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 ~~June 30, 2019~~March 31, 2020

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

For the transition period from to

Commission file number 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)


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


730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE	03054
(Address of principal executive offices)	(Zip Code)


	(603) 683-2000
	(Registrant's telephone number, including area code)

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

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

C
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	CNXN	Nasdaq Global Select Market

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

Yes ☑ No ☐

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

Yes ☑ No ☐

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


	Large accelerated filer ☐		Accelerated filer ☑
	Non-accelerated filer ☐		Smaller reporting company ☐
			Emerging growth company ☐

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

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

Yes ☐ No ☑

The number of shares outstanding of the issuer’s common stock as of ~~July 29, 2019~~April 27, 2020 was ~~26,318,073.~~26,107,451.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


	PART I FINANCIAL INFORMATION

		Page
ITEM 1.

	Condensed Consolidated Balance Sheets–~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	1

	Condensed Consolidated Statements of Income–Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	2

	Condensed Consolidated Statements of Stockholders’ Equity–Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	3

	Condensed Consolidated Statements of Cash Flows–~~Six~~Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	1311

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	2420

ITEM 4.	Controls and Procedures	2521




	PART II OTHER INFORMATION

ITEM 1A.	Risk Factors	2622

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	2623

ITEM 6.	Exhibits	2723

SIGNATURES		2824

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)


	June 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
ASSETS
Current Assets:
Cash and cash equivalents	$	69,739	$	91,703	$	111,323	$	90,060
Accounts receivable, net		500,912		447,698		485,316		549,626
Inventories, net		175,904		119,195		136,985		124,666
Income taxes receivable		56		922		1,388		1,388
Prepaid expenses and other current assets		7,054		9,661		13,971		10,671
Total current assets		753,665		669,179		748,983		776,411
Property and equipment, net		59,468		51,799		65,754		64,226
Right-of-use assets, net		15,169		—
Right-of-use assets						15,776		13,842
Goodwill		73,602		73,602		73,602		73,602
Intangibles assets, net		8,918		9,564
Intangible assets, net						8,002		8,307
Other assets		980		1,211		1,075		947
Total Assets	$	911,802	$	805,355	$	913,192	$	937,335
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	260,162	$	201,640	$	219,917	$	235,641
Accrued payroll		26,037		24,319		20,479		28,050
Accrued expenses and other liabilities		35,036		33,840		36,913		45,232
Total current liabilities		321,235		259,799		277,309		308,923
Deferred income taxes		17,194		17,184		20,170		20,170
Operating lease liability		11,727		—
Noncurrent operating lease liabilities						12,551		10,330
Other liabilities		1,479		2,469		600		600
Total Liabilities		351,635		279,452		310,630		340,023
Stockholders’ Equity:
Common stock		288		288		289		288
Additional paid-in capital		117,212		115,842		118,620		118,045
Retained earnings		477,405		441,010		529,590		514,694
Treasury stock, at cost		(34,738)		(31,237)		(45,937)		(35,715)
Total Stockholders’ Equity		560,167		525,903		602,562		597,312
Total Liabilities and Stockholders’ Equity	$	911,802	$	805,355	$	913,192	$	937,335

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
Net sales	$	741,076	$	706,570	$	1,373,997	$	1,331,465	$	711,850	$	632,921
Cost of sales		624,089		599,102		1,157,663		1,127,625		598,732		533,574
Gross profit		116,987		107,468		216,334		203,840		113,118		99,347
Selling, general and administrative expenses		84,664		82,521		165,899		163,421		92,468		81,235
Restructuring and other charges		—		—		703		—		—		703
Income from operations		32,323		24,947		49,732		40,419		20,650		17,409
Interest income, net		184		182		382		298		92		198
Income before taxes		32,507		25,129		50,114		40,717		20,742		17,607
Income tax provision		(8,839)		(6,903)		(13,719)		(11,191)		(5,846)		(4,880)
Net income	$	23,668	$	18,226	$	36,395	$	29,526	$	14,896	$	12,727

Earnings per common share:
Basic	$	0.90	$	0.68	$	1.38	$	1.10	$	0.57	$	0.48
Diluted	$	0.89	$	0.68	$	1.37	$	1.10	$	0.56	$	0.48

Shares used in computation of earnings per common share:
Basic		26,337		26,685		26,348		26,760		26,236		26,359
Diluted		26,494		26,820		26,506		26,868		26,421		26,525

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)


											Total		Three months ended March 31, 2019
	Common Stock			Additional		Retained		Treasury Stock			Stockholders'												Total
	Shares	Amount		Paid-In Capital		Earnings		Shares	Amount		Equity		Common Stock			Additional		Retained		Treasury Stock			Stockholders'
For the Three- and Six-Month Periods Ended June 30, 2018:
Balance at December 31, 2017	28,709	$	287	$	114,154	$	383,673	(1,856)	$	(15,862)	$	482,252
Cumulative effect of adoption of ASC 606	—		—		—		1,197	—		—		1,197
Stock-based compensation expense	—		—		207		—	—		—		207
Repurchase of common stock for treasury	—		—		—		—	(116)		(2,997)		(2,997)
Net income	—		—		—		11,300	—		—		11,300
Balance at March 31, 2018	28,709		287		114,361		396,170	(1,972)		(18,859)		491,959
Stock-based compensation expense	—		—		258		—	—		—		258
Repurchase of common stock for treasury	—		—		—		—	(54)		(1,387)		(1,387)
Issuance of common stock under Employee Stock Purchase Plan	19		—		605		—	—		—		605
Net income	—		—		—		18,226	—		—		18,226
Balance at June 30, 2018	28,728	$	287	$	115,224	$	414,396	(2,026)	$	(20,246)	$	509,661
													Shares	Amount		Paid-In Capital		Earnings		Shares	Amount		Equity
For the Three- and Six-Month Periods Ended June 30, 2019:
Balance at December 31, 2018	28,787	$	288	$	115,842	$	441,010	(2,391)	$	(31,237)	$	525,903	28,787	$	288	$	115,842	$	441,010	(2,391)	$	(31,237)	$	525,903
Stock-based compensation expense	—		—		269		—	—		—		269	—		—		269		—	—		—		269
Restricted stock units vested	3		—		—		—	—		—		—	3		—		—		—	—		—		—
Issuance of common stock under Employee Stock Purchase Plan	—		—		(13)		—	─		─		(13)	—		—		(13)		—	—		—		(13)
Repurchase of common stock for treasury	—		—		—		—	(43)		(1,294)		(1,294)	—		—		—		—	(43)		(1,294)		(1,294)
Net income	—		—		—		12,727	—		—		12,727	—		—		—		12,727	—		—		12,727
Balance at March 31, 2019	28,790		288		116,098		453,737	(2,434)		(32,531)		537,592	28,790	$	288	$	116,098	$	453,737	(2,434)	$	(32,531)	$	537,592
Stock-based compensation expense	—		—		564		—	—		—		564
Restricted stock units vested	9		—		—		—	—		—		—
Issuance of common stock under Employee Stock Purchase Plan	19		—		622		—	─		─		622
Shares withheld for taxes paid on stock awards	—		—		(72)		—	—		—		(72)
Repurchase of common stock for treasury	—		—		—		—	(66)		(2,207)		(2,207)
Net income	—		—		—		23,668	—		—		23,668
Balance at June 30, 2019	28,818	$	288	$	117,212	$	477,405	(2,500)	$	(34,738)	$	560,167


	Three months ended March 31, 2020
											Total
	Common Stock			Additional		Retained		Treasury Stock			Stockholders'
	Shares	Amount		Paid-In Capital		Earnings		Shares	Amount		Equity
Balance at 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 at March 31, 2020	28,874	$	289	$	118,620	$	529,590	(2,773)	$	(45,937)	$	602,562

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)


	Six Months Ended				Three Months Ended
	June 30,				March 31,
	2019		2018		2020		2019
Cash Flows provided by Operating Activities:
Net income	$	36,395	$	29,526	$	14,896	$	12,727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,077		6,729		3,147		3,709
Provision for doubtful accounts		(346)		694		2,833		256
Stock-based compensation expense		833		465		624		269
Deferred income taxes		10		429
Loss on disposal of fixed assets		118		—
Changes in assets and liabilities:
Accounts receivable		(52,868)		1,452		61,477		13,494
Inventories		(56,709)		(11,565)		(12,319)		(18,470)
Prepaid expenses, income tax receivables and other current assets		3,473		2,326		(3,300)		3,322
Other non-current assets		231		(1,997)		(98)		119
Accounts payable		58,181		6,163		(15,499)		2,121
Accrued expenses and other liabilities		6,934		7,296		(7,205)		551
Net cash provided by operating activities		3,329		41,518		44,556		18,098
Cash Flows used in Investing Activities:
Purchases of equipment		(13,877)		(9,927)		(4,595)		(6,572)
Net cash used in investing activities		(13,877)		(9,927)		(4,595)		(6,572)
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings		—		859
Repayment of short-term borrowings		—		(859)
Purchase of treasury shares		(3,501)		(4,384)		(10,222)		(1,294)
Dividend payment		(8,452)		(9,122)		(8,427)		(8,452)
Issuance of stock under Employee Stock Purchase Plan		609		605		—		(13)
Payment of payroll taxes on stock-based compensation through shares withheld		(72)		—		(49)		—
Net cash used in financing activities		(11,416)		(12,901)		(18,698)		(9,759)
(Decrease) increase in cash and cash equivalents		(21,964)		18,690
Increase in cash and cash equivalents						21,263		1,767
Cash and cash equivalents, beginning of period		91,703		49,990		90,060		91,703
Cash and cash equivalents, end of period	$	69,739	$	68,680	$	111,323	$	93,470

Non-cash Investing and Financing Activities:
Accrued capital expenditures	$	2,081	$	1,281	$	1,237	$	1,987
Supplemental Cash Flow Information:
Income taxes paid	$	11,962	$	8,309	$	369	$	291

See notes to unaudited condensed consolidated financial statements.

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the ~~“Company,” “we,” “us,” or “our”~~“Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in ~~our~~the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission (the “SEC”)~~, other than the adoption of Accounting Standards Update (“ASU”) No. 2016-02,~~ ~~Leases~~ ~~(“ASC 842”) using a modified retrospective approach as of January 1, 2018, as discussed below.~~. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in ~~our~~the Company’s Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, ~~2019.~~2020.

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 amounts reported in the accompanying condensed consolidated financial statements. Actual results could differ from those estimates.

~~Comprehensive Income~~

~~We had no items of comprehensive income, other than our net income for each of the periods presented.~~

~~Restructuring and other charges~~

Six months ended June 30,

2019
Employee separations

$
553
Lease termination costs

150
Total restructuring and other charges

$
703

The restructuring and other charges were recorded in the first quarter of 2019 and were related to a reduction in workforce in our Headquarters/Other group and included cash severance and other related benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses at June 30, 2019. Also included were exit costs incurred associated with the closing of one of our office facilities.

All planned restructuring and other charges were incurred as of March 31, 2019 and we have no ongoing restructuring plans. There were no restructuring and other charges recorded during the six months ended June 30, 2018.

~~Table of Contents~~

Adoption of ~~Recently Issued Accounting Standards~~

~~In February 2016, the Financial Accounting Standards Board, or the FASB, issued ASC 842 -~~ ~~Leases~~, which amended the accounting standards for leases. The core principle of the guidance is that an entity should establish 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.

The Company adopted ASC 842 effective January 1, 2019 using a modified retrospective transition approach to each lease that existed as of the adoption date and any leases entered into after that date. We elected the package of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification of any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company also elected the hindsight practical expedient, which allows it to use hindsight in determining the lease term. The adoption did not result in a cumulative adjustment to opening equity. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

In assessing the impact of the adoption, the Company elected to apply the short-team lease exception to any leases with contractual obligations of one year or less. These leases will continue to be treated as operating leases in accordance with the new accounting standard. Consequently, the adoption resulted in the capitalization of a number of the Company’s office leases as of January 1, 2019, for which it recognized a lease liability of $18,835, which was based on the present value of the future payments for these leases. The Company recorded a corresponding right-of-use asset of $18,723, which was adjusted for $114 of remaining unamortized lease incentives as of December 31, 2018. Only those components that were considered integral to the right to use an underlying asset were considered lease components when determining the amounts to capitalize. In accordance with ASC 842, the discount rates used in the present value calculations for each lease should be the rates implicit in the lease, if readily available. Since none of the lease agreements contain explicit discount rates, the Company utilized estimated rates that it would have incurred to borrow, over a similar term, the funds necessary to purchase the respective leased asset with cash. The remaining contractual term for these leases as of January 1, 2019 ranged from 20 to 197 months. Options to renew were considered in determining the present value of the future lease payments in the event the Company believed it was reasonably certain it will assert its respective options to renew.

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset as of June 30, 2019 was $5,998 and a corresponding lease liability of $5,350 associated with related party leases.

~~Table of Contents~~

During the second quarter of 2019, the Company closed one of its office facilities, resulting in the disposal of the net ROU lease asset of $575. The corresponding lease liability of $596 was also removed, which resulted in a $21 gain on disposal. As of June 30, 2019, the Company had no leases that were classified as financing leases and there were no additional operating or financing leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases:

Three months ended June 30, 2019

Six months ended June 30, 2019

Related Parties

Others

Total

Related Parties

Others

Total
Lease Cost












Capitalized operating lease cost
$
379

$
792

$
1,171

$
758

$
1,623

$
2,381
Short-term lease cost

41

2

43

82

4

86
Total lease cost
$
420

$
794

$
1,214

$
840

$
1,627

$
2,467

Other Information












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

Operating cash flows
$
379

$
870

$
1,249

$
758

$
1,754

$
2,512

Weighted-average remaining lease term (in years):












Capitalized operating leases

4.35

10.69

8.58

Weighted-average discount rate:

Capitalized operating leases

3.92%

3.92%

3.92%

~~As of June 30, 2019, future lease payments over the remaining term of capitalized operating leases were as follows:~~

For the Years Ended December 31,


Related Parties


Others


Total
2019, excluding the six months ended June 30, 2019

$
758

$
1,667

$
2,425
2020

1,385

3,382

4,767
2021

1,253

2,482

3,735
2022

1,253

1,484

2,737
2023

1,149

1,034

2,183
2024

—

1,043

1,043
Thereafter

—

583

583

$
5,798

$
11,675

$
17,473

Imputed interest

(1,383)
Lease liability balance at June 30, 2019

$
16,090

~~Future aggregate minimum annual lease payments as of December 31, 2018 reported in our 2018 Form 10-K under the previous lease accounting standard were as follows:~~

For the Years Ended December 31,


Related Parties


Others


Total
2019

$
1,516

$
3,519

$
5,035
2020

1,407

3,386

4,793
2021

1,253

2,466

3,719
2022

1,253

1,490

2,743
2023

1,149

820

1,969
2024 and thereafter

—

1,395

1,395

$
6,578

$
13,076

$
19,654

As of June 30, 2019, the ROU asset had a net balance of $15,169. The long-term lease liability was $11,727 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $4,363.

~~Table of Contents~~

Recently Issued Financial Accounting Standards

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. The ~~new~~Company has adopted this standard ~~is effective for fiscal years~~ beginning January 1, 2020 for both interim and annual reporting periods. The Company ~~expects to adopt this new standard in 2019 when it~~ performs ~~its~~an annual goodwill impairment ~~test~~assessment in the fourth ~~quarter.~~quarter of each calendar year, and more frequently if events or circumstances occur that would indicate a potential decline in fair value. The ~~Company does not expect the~~ adoption of this ~~ASU~~standard is not expected to have a material impact on ~~its~~the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which adds an impairment model for financial instruments, including trade receivables, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected losses, which is expected to result in more timely recognition of such losses. The Company adopted this new standard ~~is effective for fiscal years~~ beginning ~~after December 15, 2019~~January 1, 2020 for both interim and annual reporting periods. The impact of the adoption of this standard was limited to the Company’s trade receivables as it does not currently have any other financial instruments that would be affected by this standard. Customers are evaluated for their credit worthiness at the time of contract inception. Based on the results of the credit assessments, the Company ~~is currently evaluating~~will extend credit under its standard payment terms or may request alternative early payment actions. In addition, the ~~requirements~~Company analyzes its aged receivables for collectability at least quarterly, and if necessary, records a reserve against those receivable it determines may not be collectable. As such, the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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Recently Issued Financial Accounting Standards

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

Note 2–Revenue

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

The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ along with the reportable segment for each category.


	Three Months Ended June 30, 2019								Three Months Ended March 31, 2020
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total		Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	80,422	$	96,842	$	34,691	$	211,955	$	91,613	$	79,316	$	28,966	$	199,895
Desktops		34,787		39,277		18,688		92,752		33,294		34,209		10,472		77,975
Software		39,259		35,739		20,885		95,883		36,398		26,182		7,295		69,875
Servers/Storage		29,383		14,737		20,157		64,277		25,830		16,234		11,746		53,810
Net/Com Products		23,367		12,572		15,079		51,018		21,012		24,946		9,810		55,768
Displays and Sound		20,866		26,236		14,291		61,393		23,946		23,568		11,443		58,957
Accessories		23,677		59,540		10,922		94,139		28,021		90,974		8,809		127,804
Other Hardware/Services		19,291		33,096		17,272		69,659		18,671		37,989		11,106		67,766
Total net sales	$	271,052	$	318,039	$	151,985	$	741,076	$	278,785	$	333,418	$	99,647	$	711,850

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Three Months Ended June 30, 2018 (1)


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
81,999

$
68,545

$
35,261

$
185,805
Desktops

28,399

30,006

18,762

77,167
Software

38,375

37,363

11,043

86,781
Servers/Storage

27,303

24,295

16,499

68,097
Net/Com Products

29,140

20,124

11,115

60,379
Displays and Sound

20,565

34,449

16,627

71,641
Accessories

25,055

51,596

11,757

88,408
Other Hardware/Services

19,206

34,687

14,399

68,292
Total net sales

$
270,042

$
301,065

$
135,463

$
706,570

~~(1)~~

~~Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation.~~

~~The following table represents a disaggregation of revenue from arrangements with customers for the six months ended June 30, 2019 and 2018, along with the reportable segment for each category.~~

Six Months Ended June 30, 2019


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
161,357

$
163,407

$
62,066

$
386,830
Desktops

61,571

75,246

29,575

166,392
Software

73,947

63,515

30,157

167,619
Servers/Storage

55,100

32,162

32,573

119,835
Net/Com Products

45,606

27,200

25,223

98,029
Displays and Sound

41,198

53,171

24,170

118,539
Accessories

45,730

116,055

20,567

182,352
Other Hardware/Services

39,475

62,918

32,008

134,401
Total net sales

$
523,984

$
593,674

$
256,339

$
1,373,997

Six Months Ended June 30, 2018 (1)


Business
Solutions

Enterprise
Solutions

Public Sector
Solutions

Total
Notebooks/Mobility

$
153,728

$
131,983

$
59,159

$
344,870
Desktops

56,690

61,232

28,836

146,758
Software

72,799

65,804

17,906

156,509
Servers/Storage

58,804

48,838

33,638

141,280
Net/Com Products

56,166

32,492

23,873

112,531
Displays and Sound

43,875

56,454

26,098

126,427
Accessories

50,072

90,565

21,579

162,216
Other Hardware/Services

41,186

70,941

28,747

140,874
Total net sales

$
533,320

$
558,309

$
239,836

$
1,331,465

~~(1)~~

~~Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation.~~


	Three Months Ended March 31, 2019
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	80,935	$	66,565	$	27,375	$	174,875
Desktops		26,784		35,969		10,887		73,640
Software		34,688		27,776		9,272		71,736
Servers/Storage		25,717		17,425		12,416		55,558
Net/Com Products		22,239		14,628		10,144		47,011
Displays and Sound		20,332		26,935		9,879		57,146
Accessories		22,053		56,515		9,645		88,213
Other Hardware/Services		20,184		29,822		14,736		64,742
Total net sales	$	252,932	$	275,635	$	104,354	$	632,921

Contract Balances

The following table provides information about contract ~~liability~~liabilities from arrangements with customers as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

June 30, 2019

December 31, 2018
Contract liability, which are included in "Accrued expenses and other liabilities"

$
4,724

$
2,679


	March 31, 2020		December 31, 2019
Contract liabilities, which are included in "Accrued expenses and other liabilities"	$	2,532	$	5,942

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Changes in the contract liability balances during the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 are as follows (in thousands):


	Three Months Ended
	June 30,		2020
Balances at March 31, 2019	$	4,692
Balances at December 31, 2019			$	5,942
Cash received in advance and not recognized as revenue		2,511		4,852
Amounts recognized as revenue as performance obligations satisfied		(2,479)		(8,262)
Balances at June 30, 2019	$	4,724

	Six Months Ended
	June 30,
Balances at December 31, 2018	$	2,679
Cash received in advance and not recognized as revenue		7,168
Amounts recognized as revenue as performance obligations satisfied		(5,123)
Balances at June 30, 2019	$	4,724
Balances at March 31, 2020			$	2,532

Note 3–Earnings Per Share

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

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31 ,
	2019		2018		2019		2018		2020		2019
Numerator:
Net income	$	23,668	$	18,226	$	36,395	$	29,526	$	14,896	$	12,727
Denominator:
Denominator for basic earnings per share		26,337		26,685		26,348		26,760		26,236		26,359
Dilutive effect of unvested employee stock awards		157		135		158		108		185		166
Denominator for diluted earnings per share		26,494		26,820		26,506		26,868		26,421		26,525
Earnings per share:
Basic	$	0.90	$	0.68	$	1.38	$	1.10	$	0.57	$	0.48
Diluted	$	0.89	$	0.68	$	1.37	$	1.10	$	0.56	$	0.48

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

Note 4–4—Leases

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset as of March 31, 2020 was $4,353 and a corresponding lease liability of $4,353 associated with related party leases.

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


	Three months ended March 31, 2020						Three months ended March 31, 2019
	Related Parties		Others		Total		Related Parties		Others		Total
Lease Cost
Capitalized operating lease cost	$	379	$	784	$	1,163	$	379	$	831	$	1,210
Short-term lease cost		41		2		43		41		2		43
Total lease cost	$	420	$	786	$	1,206	$	420	$	833	$	1,253

Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows	$	379	$	781	$	1,160	$	379	$	884	$	1,263

Weighted-average remaining lease term (in years):
Capitalized operating leases		3.65		6.29		5.60		4.59		10.55		8.64

Weighted-average discount rate:
Capitalized operating leases		3.92%		3.92%		3.92%		3.92%		3.92%		3.92%

As of March 31, 2020, future lease payments over the remaining term of capitalized operating leases were as follows:


For the Years Ended December 31,		Related Parties		Others		Total
2020, excluding the three months ended March 31, 2020	$	1,006	$	2,489	$	3,495
2021		1,253		3,091		4,344
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
	$	4,661	$	13,547	$	18,208

Imputed interest						(1,595)
Lease liability balance at March 31, 2020					$	16,613

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

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

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

Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. We report these charges to the operating segments as “Allocations.” Certain

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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.

Segment information applicable to our reportable operating segments for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ is shown below:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31 ,
	2019		2018		2019		2018		2020		2019
Net sales:
Business Solutions	$	271,052	$	270,042	$	523,984	$	533,320	$	278,785	$	252,932
Enterprise Solutions		318,039		301,065		593,674		558,309		333,418		275,635
Public Sector Solutions		151,985		135,463		256,339		239,836		99,647		104,354
Total net sales	$	741,076	$	706,570	$	1,373,997	$	1,331,465	$	711,850	$	632,921
Operating income:
Operating income (loss):
Business Solutions	$	16,211	$	10,648	$	24,976	$	20,130	$	11,301	$	8,765
Enterprise Solutions		19,108		17,291		34,581		29,969		16,722		15,473
Public Sector Solutions		661		514		(2,405)		(2,611)		(3,322)		(3,066)
Headquarters/Other		(3,657)		(3,506)		(7,420)		(7,069)		(4,051)		(3,763)
Total operating income		32,323		24,947		49,732		40,419		20,650		17,409
Interest income, net		184		182		382		298		92		198
Income before taxes	$	32,507	$	25,129	$	50,114	$	40,717	$	20,742	$	17,607
Selected operating expense:
Depreciation and amortization:
Business Solutions	$	148	$	154	$	298	$	328	$	159	$	150
Enterprise Solutions		606		563		1,245		1,045		681		639
Public Sector Solutions		25		32		46		66		15		21
Headquarters/Other		2,589		2,679		5,488		5,290		2,292		2,899
Total depreciation and amortization	$	3,368	$	3,428	$	7,077	$	6,729	$	3,147	$	3,709
Total assets:
Business Solutions					$	291,912	$	261,419	$	319,909	$	280,889
Enterprise Solutions						506,086		447,911		536,672		484,497
Public Sector Solutions						80,461		68,679		52,285		55,536
Headquarters/Other						33,343		2,945		4,326		7,527
Total assets					$	911,802	$	780,954	$	913,192	$	828,449

The assets of our three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment, right-of-use assets, and intercompany balance, net. As of ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of ~~$25,093~~$7,024 and ~~$22,882,~~$11,201, respectively. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a ~~segment~~segment-by-segment basis.

Note 5–6–Commitments and Contingencies

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

We are subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, and such outcomes could have a material, ~~negative~~adverse impact on our financial position, results of operations, and/or cash flows.

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Note 6–7–Bank ~~Credit Facility~~Borrowings

We have a $50,000 credit facility collateralized by our account receivables that expires February 10, 2022. This facility can be increased, at our option, to $80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate (“LIBOR”) ~~(2.40%~~(0.99% at ~~June 30, 2019)~~March 31, 2020), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ~~(5.50%~~(3.25% at ~~June 30, 2019)~~March, 31 2020). The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility to trailing twelve months Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. We had no outstanding bank borrowings at ~~June 30,~~March 31, 2020 or 2019, ~~or 2018,~~ and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

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

AND RESULTS OF OPERATIONS

Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.

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, including the effects of the novel coronavirus (COVID-19) on our business, 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” of 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, ~~2018.~~2019. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

OVERVIEW

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

We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our

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customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our

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

The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.

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

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

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

EFFECTS OF COVID-19

In December 2019, a novel coronavirus disease (“COVID-19”) was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries. On March 11, 2020, the WHO characterized COVID-19 as a global pandemic.

National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home. Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country. We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We have also evaluated the potential impact of the pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.

The COVID-19 pandemic has resulted in material adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers. Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.

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The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.

In addition, the COVID-19 pandemic has caused, and may continue to cause, disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations. In our opinion, customers who operate within the hospitality, airline, and retail industries, and in particular those within our Business Solutions Segment, are likely to be most adversely affected. It is possible we could experience a decrease in orders as a result of the pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in the future. We may also experience delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether. As a result, we have increased our reserve against uncollectable amounts, which resulted in a significant increase in our operating expenses in the first quarter.

See the important information in Item 1A. Risk Factors below, under the caption “The continued spread of COVID-19 and the imposition of related health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.”

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						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
	2019			2018			2019			2018			2020			2019
Net sales (in millions)	$	741.1		$	706.6		$	1,374.0		$	1,331.5		$	711.9		$	632.9
Gross margin		15.8	%		15.2	%		15.7	%		15.3	%		15.9	%		15.7	%
Selling, general and administrative expenses		11.4	%		11.7	%		12.1	%		12.3	%		13.0	%		12.8	%
Income from operations		4.4	%		3.5	%		3.6	%		3.0	%		2.9	%		2.8	%

Net sales of ~~$741.1~~$711.9 million for the ~~second~~first quarter of ~~2019~~2020 reflected an increase of ~~$34.5~~$79.0 million compared to the ~~second~~first quarter of ~~2018,~~2019, which was driven ~~primarily~~ by growth in our Enterprise Solutions and ~~Public Sector~~Business Solutions ~~selling~~ segments. Our ~~investments in advance solution sales~~ability to meet the continued demand for the personal computer refresh, and to supply customers with the necessary technology to implement work-from-home strategies and assist on the front lines of the COVID-19 pandemic fight led to increased sales of mobility, desktop, and ~~software~~net/com products. We also saw significant increases in accessory products, ~~even as we continue to experience downward pressure on net sales growth because a greater portion of our software sales~~which were ~~recognized on a net basis~~driven by large project rollouts in the current ~~quarter.~~period. Gross profit dollars increased year-over-year by ~~$9.5~~$13.9 million due to higher invoice selling margins realized on advanced solution sales, ~~and~~ increased sales of both hardware and software ~~products.~~products, and changes in customer mix. SG&A expenses increased by ~~$2.1~~$11.2 million, ~~but decreased~~mostly due to higher personnel costs, and increased as a percentage of net sales. Operating income in the ~~second~~first quarter of ~~2019~~2020 increased year-over-year both in dollars and as a percentage of net sales by ~~$7.4~~$3.2 million and 9015 basis points, respectively, primarily as a result of increased gross profit margins, which grew by 6019 basis points over the period.

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Net Sales Distribution

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

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018 (1)

2019

2018 (1)

Sales Segment

Enterprise Solutions

43
%
43
%

43
%
42
%

Business Solutions

37

38

38

40

Public Sector Solutions

20

19

19

18

Total

100
%
100
%

100
%
100
%

Product Mix

Notebooks/Mobility

29
%
26
%

28
%
26
%

Desktops

13

11

12

11

Software

13

12

12

12

Servers/Storage

9

10

9

11

Net/Com Products

7

9

7

8

Displays and Sound

8

10

9

9

Accessories

13

13

13

12

Other Hardware/Services

8

9

10

11

Total

100
%
100
%

100
%
100
%

~~(1)~~

~~Product categories were separated into additional categories in 2019. Certain prior-year balances have been classified to conform with the new presentation.~~


	Three Months Ended
	March 31,
	2020		2019
Sales Segment
Enterprise Solutions	47	%	44	%
Business Solutions	39		40
Public Sector Solutions	14		16
Total	100	%	100	%

Product Mix
Notebooks/Mobility	28	%	28	%
Desktops	11		12
Software	10		11
Servers/Storage	8		9
Net/Com Products	8		7
Displays and Sound	8		9
Accessories	18		14
Other Hardware/Services	9		10
Total	100	%	100	%

Gross Profit Margin

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
Sales Segment
Enterprise Solutions	14.4	%	14.4	%	14.7	%	14.4	%	13.9	%	14.9	%
Business Solutions	19.5		17.5		18.7		17.5		18.8		17.8
Public Sector Solutions	12.0		12.5		12.2		12.6		14.5		12.6
Total	15.8	%	15.2	%	15.7	%	15.3	%	15.9	%	15.7	%

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Operating Expenses

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


	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
($ in millions)	2019			2018			2019			2018			2020			2019
Personnel costs	$	64.5		$	63.5		$	125.4		$	126.2		$	69.4		$	61.0
Advertising		5.0			4.4			9.6			8.2			4.6			4.6
Facilities operations		4.6			4.2			9.3			8.4			5.1			4.8
Professional fees		2.9			2.2			5.4			4.6			2.6			2.5
Credit card fees		1.8			1.8			3.3			3.4			1.7			1.5
Depreciation and amortization		3.4			3.4			7.1			6.7			3.1			3.7
Other		2.5			3.0			5.8			5.9			6.0			3.1
Total SG&A expense	$	84.7		$	82.5		$	165.9		$	163.4		$	92.5		$	81.2
Percentage of net sales		11.4	%		11.7	%		12.1	%		12.3	%		13.0	%		12.8	%

~~Restructuring and other charges~~

~~In the first quarter~~14

Table of 2019, we undertook a number of actions at our Headquarters/Other group to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred restructuring and related costs of $0.7 million in the first quarter of 2019. There were no restructuring and other charges recorded in the second quarter of 2019 or in the six months ended June 30, 2018.Contents

Year-Over-Year Comparisons

Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~June 30, 2018~~March 31, 2019

Changes in net sales and gross profit by segment are shown in the following table:


	Three Months Ended June 30,										Three Months Ended March 31,
	2019				2018						2020				2019
			% of				% of		%				% of				% of		%
($ in millions)	Amount		Net Sales		Amount		Net Sales		Change		Amount		Net Sales		Amount		Net Sales		Change
Net Sales:
Enterprise Solutions	$	318.0	42.9	%	$	301.1	42.6	%	5.6	%	$	333.4	46.8	%	$	275.6	43.5	%	21.0	%
Business Solutions		271.1	36.6			270.0	38.2		0.4			278.8	39.2			252.9	40.0		10.2
Public Sector Solutions		152.0	20.5			135.5	19.2		12.2			99.7	14.0			104.4	16.5		(4.5)
Total	$	741.1	100.0	%	$	706.6	100.0	%	4.9	%	$	711.9	100.0	%	$	632.9	100.0	%	12.5	%
Gross Profit:
Enterprise Solutions	$	45.8	14.4	%	$	43.3	14.4	%	5.8	%	$	46.2	13.9	%	$	41.2	14.9	%	12.1	%
Business Solutions		53.0	19.5			47.3	17.5		12.1			52.5	18.8			45.0	17.8		16.7
Public Sector Solutions		18.2	12.0			16.9	12.5		7.7			14.4	14.5			13.1	12.6		9.9
Total	$	117.0	15.8	%	$	107.5	15.2	%	8.8	%	$	113.1	15.9	%	$	99.3	15.7	%	13.9	%

Net sales increased in the ~~second~~first quarter of ~~2019~~2020 compared to the ~~second~~first quarter of ~~2018,~~2019, as explained below:

Net sales of ~~$318.0~~$333.4 million for the Enterprise Solutions segment reflect an increase of ~~$16.9~~$57.8 million, or ~~5.6%~~21.0%, ~~year-over-year~~year-over-year. Accessory products, driven by orders associated with large project rollouts, increased by $34.5 million compared with the prior period. Notebooks/mobility products grew by $12.8 million resulting from the tail end of the personal computer refresh due to the anticipated end-of-life support for Windows 7, and increased sales near the end of the quarter driven by workforces and consumers preparing to function remotely and increased demand from customers in the healthcare industry. We also experienced increases in net sales of mobility products and other accessories of $28.3 million and $7.9 million, respectively. The growth was partially offset by decreases in net sales of server/storage products of $9.6 million, net/com products of ~~$7.6 million, and software products of $1.6~~$10.3 million. ~~These changes were primarily driven by the timing of large product rollouts~~ ~~that began in the first quarter of 2019 and continued into the current period.~~

Net sales of ~~$271.1~~$278.8 million for the Business Solutions segment reflect an increase of ~~$1.1~~$25.9 million, or ~~0.4%~~10.2% year-over-year. Sales of notebooks/mobility products, desktop products, and ~~server products~~other accessories increased by ~~$6.4~~$10.7 million, $6.5 million, and ~~$2.1~~$6.0 million, ~~respectively, but~~

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respectively. These increases were ~~partially offset by lower net~~primarily due to increased demand from customers at the end of the quarter for systems and accessories to support their workforces shifting to remote working capabilities and from customers in the healthcare industry, along with the remaining benefits from the personal computer refresh. Net sales of ~~net/com~~software products ~~of $5.8~~also grew by $1.7 million ~~due to a few large orders in the second quarter of 2018 that did not repeat in 2019. Additionally, net sales were~~year-over-year despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent. ~~Though we experienced strong growth in cloud-based and security software sales, revenues from these products are recognized on a net basis, resulting in a smaller contribution to net sales.~~

Net sales of ~~$152.0~~$99.7 million for the Public Sector Solutions ~~increased~~segment decreased by ~~$16.5~~$4.7 million, or ~~12.2%~~4.5%, compared with the same period a year ago. ~~Net sales~~We experienced decreases year-over-year in other hardware and services of ~~software products grew by $9.8~~$3.6 million, primarily as a result of ~~an increase~~some larger projects with the Federal government in the first quarter of the prior year that did not repeat in the current year quarter. Net sales of ~~perpetual~~ software ~~licenses, which are~~products also decreased by $2.0 million compared with the prior year and was negatively impacted by a higher percentage of our software sales recognized on a ~~gross~~net basis asin the current period in transactions where we are considered to be the ~~principal on the transaction. Net~~agent. These decreases in net sales ~~of servers/storage and net/com products also grew by $3.7 million and $4.0 million, respectively, which~~ were partially offset by ~~lower net~~increased sales of ~~accessories~~notebooks/mobility products of ~~$0.8~~$1.6 million and displays and sound products of $1.6 million.

Gross profit for the ~~second~~first quarter of ~~2019~~2020 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:

Gross profit for the Enterprise Solutions segment increased ~~largely~~primarily due to the 21.0% increase in net sales year-over-year, driven primarily by increases in net sales of net/com, accessory, and notebooks/mobility products, which grew by 70.5%, 61.0%, and 19.2%, respectively. The change in gross margin in the quarter was driven by fluctuations in customer and hardware product mix.

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Gross profit for the Business Solutions segment increased due to increased sales and higher invoice selling margins. Invoice selling margins ~~of 44~~increased by 106 basis points ~~driven~~ primarily ~~by an~~due to the increase in ~~software sales~~revenues reported on a net ~~basis. This increase was partially offset by a decrease~~basis in agency fees of 36 basis points. Agency fees, which we receive from vendors for certain software and hardware sales, are recorded as revenue with no corresponding cost of goods sold, and accordingly have a positive impact on gross margin.the current year.

Gross profit for the ~~Business~~Public Sector Solutions segment increased as a result of changes in customer mix and higher invoice selling margins of ~~165~~181 basis points, driven primarily by improved hardware margins and an increase in software sales reported on a net basis.~~Agency fees from enterprise software agreements also increased year-over-year by $0.7 million, or 27 basis points.~~

Gross profit for the Public Sector Solutions segment increased primarily as a result of higher net sales in the current period. Gross margin, however, was negatively impacted by lower invoice selling margins of 42 basis points due to a shift in customer mix, which included increased sales of lower-margin products. Agency fees also decreased year-over-year by approximately 4 basis points.

Selling, general and administrative expenses increased in both dollars ~~but decreased~~and as a percentage of net sales in the ~~second~~first quarter of ~~2019~~2020 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:


	Three Months Ended June 30,										Three Months Ended March 31,
	2019				2018						2020				2019
			% of				% of						% of				% of
			Segment Net				Segment Net		%				Segment Net				Segment Net		%
($ in millions)	Amount		Sales		Amount		Sales		Change		Amount		Sales		Amount		Sales		Change
Enterprise Solutions	$	26.7	8.4	%	$	26.0	8.6	%	2.7	%	$	29.5	8.8	%	$	25.7	9.3	%	14.8	%
Business Solutions		36.7	13.5			36.6	13.6		0.3			41.2	14.8			36.2	14.3		13.8
Public Sector Solutions		17.5	11.5			16.4	12.1		6.7			17.7	17.8			16.2	15.5		9.3
Headquarters/Other, unallocated		3.8				3.5			8.6			4.1				3.1			32.3
Total	$	84.7	11.4	%	$	82.5	11.7	%	2.7	%	$	92.5	13.0	%	$	81.2	12.8	%	13.9	%

SG&A expenses for the Enterprise Solutions segment increased in dollars, ~~and~~but decreased as a percentage of net sales. The year-over-year ~~increase~~change in SG&A dollars was ~~primarily due~~attributable to ~~an increase~~increased personnel costs of ~~$0.4~~$2.4 million, driven by merit increases and variable compensation associated with higher gross profit. Bad debt expense increased by $0.8 million in ~~advertising expenses and~~the first quarter of 2020 compared with the prior year, primarily as a ~~$0.3~~result of anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic. The year-over-year increase in SG&A expense also resulted from a $0.4 million increase in the ~~usage~~use of ~~Headquarters services.~~Headquarter services in the current period. SG&A expenses as a percentage of net sales was ~~8.4%~~8.8% for the Enterprise Solutions segment in the ~~second~~first quarter of ~~2019,~~2020, which reflects a decrease of 2048 basis points and is a result of net sales growing at a higher rate than operating expenses when compared with the same period a year ago.

SG&A expenses for the Business Solutions segment ~~remained relatively flat year-over-year~~increased in both dollars and as a percentage of net sales. Contributing to the slight change year-over-year was an increase in advertising costs of $0.3 million and other expenses of approximately $0.1 million, of which there were no individually significant drivers. These increases were partially offset by a decrease in personnel-related costs of $0.3 million. SG&A expenses as a percentage of net sales was 13.5% for the Business Solutions segment in the second

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~~quarter of 2019 compared to 13.6% in the second quarter of 2018. This improvement year-over-year is attributable to the slight increase in net sales, combined with relatively flat SG&A expenses.~~

~~SG&A expenses for the Public Sector Solutions segment increased in dollars and decreased~~ as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a ~~$0.8~~$2.0 million increase in ~~personnel expenses,~~bad debt expense resulting from higher expected credit losses from customers who have been significantly impacted by the COVID-19 pandemic. Personnel costs, including merit increases and variable compensation associated with higher gross profit, ~~and a $0.4~~also increased by $1.8 million, ~~increase in~~while the ~~usage~~use of ~~Headquarters services. These increases were partially offset~~Headquarter services increased by ~~a $0.1 million decrease in advertising expense.~~$1.3 million. SG&A expenses as a percentage of net sales was ~~11.5%~~14.8% for the ~~Public Sector~~Business Solutions segment in the first quarter of 2020 compared to 14.3% in the first quarter of 2019, which reflects ~~a decrease~~an increase of 6046 basis points ~~compared to the prior period,~~year-over-year, resulting from spending that outpaced net sales growth ~~that outpaced spending~~ compared with the same period a year ago.

SG&A expenses for the Public Sector Solutions segment increased in both dollars and as a percentage of net sales. Personnel costs, including merit increases and variable compensation associated with higher gross profit, increased by $0.8 million year-over-year, while the use of Headquarter services increased by $0.6 million. SG&A expenses as a percentage of net sales was 17.8% for the Public Sector Solutions segment in the first quarter of 2020, which reflects an increase of 225 basis points. This increase year-over-year is primarily attributable to spending that outpaced net sales growth compared with the same period a year ago.

SG&A expenses for the Headquarters/Other group increased primarily due to ana $3.4 million increase in personnel-related costs driven primarily by a higher headcount, increased payroll expense, and increased variable compensation associated with higher profits. These increases were partially offset by a decrease in unallocated executive oversight ~~costs.~~costs of $2.4 million. The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management. Most of the

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operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs.

Income from operations for the ~~second~~first quarter of ~~2019~~2020 increased to ~~$32.3~~$20.7 million, compared to ~~$24.9~~$17.4 million for the ~~second~~first quarter of ~~2018,~~2019, primarily due to the increase in net sales and gross profit year-over-year. Income from operations as a percentage of net sales was ~~4.4%~~2.9% for the ~~second~~first quarter of ~~2019,~~2020, compared to ~~3.5%~~2.8% of net sales for the prior year quarter, primarily as a result of the growth rate in gross profit slightly exceeding the growth rate in SG&A expenses.

Our effective tax rate was ~~27.2%~~28.2% for the ~~second~~first quarter of ~~2019,~~2020, compared to ~~27.5%~~27.7% for the ~~second~~first quarter of ~~2018.~~2019. We expect our corporate income tax rate for ~~2019~~2020 to range from ~~27%~~26% to ~~29%~~28%.

Net income for the ~~second~~first quarter of ~~2019~~2020 increased to ~~$23.7~~$14.9 million, compared to ~~$18.2~~$12.7 million for the ~~second~~first quarter of ~~2018,~~2019, primarily due to higher gross profit and ~~lower~~an increase in gross margin which outpaced the growth in operating expenses ~~due to expense management in the second quarter of 2019, as compared to the second quarter of 2018.~~

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

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

Six Months Ended June 30,

2019

2018

% of

% of

%

($ in millions)

Amount

Net Sales

Amount

Net Sales

Change


Net Sales:

Enterprise Solutions

$
593.7

43.2
%
$
558.3

41.9
%
6.3
%

Business Solutions

524.0

38.1

533.3

40.1

(1.7)

Public Sector Solutions

256.3

18.7

239.9

18.0

6.9

Total

$
1,374.0

100.0
%
$
1,331.5

100.0
%
3.2
%

Gross Profit:

Enterprise Solutions

$
87.1

14.7
%
$
79.9

14.4
%
9.0
%

Business Solutions

97.9

18.7

93.6

17.5

4.6

Public Sector Solutions

31.3

12.2

30.3

12.6

3.3

Total

$
216.3

15.7
%
$
203.8

15.3
%
6.1
%

~~Net sales~~ ~~increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, as explained below:~~

Net sales of $593.7 million for the Enterprise Solutions segment reflect an increase of $35.4 million, or 6.3%, primarily driven by increases in net sales of mobility products and accessories of $31.4 million and $25.5 million, respectively, due in large part to the timing of large project rollouts that began in the first quarter of 2019 and continued into the current quarter. This growth was partially offset by a decrease in net sales of server/storage products of $16.7 million and lower net sales of net/com products of $5.3 million.

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~~Net sales of $524.0 million for the Business Solutions segment reflect a decrease of $9.3 million, or 1.7%.~~ ~~Net sales were negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent.~~ ~~Though we experienced strong growth in cloud-based and security software sales, revenues from these products are recognized on a net basis, resulting in a smaller contribution to net sales.~~

Net sales of $256.3 million for the Public Sector Solutions segment reflect an increase of $16.4, or 6.9%. Net sales of software products grew by $12.3 million, primarily as a result of an increase in sales of perpetual software licenses, which are recognized on a gross basis as we are considered to be the principal on the transaction. Net sales of mobility and net/com products also grew by $2.9 million and $1.4 million, respectively.

~~Gross profit~~ ~~for the six months ended June 30, 2019 increased year-over-year in dollars and as a percentage of net sales (gross margin), as explained below:~~

Gross profit for the Enterprise Solutions segment increased due to higher invoice selling margins of 60 basis points, driven primarily by an increase in software sales reported on a net basis, and partially offset by a decrease in agency fees of 20 basis points. Agency fees, which we receive from vendors for certain software and hardware sales, are recorded as revenue with no corresponding cost of goods sold, and accordingly have a positive impact on gross margin.

~~Gross profit for the Business Solutions segment increased period-over-period despite lower net sales in the current period. The increase was a result of~~ ~~higher invoice selling margins of 92 basis points driven primarily by an increase in software sales reported on a net basis.~~ ~~Agency fees from enterprise software agreements also increased year-over-year by $1.4 million, or 30 basis points.~~

Gross profit for the Public Sector Solutions segment increased primarily as a result of higher net sales in the current period. Gross margin, however, was negatively impacted by lower invoice selling margins of 37 basis points due to a shift in both client and product mix, which included increased sales of lower-margin products. Agency fees also decreased year-over-year by approximately 3 basis points.

~~Selling, general and administrative expenses~~ increased in dollars and decreased as a percentage of net sales in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. 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):

Six Months Ended June 30,

2019

2018

% of

% of

Segment Net

Segment Net

%

($ in millions)

Amount

Sales

Amount

Sales

Change


Enterprise Solutions

$
52.5

8.8
%

50.0

9.0
%
5.0
%

Business Solutions

73.0

13.9

$
73.4

13.8

(0.5)

Public Sector Solutions

33.7

13.1

32.9

13.7

2.4

Headquarters/Other, unallocated

6.7

7.1

(5.6)

Total

$
165.9

12.1
%
$
163.4

12.3
%
1.5
%

SG&A expenses for the Enterprise Solutions segment increased in dollars and decreased as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $0.6 million increase in personnel expenses, including variable compensation associated with higher gross profit, a $0.6 million increase in advertising expenses and a $0.9 million increase in the usage of Headquarters services. Depreciation and amortization expense also increased by $0.2 million, along with other miscellaneous expenses that were individually insignificant. SG&A expenses as a percentage of net sales was 8.8% for the Enterprise Solutions segment, which reflects a decrease of 20 basis points compared to the prior period, resulting primarily from the strong growth in net sales in the current period.

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SG&A expenses for the Business Solutions segment decreased in dollars and increased slightly as a percentage of net sales. The year-over-year decrease in SG&A dollars was primarily driven by a $1.9 million decrease in personnel-related expenses, of which approximately $1.3 million was attributable to the reallocation of certain personnel-related expenses in the first half of 2018 to the Headquarters/Other group, combined with increased variable compensation associated with higher gross profits. Credit card fees also decreased by approximately $0.2 million. These period-over-period changes were almost entirely offset by a $1.8 million increase in the usage of Headquarter services in the current period. SG&A expenses as a percentage of net sales was 13.9% for the Business Solutions segment, which reflects an increase of 10 basis points compared to the prior period.

SG&A expenses for the Public Sector Solutions segment increased in dollars and decreased as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by a $0.4 million increase in personnel expenses, including variable compensation associated with higher gross profit, and a $0.6 million increase in the usage of Headquarters services. These increases were partially offset by a $0.1 million decrease in advertising expense and a $0.1 million decrease in professional service fees. SG&A expenses as a percentage of net sales was 13.1% for the Public Sector segment, which reflects a decrease of 60 basis points compared to the prior period, resulting from net sales growth that outpaced spending compared with the same period a year ago.

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

~~Restructuring and other charges~~ ~~incurred~~ in the first quarter of 2019 were $0.7 million and related to a reduction in workforce in our Headquarters/Other group, and included cash severance payments and other related benefits. Also included were costs incurred related to the closing of one of our office facilities. There were no such charges incurred in the second quarter of 2019 or in the six months ended June 30, 2018.

~~Income from operations~~ for the six months ended June 30, 2019 increased to $49.7 million, compared to $40.4 million for the six months ended June 30, 2018, primarily due to the increase in net sales and gross profit year-over-year. Income from operations as a percentage of net sales was 3.6% for the six months ended June 30, 2019, compared to 3.0% of net sales for the same period in the prior year, primarily due to the growth rate in gross profit exceeding the growth rate in SG&A expenses.

Our effective tax rate was 27.4% for the six months ended June 30, 2019, compared to 27.5% for the six months ended June 30, 2018. We expect our corporate income tax rate for 2019 to range from 27% to 29%.

~~Net income~~ for the six months ended June 30, 2019 increased to $36.4 million, compared to $29.5 million for the six months ended June 30, 2018, primarily due to higher gross profit and improved operating expense management in the six months ended June 30, 2019,2020, as compared to the ~~six months ended June 30, 2018.~~first quarter of 2019.

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. 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 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, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.

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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 under our bank line of credit, as follows:

Cash on Hand. At ~~June 30, 2019,~~March 31, 2020, we had $~~69.7~~111.3 million in cash and cash equivalents.

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

Credit Facilities. As of ~~June 30, 2019,~~March 31, 2020, we had no borrowings under our $50.0 million bank line of credit, which is available until February 10, 2022. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

The COVID-19 global pandemic has created some uncertainty in financial liquidity. A number of customers across affected industries have requested various concessions from us. We have worked closely with our partners to mitigate the impact these concessions might have on us, but we expect that these situations will continue to arise as we navigate through this crisis.

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.”

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Summary of Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods indicated:



	Six Months Ended				Three Months Ended
($ in millions)	2019		2018		2020		2019
Net cash provided by operating activities	$	3.3	$	41.5	$	44.6	$	18.1
Net cash used in investing activities		(13.9)		(9.9)		(4.6)		(6.6)
Net cash used in financing activities		(11.4)		(12.9)		(18.7)		(9.7)
(Decrease) increase in cash and cash equivalents	$	(22.0)	$	18.7
Increase in cash and cash equivalents					$	21.3	$	1.8

Cash provided by operating activities was ~~$3.3~~$44.6 million in the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. Cash flow provided by operations in the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 resulted primarily from net income before depreciation and amortization ~~an increase accounts payable, an increase in accrued expenses,~~ and a decrease in ~~prepaid expenses.~~accounts receivable, which was reduced by $61.5 million year-over-year and was driven by strong collection efforts and the timing of product shipments. These factors that contributed to the positive inflow of cash from operating activities were partially offset by decreases in accounts payable of $15.5 million, increases in inventory ~~and accounts receivable, which grew by $56.7~~of $12.3 million, and ~~$53.2~~decreases in accrued expenses of $7.2 million ~~respectively,~~ compared with the prior year-end balance. ~~Days~~Our days sales outstanding increased to 58 days at March 31, 2020, compared to 55 days at ~~June 30, 2019, compared to 53 days at June 30, 2018.~~March 31, 2019. Inventory increased from the prior year-end balance due to higher levels of inventory on-hand related to future backlog and an increase in shipments in transit but not received by our customers as of ~~June 30, 2019~~March 31, 2020 compared to December 31, ~~2018.~~2019. Inventory turns, ~~decreased~~which measures the number of times inventory was sold and replaced during the period, increased to 1721 for the ~~second~~first quarter of ~~2019~~2020 compared to 2617 turns for the prior year quarter. ~~This decrease is driven by a higher inventory balance~~Operating cash flow in the ~~current period~~three months ended March 31, 2019 resulted primarily ~~related to committed customer orders not yet shipped as of the end of the quarter.~~from net income before depreciation and amortization, a decrease in accounts receivable, an increase in accounts payable, and a decrease in prepaid expenses, offset partially by an increase in inventory.

Cash used in investing activities in the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 represented ~~$13.9~~$4.6 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, compared to ~~$9.9~~$6.6 million of purchases of property and equipment in the prior year.

Cash used in financing activities in the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 consisted primarily of $10.2 million for the repurchase treasury shares and an $8.4 million payment of a special $0.32 per share dividend. In the prior year period, financing activities primarily represented an $8.5 million payment of a special $0.32 per share dividend and ~~$3.5~~$1.3 million for the purchase of treasury shares, offset by $0.6 million for the issuance of stock under our employee stock purchase plan. Whereas in the prior year period, financing activities primarily represented a $9.1 million payment of a special $0.34 per share dividend and $4.4 million for the purchase of treasury shares, offset by $0.6 million for the issuance of stock under the employee stock purchase plan.shares.

~~Table of Contents~~

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit facilities 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.

Bank Line of Credit ~~Facility~~. Our bank line of credit extends until February 2022 and is collateralized by our accounts receivable. Our borrowing capacity is up to $50.0 million. Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ~~(5.50%~~(3.25% at ~~June 30, 2019)~~March 31, 2020). The one-month LIBOR rate at ~~June 30, 2019~~March 31, 2020 was ~~2.40%~~0.99%. 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 ~~June 30, 2019,~~March 31, 2020, $50.0 million was available for borrowing under the facility.

Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the line of credit are classified as current.

~~Operating Leases~~. We lease facilities from our principal stockholders and facilities and equipment from third parties under non-cancelable operating leases. On January 1, 2019, we adopted ASC 842, which replaces existing lease accounting rules with a requirement to establish a right-of-use (ROU) asset model. As a result of the adoption, we recorded a ROU asset and a lease liability on the balance sheet for leases with terms longer than twelve months as of the date of transition. Refer to the ~~Adoption of Recently Issued Accounting Standards~~ ~~section within Note 1 to the consolidated financial statements for more information.~~

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.

Contractual Obligations. The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 have not materially changed since the report was filed.

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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. These factors may also be adversely impacted by the COVID-19 pandemic.

Credit Facility. Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, and other distributions, investments, and liens) with which we and all of our subsidiaries must comply. 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. This credit facility contains two financial covenants:

Our funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by our consolidated trailing twelve months Adjusted EBITDA—earnings before interest expense, taxes, depreciation, amortization, and special charges—for the trailing four quarters) must not be more than 2.0 to 1.0. Our outstanding borrowings under the credit facility during ~~six~~the three months ended ~~June 30, 2019~~March 31, 2020 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of ~~June 30, 2019.~~March 31, 2020. Future decreases in our consolidated trailing twelve months Adjusted EBITDA, could limit our potential borrowings under the credit facility.

Our minimum consolidated net worth (defined as our consolidated total assets less our consolidated total liabilities) must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016 (loss quarters not counted). Such amount was calculated as ~~$431.1~~$468.9 million at ~~June 30, 2019,~~March 31, 2020, whereas our consolidated stockholders’ equity at that date was ~~$560.2~~$602.6 million.

~~Table of Contents~~

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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

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.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of our market risks, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019. In the quarter ending March 31, 2020, we identified an additional risk that could materially adversely impact our business, financial condition, results of operations and cash flows, which has been included in “Part II – Other Information” of this Form 10-Q. No other material changes have occurred in our market risks since December 31, ~~2018.~~2019.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 4 - CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~June 30, 2019.~~March 31, 2020. 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 the 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There 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 ~~June 30, 2019~~March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In response to the COVID-19 pandemic, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures, however, those changes have so far not been material.

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PART II - OTHER INFORMATION

Item 1A - Risk Factors

In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which could materially affect our business, financial position, and results of operations. The COVID-19 pandemic has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the Annual Report, and the risk factor disclosure in the Annual Report is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q.

We ~~did not identify any~~identified an additional ~~risks~~risk in the current period that ~~are~~was not included in our Annual Report. ~~Risk factors which~~

The continued spread of COVID-19 and the imposition of related public health measures and restrictions may materially adversely impact our business, financial condition, results of operations and cash flows.

In December 2019, the 2019 novel coronavirus surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and several countries, including the United States, Japan and Australia have initiated travel restrictions to and from China. The impacts of the outbreak are unknown and rapidly evolving.

The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause ~~actual~~material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.

We rely on third-party suppliers and manufacturers. This outbreak has resulted in the extended shutdown of certain businesses, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. Any disruption of our suppliers and their contract manufacturers will likely impact our sales and operating results. In addition, the COVID-19 pandemic has caused, and may continue to cause, disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity. It is possible we could experience a decrease in orders as a result of the pandemic. We may also experience delays in collecting amounts owed to us.

This widespread health crisis has adversely affected the global economy, and may result in an economic downturn that could impact demand for our products.

To date the outbreak has not had a material adverse impact on our operations. However, the future impact of the outbreak is highly uncertain and cannot be predicted, and there is no assurance that the outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact will depend on future developments, including actions taken 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~~contain the ~~SEC, and those incorporated by reference in Item 1A. “Risk Factors” in our~~ coronavirus.

~~Annual Report on Form 10-K~~Table of Contents ~~for the year ended December 31, 2018.~~

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended ~~June 30, 2019.~~March 31, 2020.


ISSUER PURCHASES OF EQUITY SECURITIES	ISSUER PURCHASES OF EQUITY SECURITIES							ISSUER PURCHASES OF EQUITY SECURITIES
Period		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (in thousands)			Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (in thousands)
April 1 - April 30, 2019		—	$	—	—	$	26,098
May 1 - May 31, 2019		45,153	$	33.81	45,153	$	24,571
June 1 - June 30, 2019		20,756	$	32.78	20,756	$	23,891
January 1 - January 31, 2020									7,203	$	49.87	7,203	$	22,555
February 1 - February 29, 2020									158,835	$	41.99	158,835	$	15,885
March 1 - March 31, 2020									81,199	$	39.32	81,199	$	12,692
Total		65,909	$	33.49	65,909				247,237	$	41.34	247,237

(1)

In December 2018, our Board of Directors announced a ~~new~~ share repurchase program of our common stock authorizing up to ~~an additional~~ $25 million in share repurchases to be added to our ~~existing~~previous publicly-announced share repurchase programs. ~~Prior to that, our Board had previously authorized the spending of up to $30.0 million in aggregate, under which the remaining authorized amount as of April 1, 2019 was approximately $1.0 million.~~There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions.

(2)

We have repurchased in aggregate approximately ~~2.3~~2.6 million shares of our common stock for approximately ~~$31~~$42 million pursuant to Board-approved programs.

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Item 6 - Exhibits


Exhibit Number		Description
31.1	*	Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	*	Certification of the Company’s President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	*	Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002.
101.INS	**	XBRL Instance Document.
101.SCH	**	XBRL Taxonomy Extension Schema Document.
101.CAL	**	XBRL Taxonomy Calculation Linkbase Document.
101.DEF	**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	**	XBRL Taxonomy Label Linkbase Document.
101.PRE	**	XBRL Taxonomy Presentation Linkbase Document.



*		~~Filed herewith.~~
**

* 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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, (ii) Condensed Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~June 30, 2018~~March 31, 2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, (iv) Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

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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:	~~August 1, 2019~~April 30, 2020	By:	/s/ TIMOTHY J. MCGRATH
			Timothy J. McGrath
			President and Chief Executive Officer (Duly Authorized Officer)

Date:	~~August 1, 2019~~April 30, 2020	By:	/s/ THOMAS C. BAKER
			Thomas C. Baker
			Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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	Six months ended June 30,
	2019
Employee separations	$	553
Lease termination costs		150
Total restructuring and other charges	$	703


	Three months ended June 30, 2019						Six months ended June 30, 2019
	Related Parties		Others		Total		Related Parties		Others		Total
Lease Cost
Capitalized operating lease cost	$	379	$	792	$	1,171	$	758	$	1,623	$	2,381
Short-term lease cost		41		2		43		82		4		86
Total lease cost	$	420	$	794	$	1,214	$	840	$	1,627	$	2,467

Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows	$	379	$	870	$	1,249	$	758	$	1,754	$	2,512

Weighted-average remaining lease term (in years):
Capitalized operating leases								4.35		10.69		8.58

Weighted-average discount rate:
Capitalized operating leases								3.92%		3.92%		3.92%


	Three Months Ended June 30, 2018 (1)
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	81,999	$	68,545	$	35,261	$	185,805
Desktops		28,399		30,006		18,762		77,167
Software		38,375		37,363		11,043		86,781
Servers/Storage		27,303		24,295		16,499		68,097
Net/Com Products		29,140		20,124		11,115		60,379
Displays and Sound		20,565		34,449		16,627		71,641
Accessories		25,055		51,596		11,757		88,408
Other Hardware/Services		19,206		34,687		14,399		68,292
Total net sales	$	270,042	$	301,065	$	135,463	$	706,570


	Six Months Ended June 30, 2018 (1)
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	153,728	$	131,983	$	59,159	$	344,870
Desktops		56,690		61,232		28,836		146,758
Software		72,799		65,804		17,906		156,509
Servers/Storage		58,804		48,838		33,638		141,280
Net/Com Products		56,166		32,492		23,873		112,531
Displays and Sound		43,875		56,454		26,098		126,427
Accessories		50,072		90,565		21,579		162,216
Other Hardware/Services		41,186		70,941		28,747		140,874
Total net sales	$	533,320	$	558,309	$	239,836	$	1,331,465


	June 30, 2019		December 31, 2018
Contract liability, which are included in "Accrued expenses and other liabilities"	$	4,724	$	2,679