices.~~

~~Net sales for~~compared with the Large Account segment increased due to higher sales of software and mobility. On a dollar basis, software and mobility product revenues increased by $4.0 million and $3.1 million, respectively in the third quarter. ~~Software increased by 6% due to increased demand of security and office productivity products. Mobility increased by 6% due to Large Account customers refresh of client devices.~~

Net sales to the Public Sector segment decreased in the quarter. Net sales to state and local government and educational institutions decreased by $3.0 million primarily due to lower sales to higher education customers. Net sales to the federal government however increased by $1.3 million as federal defense spending continued to grow in the quarter. On a dollar basis, mobility, servers/storage, and other hardware/services decreased $10.1 million, $4.1 million, and $3.8 million, respectively, in the third quarter. The decrease in these product sales wereprior year, which was partially offset by ~~an increase~~the decrease of ~~$17.6 million~~net sales in ~~software sales driven by security and office productivity products.~~

servers/storage products of $5.1 million.

Gross profit for the ~~third~~first quarter of ~~2017 decreased year over year~~2021decreased year-over-year in dollars, ~~and~~but stayed relatively flat as a percentage of net sales (gross margin), as explained below:

●

Gross profit for the ~~SMB~~Enterprise Solutions segment decreased primarily as a result of the 20.4% decrease in net sales year-over-year, fluctuations in customer, and hardware product mix. The change in customer and hardware product mix also explains the increase in gross margin of 20 basis points in the current quarter.

●

Gross profit for the Business Solutions segment decreased year-over-year primarily due to ~~lower invoice selling margins. Invoice selling margins~~a 11.7% decrease in net sales. Gross margin percentage increased by approximately 40 basis points, primarily due to an increase in cloud-based and security software sales, which are recognized on a net basis.

●

Gross profit for the Public Sector Solutions segment increased as a result of a 25.7% increase in net sales. Gross margin percentage decreased by 91200 basis points year-over-year due to ~~lower vendor funding and~~ a shift in ~~both client and~~ product mix, which included increased sales of lower-margin transactional products (notebooks/mobility and desktops). We also receive agency fees from suppliers for certain software and hardware sales which are recorded as revenue with no corresponding cost of goods sold, and accordingly such fees have a positive impact on gross margin. A 30 basis point increases in these agency revenues partially offset the decrease in invoice selling margins.

products.

Gross profit for the Large Account segment decreased due to lower invoice selling margins. Invoice selling margins decreased by 101 basis points in the quarter due to a hyper-competitive demand environment. This margin decrease was partially offset by higher agency revenues (14 basis points).

Gross profit for the Public Sector segment decreased due to a decrease in both net sales and invoice selling margins. Invoice selling margins decreased by 18 basis points due to lower vendor funding.

~~Table of Contents~~

Selling, general and administrative expenses decreased in dollars ~~and~~but increased as a percentage of net sales in the ~~third~~first quarter of ~~2017~~2021 compared to the prior year quarter. 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):~~below:

Three Months Ended September 30,

2017

2016

% of

% of Net

Segment Net

Segment Net

%


Amount

Sales

Amount

Sales

Change


SMB

$
33.8

11.6
%
$
33.7

11.9
%
0.3
%

Large Account

21.7

8.1

22.3

8.8

(2.7)

Public Sector

15.9

9.3

15.6

9.0

1.9

Headquarters/Other, unallocated

3.0

2.9

3.4

Total

$
74.4

10.2
%
$
74.5

10.5
%
(0.1)
%


	Three Months Ended March 31,
	2021				2020
			% of				% of
			Segment Net				Segment Net		%
	Amount		Sales		Amount		Sales		Change
Enterprise Solutions	$	25.0	9.4	%	$	29.5	8.8	%	(15.3)	%
Business Solutions		38.9	15.8			41.2	14.8		(5.6)
Public Sector Solutions		18.4	14.7			17.7	17.8		4.0
Headquarters/Other, unallocated		4.1				4.1			—
Total	$	86.4	13.6	%	$	92.5	13.0	%	(6.6)	%

●

SG&A expenses for the ~~SMB~~Enterprise Solutions segment decreased in dollars but increased as a percentage of net sales. The year-over-year change in SG&A dollars was attributable to decreased personnel costs of $3.5 million, driven primarily by a reduction in headcount and lower variable compensation expense associated with lower gross profit, along with lower product marketing and advertising expenses of $0.8 million. SG&A expenses as a percentage of net sales were 9.4% for the Enterprise Solutions segment in the first quarter of 2021, which reflects an increase of 60 basis points. There were no individual significant drivers of this change year-over-year, but primarily it is a result of lower net sales compared with the same period a year ago.

●

SG&A expenses for the Business Solutions segment decreased in dollars and increased as a percentage of net sales. The year-over-year change in SG&A dollars was driven primarily by lower bad debt expenses of $2.3 million compared to the same period last year. This is as a result of higher bad debt expenses recorded in the prior year as a reaction to the COVID-19 pandemic. SG&A expenses as a percentage of net sales were 15.8% for the Business Solutions segment in the first quarter of 2021, which reflects an increase of 100 basis points and is a result of lower net sales in the quarter compared with the same period a year ago.

●

SG&A expenses for the Public Sector Solutions segment increased in dollars but decreased as a percentage of net sales. The ~~year-over year~~increase is primarily driven by an increase in ~~SG&A dollars was due to~~ ~~$0.1 million of higher usage~~the use of Headquarter services. ~~The decrease in~~ of $0.9 million. SG&A expenses as a percentage of net sales was ~~due to the leveraging of fixed costs over larger net sales~~.

~~SG&A expenses for the Large Account segment~~ ~~decreased in dollars and as a percentage of net sales.~~ The year-over-year decrease in SG&A dollars was due to a decrease of $1.0 million in personnel costs related to cost reductions implemented in April 2017 and transfers of technical staff to Headquarters, offset by an increase in bad debt expense of $0.3 million. The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.

~~SG&A expenses~~14.7% for the Public Sector ~~segment increased~~Solutions segment in ~~dollars and as~~the first quarter of 2021, which reflects a ~~percentage~~decrease of 310 basis points. This decrease year-over-year is primarily attributable to higher net ~~sales.~~ ~~The year-over-year increase~~sales in ~~SG&A dollars was primarily due to an increase of $0.2 million of personnel costs related to~~ the ~~transfers of technical solutions staff from Headquarters.~~

quarter compared with the same period a year ago.

Table of Contents

●

SG&Aexpenses for the Headquarters/Other group ~~increased due~~were relatively flat in comparison to ~~an increase in unallocated executive oversight costs.~~the same period of prior year. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs.

Income from operations for the ~~third~~first quarter of ~~2017~~2021 decreased to ~~$21.7~~$14.1 million, compared to ~~$22.4~~$20.7 million for the ~~third~~first quarter of ~~2016,~~2020, primarily due to the ~~decrease~~decreases in net sales and gross profit. Income from operations as a percentage of net sales was ~~3.0%~~2.2% for the ~~third~~first quarter of ~~2017,~~2021, compared to ~~3.2%~~2.9% of net sales for the prior year ~~quarter.~~

~~Our effective tax rate was 39.6% for the third~~ quarter, of 2017, compared to 39.4% for the third quarter of 2016. Our tax rate will vary based on fluctuations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.

~~Net income~~ ~~for the third quarter of 2017 decreased to $13.1 million, compared to $13.6 million for the third quarter of 2016, due to the decrease in operating income.~~

~~Table of Contents~~

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

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

Nine Months Ended September 30,

2017

2016

% of

% of

%


Amount

Net Sales

Amount

Net Sales

Change


Sales:

SMB

$
860.6

40.0
%
$
814.1

41.6
%
5.7
%

Large Account

823.0

38.3

723.9

37.0

13.7

Public Sector

466.0

21.7

419.0

21.4

11.2

Total

$
2,149.6

100.0
%
$
1,957.0

100.0
%
9.8
%

Gross Profit:

SMB

$
131.4

15.3
%
$
128.8

15.8
%
2.0
%

Large Account

102.8

12.5

94.6

13.1

8.7

Public Sector

48.3

10.4

49.6

11.8

(2.7)

Total

$
282.5

13.1
%
$
273.0

14.0
%
3.5
%

~~Net sales~~ ~~increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, as explained below:~~

Net sales for the SMB segment increased due to higher sales of software and transactional products. Software sales increased by $17.7 million due to the inclusion of revenue from Softmart, which we acquired on May 27, 2016, and due to our investments in advanced solution sales including security and software services. On a dollar basis, notebooks/mobility and desktop products increased by $21.9 million and $11.1 million, respectively for the nine months ended September 30, 2017. Mobility continues to be a strategic focus for SMB customers.

Net sales for the Large Account segment increased significantly due to an increase in large project rollouts. On a dollar basis, software, accessories, and net/com products increased year over year by $39.7 million, $19.5 million, and $13.5 million, respectively. All three product categories increased by double-digit rates year over year.

Net sales to the Public Sector segment increased significantly in the nine months ended September 30, 2017. Net sales to the federal government increased by $35.4 million due to higher sales made under federal government contracts and a large project rollout to the federal government. Net sales to state and local government and educational institutions increased by $11.5 million due to increased sales to higher education and K-12 customers. On a dollar basis, desktops, software, and net/com products increased year over year by $36.1 million, $21.0 million, and $8.7 million, respectively.

~~Gross profit~~ ~~for the nine months ended September 30, 2017 increased year over year in dollars, but decreased~~higher SG&A expenses as a percentage of net ~~sales (gross margin), as explained below:~~sales.

~~Gross profit for the SMB segment increased~~ ~~due to higher net sales.~~ However, invoice selling margins decreased by 87 basis points due to a shift in both client and product mix, which reflected increased sales of lower-margin mobility products, as well as lower vendor funding. The decrease in invoice selling margins was partially offset by higher agency revenues (33 basis points).

Gross profit for the Large Account segment increased due to higher net sales. However, invoice selling margins decreased by 71 basis points due to a shift in product mix and an increase in large project rollouts, which generally carry lower gross margins. The decrease in invoice selling margins was partially offset by higher agency revenues (9 basis points).

Gross profit for the Public Sector segment decreased despite higher net sales. Invoice selling margins decreased by 115 basis points due to a shift in sales mix to lower-margin transactional products, including several large federal government project rollout.

~~Table of Contents~~

~~Selling, general and administrative expenses~~ ~~increased in dollars, but decreased as a percentage of net sales~~Our provision for income taxes in the ~~nine~~three months ended September 30, 2017 compared to the nine months ended September 30, 2016. 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):

Nine Months Ended September 30,

2017

2016

% of

% of

Segment Net

Segment Net

%


Amount

Sales

Amount

Sales

Change


SMB

$
102.0

11.9
%
$
96.7

11.9
%
5.5
%

Large Account

67.0

8.1

63.4

8.8

5.7

Public Sector

48.1

10.3

45.1

10.8

6.7

Headquarters/Other, unallocated

9.8

9.2

6.5

Total

$
226.9

10.6
%
$
214.4

11.0
%
5.8
%

SG&A expenses for the SMB segment increased in dollars and remained unchanged as a percentage of net sales. The year-over-year increase in SG&A dollars was due to the inclusion of $2.4 million of personnel costs related to technical staff transferred from Headquarters and higher usage of Headquarter services of $2.5 million. The increase in Headquarter services was related to our investments in technical and engineering support provided to the SMB segment.

~~SG&A expenses for the Large Account segment~~ ~~increased in dollars, but decreased as a percentage of net sales.~~ ~~The year-over-year increase in SG&A dollars was due to the inclusion of $2.7 million of operating expenses for Globalserve~~ and higher usage of Headquarter services of $0.8 million. The increase in Headquarter services was related to our investments in technical and engineering support provided to the Large Account segment. ~~The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.~~

~~SG&A expenses for the Public Sector segment increased in dollars, but decreased as a percentage of net sales.~~ The year-over-year increase in SG&A dollars was due to $1.0 million of personnel costs which is primarily due to transfers of technical staff transferred from Headquarters and increased headcount, an increase in credit card fees of $0.4 million, and $1.3 million of higher usage of Headquarter services. ~~The increase in Headquarter services was related to our investments in technical and engineering support provided to the Public Sector segment.~~ ~~The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.~~

~~SG&A~~expenses for the Headquarters/Other group increased due to an increase in unallocated executive oversight costs. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

~~Income from operations~~ ~~for the nine months ended September 30, 2017 decreased to $55.7~~March 31, 2021 was $3.9 million, compared to ~~$58.6~~$5.8 million for the ~~nine months ended September 30, 2016, due to the increase in SG&A. Income from operations as a percentage~~first quarter of ~~net sales was 2.6%~~2020.

Net income for the ~~nine months ended September 30, 2017, compared to 3.0%~~first quarter of ~~net sales for the nine months ended September 30, 2016.~~

Our effective tax rate was 38.7% for the nine months ended September 30, 2017, compared to 40.0% for the nine months ended September 30, 2016. Our effective tax rate was mainly impacted by the recognition of excess tax benefit associated with stock based compensation exercised during the nine months ended September 30, 2017.

~~Net income~~ ~~for the nine months ended September 30, 2017~~2021 decreased to ~~$34.1~~$10.2 million, compared to ~~$35.1~~$14.9 million for the ~~nine months ended September 30, 2016,~~first quarter of 2020, primarily due to ~~the decrease in operating income.~~lower net sales and gross profit.

~~Table of Contents~~

Liquidity and Capital Resources

Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our ~~bank line of credit.~~credit facility. We have used 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, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of ~~new~~ businesses. Market conditions impact and help determine our strategic use of funds.

We believe that funds generated from operations, together with available credit under our ~~bank line of~~ credit facility, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. ~~We expect~~Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our capital needs for the next twelve months to consist primarily of capital expenditures of $18.0 to $20.0 million, and payments on leases and other contractual obligations of approximately $5.0 million. We have completed a comprehensive review and assessment of our entire business software needs, including commercially available software that meets, or can be configured to meet, those needs better than our existing software. In October 2017, we began a multi-year initiative to upgrade our IT infrastructure, and accordingly we expect our related capital investments to range from $20.0 to $25.0 million over the next two to three years.customers enhanced functionality.

We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings onunder our ~~bank line of~~ credit facility, as follows:

●

Cash on Hand. At ~~September 30, 2017,~~March 31, 2021, we had ~~approximately $62.3~~$92.3 million in cash and cash equivalents.

●

Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and ~~receivables with changes in~~ payables to generate a positive cash flow.

●

Credit ~~Facilities.~~Facility. As of ~~September 30, 2017,~~March 31, 2021, we had no borrowings ~~were outstanding against~~under our $50.0 million ~~bank line of~~ credit facility, which is available until February 10, 2022. Accordingly, our entire line of credit was available for borrowing at September 30, 2017. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

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 continue to be materially adversely affected by the COVID-19 pandemic, our cash flows from operations may be substantially affected. ~~See also related risks listed below under “Item 1A. “Risk Factors.”~~

Table of Contents

Summary of Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods ~~indicated (in millions):~~indicated:



	Three Months Ended
	2021		2020
Net cash provided by operating activities	$	6.0	$	44.6
Net cash used in investing activities		(0.9)		(4.6)
Net cash used in financing activities		(8.5)		(18.7)
(Decrease) increase in cash and cash equivalents	$	(3.4)	$	21.3

Nine Months Ended

2017

2016

Net cash provided by operating activities

$
28.4

$
39.8

Net cash used for investing activities

(7.9)

(42.7)

Net cash used for financing activities

(7.3)

(10.4)

Increase (decrease) in cash and cash equivalents

$
13.2

$
(13.3)

Cash provided by operating activities was ~~$28.4~~$6.0 million in the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2021. Cash flow provided ~~for~~by operations in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, which decreased by $54.9 million in the current year and was driven primarily by the timing of collections. These factors that contributed to the positive inflow of cash from operating activities were partially offset by ~~an increase~~decreases in ~~inventory~~accounts payable of $60.9 million in the current year, primarily due to the timing of payments. Operating cash flow in the three months ended March 31, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts ~~payable. Accounts~~ receivable, ~~decreased~~and partially offset by ~~$28.1 million from~~increases in inventory and decreases in accounts payable and other accrued expenses.

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)	Three Months Ended
	2021		2020
Days of sales outstanding (DSO)⁽¹⁾		74		58
Days of supply in inventory (DIO)⁽²⁾		24		21
Days of purchases outstanding (DPO)⁽³⁾		(35)		(33)
Cash conversion cycle		63		46

(1) Represents the rolling three-month average of the balance of accounts receivable, net at the end of the period, divided by average daily net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.

(2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period.

(3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period.

The cash conversion cycle increased to 63 days at March 31, 2021, compared to 46 days at March 31, 2020. The increase is primarily due to the 16 day increase of DSO and the 3 day increase of DIO, and partially offset by the 2 days increase of DPO. The increase in DSO was primarily due to payment terms extended to our customers in the prior year-end balance. Days sales outstanding increased to 43 days at September 30, 2017, compared to 42 days at September 30, 2016. Inventory increased from the prior year-end balance by $16.2 million due to higher levels of inventory on-hand related to future backlog and an increase in shipments not received by our customers as of September 30, 2017 compared to December

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~~31, 2016. Inventory turns decreased to 22 turns for the third quarter of 2017 compared to 23 turns for the prior year quarter.~~ year.

At ~~September 30, 2017~~, we had $164.9 million in outstanding accounts payable. Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be paid by cash flows from operations or short-term borrowings under the line of credit. We believe we will be able to meet our obligations under our accounts payable with cash flows from operations and our existing line of credit.

Cash used ~~for~~in investing activities in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 represented ~~$7.9~~$2.4 million of purchases of property and equipment. These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure. ~~Whereas in~~In the prior year, ~~period, investing activities represented $34.0~~we made similar investments with $4.6 million ~~payment for the acquisition of Softmart, Inc. and $8.7 million of~~in purchases of property and equipment.

Cash used for capital expenditures for the first quarter of 2021 was partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in financing activities in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 consisted primarily of ~~a $9.0~~an $8.4 million payment of a special ~~$0.34~~$0.32 per share ~~dividend, offset by $1.6 million of proceeds from the exercise of stock options. Whereas in~~dividend. In the prior year period, financing activities primarily represented ~~a $10.6~~an $8.4 million payment of a special ~~$0.40~~$0.32 per share ~~dividend.~~dividend and $10.2 million for the purchase of treasury shares.

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Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit ~~facilities~~facility and other contractual obligations. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors Affecting Sources of Liquidity” below. For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly ~~Report~~.Report.

~~Bank Line of~~ Credit facility. Our ~~bank line of~~ credit facility extends until February 2022 and is collateralized by our accounts receivable. Our borrowing capacity is up to $50.0 ~~million~~million. Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ~~(4.25%~~(3.25% at ~~September 30, 2017)~~March 31, 2021). The one-month LIBOR rate at ~~September 30, 2017~~March 31, 2021 was ~~1.23%~~0.11%. In addition, we have the option to increase the facility by an additional $30.0 million to meet additional borrowing requirements. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At ~~September 30, 2017, the entire~~March 31, 2021, $50.0 million ~~facility~~ was available for ~~borrowing.~~

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. Borrowingsborrowing under the ~~line of credit are classified as current.~~facility.

~~Operating Leases~~. We lease facilities from our principal stockholders and facilities and equipment from third parties under non-cancelable operating leases which have been reported in the “Contractual Obligations” section of our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital ~~resources that is material to investors.~~resources.

~~Contractual Obligations.~~ ~~The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2016 have not materially changed since the report was filed.~~

Factors Affecting Sources of Liquidity

Internally Generated Funds.The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.

~~Bank Line of Credit.~~ ~~Our bank line of credit extends until February 2022 and is collateralized by our accounts receivable. As of September 30, 2017, the entire $50.0 million facility was available for borrowing.~~ Credit Facility. Our credit facility

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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. Our credit facility does not include restrictions on future dividend payments. Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing ~~additional~~ funds under this ~~line of credit.~~credit facility. This credit facility contains two financial ~~tests:~~covenants:

●

~~The~~Our funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by ~~the~~our consolidated trailing twelve months Adjusted ~~EBITDA~~ EBITDA—earnings before interest expense, taxes, depreciation, amortization, and special charges—for the trailing four quarters) must not be more than 2.0 to 1.0. Our ~~actual funded ratio as of September 30, 2017 was 0.01 to 1.0, as average~~outstanding borrowings ~~against our~~under the credit facility ~~were minimal~~ during the three months ended ~~September 30, 2017.~~March 31, 2021 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2021. Future decreases in our consolidated trailing twelve months Adjusted EBITDA, could limit our potential borrowings under the credit facility.

●

~~Minimum Consolidated Net Worth~~Our minimum consolidated net worth (defined as our consolidated total assets less our consolidated total liabilities) must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016 (loss quarters not counted). Such amount was calculated as ~~$370.3~~$487.0 million at ~~September 30, 2017,~~March 31, 2021, whereas our ~~actual~~ consolidated stockholders’ equity at ~~this~~that date was ~~in compliance at $469.9~~$647.5 million.

Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.

~~SUMMARY~~APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2016. These policies include revenue recognition, accounts receivable, vendor allowances, inventory, and the value~~2020.

Table of ~~goodwill and long-lived assets, including intangibles.~~Contents

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 3 - QUANTITATIVE AND QUALITATIVE ~~DISCLOSURES~~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 fiscal year ended December 31, ~~2016.~~2020. No other material changes have occurred in our market risks since December 31, ~~2016.~~2020.

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 4 - CONTROLS AND ~~PROCEDURES~~PROCEDURES

Disclosure Controls and Procedures

~~The Company’s~~

Our management, with the participation of the Chief Executive Officer and ~~Interim~~ Chief Financial Officer, evaluated the effectiveness of ~~the Company’s~~our disclosure controls and procedures as of ~~September 30, 2017.~~March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by athe company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. ~~The Company’s~~Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, the Chief Executive Officer and ~~Interim~~ Chief Financial Officer concluded that, as of the end of the period covered by this report, ~~the Company’s~~our disclosure controls and procedures were effective at the reasonable assurance level.

NoChanges in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended ~~September 30, 2017~~March 31, 2021 that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER ~~INFORMATION~~INFORMATION

Item 1 – Legal Proceedings

For information related to legal proceedings, see the discussion in Note 6 - Commitments and Contingencies to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which information is incorporated by reference into this Part II, Item 1.

Item 1A -– Risk Factors

In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, which could materially affect our business, financial position, and results of operations. We did not identify any additional risks in the current period that are not included in our Annual Report. 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 public filings with the SEC, and those incorporated by reference in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

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Item 6 - Exhibits


Exhibit Number				Description
~~Exhibit~~ ~~Number~~		~~Description~~
3.1			Amended and Restated Certificate of Incorporation of PC Connection, Inc., as amended (incorporated by reference from the exhibits filed with the company’s registration statement (333-63272) on Form-4 filed under the security act of 1933)

3.2			Amended and Restated Bylaws of PC Connection, Inc. (incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9, 2008).

10.1	*		Incentive and Retention agreement, dated as of March 15, 2021, between the Registrant and Timothy McGrath.

10.2	*		Incentive and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker.

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 ~~Interim~~ 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 ~~Interim~~ 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.~~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

*			~~Filed herewith.~~
**			~~Submitted electronically herewith.~~Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

* Filed herewith.

** Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, (ii) Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 2016,~~2020, (iii) Condensed Consolidated Statements of Stockholders’ Equity for three months ended March 31, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 2016,~~2020, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

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~~SIGNATURES~~

SIGNATURES

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.

PC CONNECTION, INC.


Date:	~~November 9, 2017~~May 7, 2021	By:	/S/s/ TIMOTHY J. MCGRATH
			Timothy J. McGrath
			President and Chief Executive Officer (Duly Authorized Officer)

Date:	~~November 9, 2017~~May 7, 2021	By:	/s/ ~~G. WILLIAM SCHULZE~~THOMAS C. BAKER
			~~G. William Schulze~~Thomas C. Baker
			Senior Vice President, ~~Interim Treasurer and~~ Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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	September 30,		December 31,
	2017		2016

ASSETS
Current Assets:
Cash and cash equivalents	$	62,338	$	49,180
Accounts receivable, net		382,666		411,883
Inventories		106,724		90,535
Prepaid expenses and other current assets		5,185		5,453
Income taxes receivable		4,579		2,120
Total current assets		561,492		559,171
Property and equipment, net		40,077		39,402
Goodwill		73,602		73,602
Other intangibles, net		11,393		12,586
Other assets		5,318		1,373
Total Assets	$	691,882	$	686,134
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	164,883	$	177,862
Accrued expenses and other liabilities		18,294		31,047
Accrued payroll		16,938		21,345
Total current liabilities		200,115		230,254
Deferred income taxes		19,766		19,602
Other liabilities		2,083		2,836
Total Liabilities		221,964		252,692
Stockholders’ Equity:
Common stock		287		285
Additional paid-in capital		113,421		111,081
Retained earnings		372,072		337,938
Treasury stock, at cost		(15,862)		(15,862)
Total Stockholders’ Equity		469,918		433,442
Total Liabilities and Stockholders’ Equity	$	691,882	$	686,134


	Purchase Price
	Allocation
Current assets	$	22,812
Fixed assets		343
Goodwill		14,314
Customer relationships		11,300
Total assets acquired		48,769
Acquired liabilities		(16,252)
Net assets acquired		32,517
Less cash acquired		(628)
Purchase price at closing, net of cash acquired	$	31,889


	Three Months Ended September 30,
	2017				2016
			% of				% of		%
	Amount		Net Sales		Amount		Net Sales		Change
Sales:
SMB	$	290.6	39.8	%	$	281.9	39.8	%	3.1	%
Large Account		268.0	36.8			254.3	35.9		5.4
Public Sector		170.6	23.4			172.3	24.3		(1.0)
Total	$	729.2	100.0	%	$	708.5	100.0	%	2.9	%
Gross Profit:
SMB	$	43.4	14.9	%	$	43.7	15.5	%	(0.6)	%
Large Account		34.0	12.7			34.1	13.4		(0.2)
Public Sector		18.7	11.0			19.2	11.1		(2.6)
Total	$	96.1	13.2	%	$	97.0	13.7	%	(0.8)	%


	Nine Months Ended September 30,
	2017				2016
			% of				% of		%
	Amount		Net Sales		Amount		Net Sales		Change
Sales:
SMB	$	860.6	40.0	%	$	814.1	41.6	%	5.7	%
Large Account		823.0	38.3			723.9	37.0		13.7
Public Sector		466.0	21.7			419.0	21.4		11.2
Total	$	2,149.6	100.0	%	$	1,957.0	100.0	%	9.8	%
Gross Profit:
SMB	$	131.4	15.3	%	$	128.8	15.8	%	2.0	%
Large Account		102.8	12.5			94.6	13.1		8.7
Public Sector		48.3	10.4			49.6	11.8		(2.7)
Total	$	282.5	13.1	%	$	273.0	14.0	%	3.5	%