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, 2017March 31, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number number: 0-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
| |
02-0513618 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
| |
730 Milford Road | |
| |
| 03054 |
(Address of principal executive offices) | (Zip Code) |
| | |
| (603) 683-2000 | |
| ||
| (Registrant's telephone number, including area code) | |
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:
C | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | CNXN | Nasdaq Global Select Market |
Indicate by check 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 ☐ |
|
| | 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.
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
PC CONNECTION, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
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.
1
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF 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.
2
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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.
3
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.
4
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “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 ourthe 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 ourthe 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, 2017March 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 eachestimates 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 principle2020-04, 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 depictapplied prospectively and becomes effective immediately upon the transfer of promised goods or services to customers in an amount that reflects the consideration totransition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which the entity expectsis 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 deferraleffect of the mandatory effective date as well as providing the option to early adopt theadoption 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 ourits 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:
|
|
|
|
4
|
|
|
|
|
|
|
|
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
5
income tax expense or benefit inNote 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 notionnature, amount, timing, and uncertainty of the additional paid-in capital poolrevenue 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 reflectedaffected 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 |
| Enterprise |
| Public Sector |
| 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 |
| Enterprise |
| Public Sector |
| 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 insteadthe 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 |
6
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 nonvestednon-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, 2017March 31, 2021 and 2016,2020, the followingCompany had 0 outstanding nonvestednon-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 |
|
k
Note 3–Acquisitions4—Leases
Softmart AcquisitionThe 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 allAs 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
6
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 incomeCompany’s leases for the yearthree months ended DecemberMarch 31, 2016. We have included the operating results of GlobalServe in the Large Account segment since the acquisition date. The revenues2021 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.
k
| | | | | | | | | | | | | | | | | | |
| 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% | |
7
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 DisclosuresInformation
The internal reporting structure used by ourthe Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. OurThe Company’s CODM is ourits Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
OurThe Company’s operations are organized under three3 reportable segments—the SMBBusiness Solutions segment, which serves primarily small- and medium-sized businesses; the Large AccountEnterprise 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 reportThe 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.
8
Segment information applicable to our reportable operating segments for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 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 three3 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. Totalequipment, 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 segmentsegment-by-segment basis.
Note 5–6–Commitments and Contingencies
We areThe 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, andand/or cash flows.
We areThe 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, andbut such outcomes couldare not expected to have a material, negativeadverse impact on our financial position, results of operations, andand/or cash flows.
9
Note 7–Bank Borrowings
Note 6–Bank Borrowing
We haveThe Company has a $50,000 credit facility collateralized by our accounts receivableaccount receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for approvedpermitted acquisitions or other uses authorized by the lender
9
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 borrowingsborrowing capacity under the credit facility. WeThe Company had no0 outstanding bank borrowings at September 30, 2017March 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.
10
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSISANALYSIS 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‑Q10-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.
11
• 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 managerssales 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 addedvalue-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
11
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 TechnologyTechnical 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 solutionsproducts 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.
12
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 expandinghave expanded, and expect to continue to expand, our IT solutionsolutions business, which requires the addition of highly-skilled advanced solutionservice engineers. Although we expect to realize the ultimate benefit of higher-margin advanced solution services and productservice revenues under this multi-year initiative, we believe that our cost of sales mayservices will increase significantly as we add suchservice engineers. If our advanced solutionservice 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 internetInternet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest more heavilyon 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 begancontinue to monitor the effects on our customers, suppliers, and the economy as a multi-year initiativewhole and will adjust our business practices, as necessary, to upgraderespond 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 thirdfirst quarter of 2017 increased year over year by $20.72021 reflected a decrease of $75.0 million or 2.9%, compared to the thirdfirst quarter of 2016, due to increased revenues2020, which was driven by lower net sales in the Large Accountour 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 ofwas partially offset by growth in our Public Sector Solutions segment. The decrease in net sales was primarily due to higher net salesthe supply chain constraints in the thirdfirst quarter of 2017, compared to2021 and strong comparative results in the priorsame quarter a year quarter.ago. Gross marginprofit decreased due to a competitive demand environment and changes in vendor funding programs. The decrease in SG&A expenses in dollars wasyear-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 tocost of $4.6 million associated with reduced headcount and lower gross profitvariable compensation, a decrease in bad debt expenses of $2.9 million and cost reductions implementeda decrease in the second quarteradvertising expenses of 2017.$1.3 million, which were partially offset by an increase in professional fees of $2.1 million. Operating income in the thirdfirst quarter of 20172021 decreased year over yearyear-over-year both in dollars and as a percentage of net sales compared toby $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 ofdecrease in net sales.
12
13
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 | % |
|
14
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated (dollarsindicated:
| | | | | | | | |
| | 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 | % |
|
13
Year-Over-Year Comparisons
Three Months Ended September 30, 2017March 31, 2021 Compared to Three Months Ended September 30, 2016March 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 increaseddecreased in the thirdfirst quarter of 20172021 compared to the thirdfirst quarter of 2016,2020, as explained below:
| Net sales of $265.3 million for the |
● | 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. |
15
● | 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 |
|
|
|
|
Gross profit for the thirdfirst quarter of 2017 decreased year over year2021decreased year-over-year in dollars, andbut stayed relatively flat as a percentage of net sales (gross margin), as explained below:
| Gross profit for the |
● | Gross profit for the Business Solutions segment decreased year-over-year primarily due to |
● | 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 |
|
|
|
|
14
Selling, general and administrative expenses decreased in dollars andbut increased as a percentage of net sales in the thirdfirst quarter of 20172021 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 |
● | 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 |
|
|
|
|
16
| SG&Aexpenses for the Headquarters/Other group |
Income from operations for the thirdfirst quarter of 20172021 decreased to $21.7$14.1 million, compared to $22.4$20.7 million for the thirdfirst quarter of 2016,2020, primarily due to the decreasedecreases in net sales and gross profit. Income from operations as a percentage of net sales was 3.0%2.2% for the thirdfirst 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.
15
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Changes in net sales and gross profitprimarily 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:
|
|
|
|
|
|
Gross profit for the nine months ended September 30, 2017 increased year over year in dollars, but decreasedhigher SG&A expenses as a percentage of net sales (gross margin), as explained below:sales.
|
|
|
|
|
|
16
Selling, general and administrative expenses increased in dollars, but decreased as a percentage of net salesOur provision for income taxes in the ninethree 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 | % |
|
|
|
|
|
|
|
|
|
Income from operations for the nine months ended September 30, 2017 decreased to $55.7March 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 percentagefirst 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, 20172021 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.
17
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 expectOur 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 |
| 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 |
| Credit |
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.”
17
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 ninethree months ended September 30, 2017.March 31, 2021. Cash flow provided forby operations in the ninethree months ended September 30, 2017March 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 increasedecreases in inventoryaccounts 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, decreasedand partially offset by $28.1 million fromincreases 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
18
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 forin investing activities in the ninethree months ended September 30, 2017March 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 inIn the prior year, period, investing activities represented $34.0we made similar investments with $4.6 million payment for the acquisition of Softmart, Inc. and $8.7 million ofin 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 ninethree months ended September 30, 2017March 31, 2021 consisted primarily of a $9.0an $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 individend. In the prior year period, financing activities primarily represented a $10.6an $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.
18
Debt Instruments, Contractual Agreements, and Related Covenants
Below is a summary of certain provisions of our credit facilitiesfacility 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 millionmillion. 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, 2017March 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 entireMarch 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
19
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:
|
|
|
|
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.
SUMMARYAPPLICATION 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 value2020.
19
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.
20
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURESDISCLOSURES 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.
21
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 4 - CONTROLS AND 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’sour 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’sOur 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’sour 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, 2017March 31, 2021 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
22
PART II - OTHER 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.
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.
23
| | | | |
Exhibit | | Description | ||
| |
| | |
3.1 | | | ||
| | | | |
3.2 | | | ||
| | | | |
10.1 | * | | ||
| | | | |
10.2 | * | | Incentive and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker. | |
| | | | |
31.1 | * | | ||
| | | | |
31.2 | * | | ||
| | | | |
32.1 | * | | ||
| | | | |
32.2 | * | | ||
| | | | |
101.INS | ** | | Inline XBRL Instance | |
| | | | |
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.
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, 2017March 31, 2021 and December 31, 2016,2020, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017March 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 ninethree months ended September 30, 2017March 31, 2021 and September 30, 2016,2020, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
2324
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: |
| | By: | / |
| | | | Timothy J. McGrath |
| | | | President and Chief Executive Officer (Duly Authorized Officer) |
| | | | |
Date: |
| | By: | /s/ |
| | | |
|
| | | | Senior Vice President, |
2425