pccc_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                     to                    

Commission file number 0-23827

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

02-0513618

(State or other jurisdiction of

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

incorporation or organization)

 

 

 

 

 

730 MILFORD ROAD,

 

MERRIMACK, NEW HAMPSHIRE

03054

(Address of principal executive offices)

(Zip Code)

 

 

 

 

 

 

(603) 683-2000

 

 

(Registrant's telephone number, including area code)

 


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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ☑    NO  ☐

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☑

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

(Do not check if smaller reporting company)

 

 

 

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 October 31, 2016 was 26,559,311.

 

 


 

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

Unaudited Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets–September 30, 2016 and December 31, 2015

 

 

 

 

Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2016 and 2015

 

 

 

 

Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2016 and 2015

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

ITEM 2.

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

10 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

20 

 

 

 

ITEM 4.

Controls and Procedures

21 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

ITEM 1A.

Risk Factors

22 

 

 

 

ITEM 6.

Exhibits

22 

 

 

 

SIGNATURES 

23 

 

 

 

 

 


 

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,883

 

$

80,188

 

Accounts receivable, net

 

 

357,967

 

 

356,145

 

Inventories

 

 

101,982

 

 

102,780

 

Deferred income taxes

 

 

 —

 

 

7,909

 

Prepaid expenses and other current assets

 

 

4,109

 

 

4,254

 

Income taxes receivable

 

 

1,660

 

 

1,575

 

Total current assets

 

 

532,601

 

 

552,851

 

Property and equipment, net

 

 

34,287

 

 

32,227

 

Goodwill

 

 

67,510

 

 

51,276

 

Other intangibles, net

 

 

12,142

 

 

1,668

 

Other assets

 

 

1,193

 

 

1,052

 

Total Assets

 

$

647,733

 

$

639,074

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

159,619

 

$

166,516

 

Accrued expenses and other liabilities

 

 

25,885

 

 

36,207

 

Accrued payroll

 

 

17,301

 

 

19,280

 

Total current liabilities

 

 

202,805

 

 

222,003

 

Deferred income taxes

 

 

13,871

 

 

21,615

 

Other liabilities

 

 

2,284

 

 

3,005

 

Total Liabilities

 

 

218,960

 

 

246,623

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

284

 

 

284

 

Additional paid-in capital

 

 

110,369

 

 

109,161

 

Retained earnings

 

 

333,982

 

 

298,868

 

Treasury stock, at cost

 

 

(15,862)

 

 

(15,862)

 

Total Stockholders’ Equity

 

 

428,773

 

 

392,451

 

Total Liabilities and Stockholders’ Equity

 

$

647,733

 

$

639,074

 

 

 

See notes to unaudited condensed consolidated financial statements.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net sales

 

$

708,485

 

$

680,769

 

$

1,957,044

 

$

1,889,650

 

Cost of sales

 

 

611,518

 

 

592,201

 

 

1,684,010

 

 

1,640,482

 

Gross profit

 

 

96,967

 

 

88,568

 

 

273,034

 

 

249,168

 

Selling, general and administrative expenses

 

 

74,522

 

 

66,707

 

 

214,415

 

 

193,505

 

Income from operations

 

 

22,445

 

 

21,861

 

 

58,619

 

 

55,663

 

Interest/other expense, net

 

 

(27)

 

 

(29)

 

 

(53)

 

 

(67)

 

Income before taxes

 

 

22,418

 

 

21,832

 

 

58,566

 

 

55,596

 

Income tax provision

 

 

(8,825)

 

 

(8,831)

 

 

(23,452)

 

 

(22,382)

 

Net income

 

$

13,593

 

$

13,001

 

$

35,114

 

$

33,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.49

 

$

1.32

 

$

1.26

 

Diluted

 

$

0.51

 

$

0.49

 

$

1.32

 

$

1.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation of earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,542

 

 

26,423

 

 

26,514

 

 

26,281

 

Diluted

 

 

26,736

 

 

26,622

 

 

26,699

 

 

26,514

 

 

 

See notes to unaudited condensed consolidated financial statements.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

35,114

 

$

33,214

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,504

 

 

6,597

 

Stock-based compensation expense

 

 

975

 

 

720

 

Provision for doubtful accounts

 

 

239

 

 

1,103

 

Deferred income taxes

 

 

165

 

 

56

 

Excess tax benefit from exercise of equity awards

 

 

(385)

 

 

(472)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

19,530

 

 

(39,262)

 

Inventories

 

 

954

 

 

(11,656)

 

Prepaid expenses and other current assets

 

 

506

 

 

79

 

Other non-current assets

 

 

(141)

 

 

(449)

 

Accounts payable

 

 

(20,922)

 

 

35,654

 

Accrued expenses and other liabilities

 

 

(3,757)

 

 

(279)

 

Net cash provided by operating activities

 

 

39,782

 

 

25,305

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,746)

 

 

(10,069)

 

Purchase of Softmart

 

 

(33,983)

 

 

 —

 

Net cash used for investing activities

 

 

(42,729)

 

 

(10,069)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Dividend payment

 

 

(10,591)

 

 

 —

 

Issuance of stock under Employee Stock Purchase Plan

 

 

473

 

 

435

 

Excess tax benefit from exercise of equity awards

 

 

385

 

 

472

 

Exercise of stock options

 

 

 —

 

 

379

 

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

 

 

(625)

 

 

(564)

 

Net cash (used for) provided by financing activities

 

 

(10,358)

 

 

722

 

(Decrease) increase in cash and cash equivalents

 

 

(13,305)

 

 

15,958

 

Cash and cash equivalents, beginning of period

 

 

80,188

 

 

60,909

 

Cash and cash equivalents, end of period

 

$

66,883

 

$

76,867

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

160

 

$

711

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Income taxes paid

 

$

23,953

 

$

23,360

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

 

The accompanying condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared 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 Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the “SEC”).  The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements contained in our Annual Report on Form 10-K.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated through the date of issuance of these financial statements.  The operating results for the three and nine months ended September 30, 2016 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2016.

 

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.

 

Recently Issued Financial Accounting Standards

 

In May 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract, and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition.  This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and

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consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. This standard is effective for the Company prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently assessing the potential impact of the adoption of ASU 2015-11 on its consolidated financial statements.

 

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

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and deferred tax assets are required to be classified as non-current on the consolidated balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016 with early adoption permitted. The Company elected to early adopt ASU 2015-17 on January 1, 2016, prospectively, as permitted, and reclassified $7,909 of current deferred tax assets to non-current liabilities on the accompanying consolidated balance sheet at September 30, 2016. The prior reporting period was not retroactively adjusted. The adoption of the guidance had no impact on the Company’s condensed consolidated statements of income and comprehensive income.

 

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718). The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This change eliminates the notion of the additional paid-in capital pool and reduces the complexity in accounting for excess tax benefits and tax deficiencies. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, however, early adoption is allowed. The Company is currently assessing the potential impact of the adoption of ASU 2016-09 on its consolidated financial statements.

 

 

Note 2–Earnings Per Share

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

    

2016

    

2015

    

2016

    

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,593

 

$

13,001

 

$

35,114

 

$

33,214

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

 

26,542

 

 

26,423

 

 

26,514

 

 

26,281

 

Dilutive effect of employee stock awards

 

 

194

 

 

199

 

 

185

 

 

233

 

Denominator for diluted earnings per share

 

 

26,736

 

 

26,622

 

 

26,699

 

 

26,514

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.49

 

$

1.32

 

$

1.26

 

Diluted

 

$

0.51

 

$

0.49

 

$

1.32

 

$

1.25

 

 

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For the three and nine months ended September 30, 2016 and 2015, the following outstanding nonvested stock units were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

    

2016

    

2015

    

2016

    

2015

 

Employee stock based awards

 

$

 —

 

$

 —

 

$

80

 

$

 —

 

 

 

 

Note 3–Acquisition of Softmart

 

On May 27, 2016, we acquired substantially all of the assets of Softmart Inc. (“Softmart”), a global supplier of information technology and software services solutions.  Under the terms of the asset purchase agreement, we paid $34,000 at closing, of which $4,250 was placed in escrow subject to a working capital adjustment as of the closing date.    We expect to finalize the working capital adjustment prior to year-end.  The purchase of Softmart will allow us to expand our software services capabilities, and the excess of the purchase price over the net assets acquired represents potential synergies from Softmart’s customer base and its assembled workforce of sales representatives and software service specialists that we acquired in the transaction.  We allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition and recorded the excess of purchase price over the aggregate fair values as goodwill. The initial allocation of the purchase price was based upon a preliminary valuation, and accordingly, our estimates and assumptions are subject to change as we obtain additional information during the measurement period and completion of the valuation of intangible assets.  We incurred $357 of transaction costs in the nine months ended September 30, 2016 related to the acquisition.  We have included the operating results of Softmart in the SMB segment since the acquisition date.  Pro forma results of operations have not been presented because the effects of the business combination were not material to our condensed consolidated financial statements.

   

The following table reflects components of the purchase price at fair value as of May 27, 2016.  The fair values of the intangibles were determined through a third-party valuation using management estimates, which have not been finalized.

 

 

 

 

 

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

Current assets

 

$

22,210

 

Fixed assets

 

 

343

 

Goodwill

 

 

16,234

 

Customer relationships

 

 

11,300

 

Total assets acquired

 

 

50,087

 

Acquired liabilities

 

 

(16,087)

 

Net assets acquired

 

 

34,000

 

Less cash acquired

 

 

(17)

 

Purchase price at closing, net of cash acquired

 

$

33,983

 

 

We recorded $16,234 of goodwill as a result of our acquisition of Softmart in our SMB segment, and it is deductible for tax purposes. 

 

The intangible assets of Softmart were valued at the date of acquisition using third-party valuation specialists and will be amortized on a straight-line basis over its estimated useful life of 10 years.

 

For the three-month periods ended September 30, 2016 and 2015, we recorded amortization expenses of $443 and $175, respectively, for intangible assets.  Amortization expense in the third quarter of 2016 included $293 related to the acquired Softmart intangible assets.  For the nine-month periods ended September 30, 2016 and 2015, we recorded amortization expenses of $826 and $560, respectively, for intangible assets.  Amortization expense for the nine months ended September 30, 2016 included $377 related to the acquired Softmart intangible assets.

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The estimated amortization expense which includes all acquired intangible assets for each of the five succeeding years and thereafter is as follows:

 

 

 

 

 

For the Years Ended December 31, 

    

 

 

2016*

 

$

432

2017

 

 

1,492

2018

 

 

1,351

2019

 

 

1,166

2020

 

 

1,130

2021 and thereafter

 

 

6,121

 

 

$

11,692

(*)  Represents estimated amortization expense for the three months ending December 31, 2016.

 

 

 

 

k

 

Note 4–Segment and Related Disclosures

 

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 evaluates operations and allocates resources based on a measure of operating income.

 

Our operations are organized under three reportable segments—the SMB segment, which serves primarily small- and medium-sized businesses; the Large Account segment, which serves primarily medium-to-large corporations; and the Public Sector segment, which serves primarily federal, state, and local governmental and educational institutions.  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 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.

 

On May 27, 2016, we acquired Softmart, a global supplier of information technology and software services solutions.  We have included the operating results of Softmart since the acquisition in our SMB segment, which also includes the operating results of our PC Connection Sales subsidiary. 

 

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Segment information applicable to our reportable operating segments for the three and nine months ended September 30, 2016 and 2015 is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

$

302,410

 

$

268,720

 

$

844,470

 

$

777,940

 

Large Account

 

 

233,778

 

 

242,771

 

 

693,517

 

 

684,033

 

Public Sector

 

 

172,297

 

 

169,278

 

 

419,057

 

 

427,677

 

Total net sales

 

$

708,485

 

$

680,769

 

$

1,957,044

 

$

1,889,650

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

$

9,898

 

$

10,462

 

$

32,580

 

$

30,604

 

Large Account

 

 

11,923

 

 

11,007

 

 

30,712

 

 

30,916

 

Public Sector

 

 

3,593

 

 

3,568

 

 

4,555

 

 

3,552

 

Headquarters/Other

 

 

(2,969)

 

 

(3,176)

 

 

(9,228)

 

 

(9,409)

 

Total operating income

 

 

22,445

 

 

21,861

 

 

58,619

 

 

55,663

 

Interest expense

 

 

(27)

 

 

(29)

 

 

(53)

 

 

(67)

 

Income before taxes

 

$

22,418

 

$

21,832

 

$

58,566

 

$

55,596

 

Selected operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

$

359

 

$

5

 

$

479

 

$

16

 

Large Account

 

 

291

 

 

319

 

 

911

 

 

972

 

Public Sector

 

 

40

 

 

39

 

 

121

 

 

118

 

Headquarters/Other

 

 

2,011

 

 

1,863

 

 

5,993

 

 

5,491

 

Total depreciation and amortization

 

$

2,701

 

$

2,226

 

$

7,504

 

$

6,597

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

 

 

 

 

 

 

$

271,968

 

 

 

 

Large Account

 

 

 

 

 

 

 

 

321,735

 

 

 

 

Public Sector

 

 

 

 

 

 

 

 

66,072

 

 

 

 

Headquarters/Other

 

 

 

 

 

 

 

 

(12,042)

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

647,733

 

 

 

 

 

The assets of our three operating segments presented above consist primarily of accounts receivable, intercompany receivable, goodwill, and other intangibles.  Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, and property and equipment.  Total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $24,019 as of September 30, 2016.  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 basis.

 

Note 5–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 effect on our financial position, results of operations, and cash flows.

 

We are subject to audits by states on sales and income taxes, unclaimed property, employment matters, and other assessments.  A comprehensive multi‑state unclaimed property audit continues to be in progress.  While management believes that known and estimated unclaimed property liabilities have been adequately provided for, it is too early to determine the ultimate outcome of such audits, as not all formal assessments have been finalized.  Additional liabilities for this and other audits could be assessed, and such outcomes could have a material, negative impact on our financial position, results of operations, and cash flows.

 

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Note 6–Bank Borrowing and Trade Credit Arrangements

 

We have a $50,000 credit facility collateralized by our accounts receivable that expires February 24, 2017.  This facility can be increased, at our option, to $80,000 for approved acquisitions or other uses authorized by the lender on substantially the same terms.  Negotiations with our current lender are in process, and we expect to renew the facility at substantially the same terms.  Amounts outstanding under this 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 (3.50% at September 30, 2016).  The one-month LIBOR rate at September 30, 2016 was 0.53%.  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.  Funded debt ratio is the ratio of average outstanding advances under the credit facility to 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 Adjusted EBITDA could limit our potential borrowings under the credit facility.  We had no outstanding bank borrowings at September 30, 2016 or December 31, 2015, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.

 

At September 30, 2016 and December 31, 2015, we had security agreements with two financial institutions to facilitate the purchase of inventory from various suppliers under certain terms and conditions.  The agreements allow a collateralized first position in certain branded products in our inventory financed by the financial institutions up to an aggregated amount of $65,000.  The cost of such financing under these agreements is borne by the suppliers by discounting their invoices to the financial institutions.  We do not pay any interest or discount fees on such inventory.  At September 30, 2016 and December 31, 2015, accounts payable included $26,880 and $23,044, respectively, owed to these financial institutions.

 

Note 7–Subsequent Events

 

     On October 11, 2016, we completed the acquisition of GlobalServe, Inc. a global IT procurement and service management company.  Under the terms of the merger agreement, we paid $11,883 at closing for 100% of GlobalServe’s stock. We believe the acquisition of GlobalServe will provide our multinational customers access to a global supply chain platform that delivers greater flexibility, scalability, and efficiency.

 

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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 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, 2015.  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 national 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, which serve primarily: (a) small- to medium-sized businesses, or SMBs, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Large Account segment, through our MoreDirect subsidiary, and (c) federal, state, and local governmental and educational institutions, in our Public Sector segment, through our GovConnection subsidiary.

 

We generate sales primarily through outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets, our websites, and inbound calls from customers responding to our catalogs and other advertising media.  We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

 

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

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advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs.  By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers.  Through the formation of our ProConnection services 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 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 solution business, which requires the addition of highly-skilled advanced solution engineers.  Although we expect to realize the ultimate benefit of higher-margin advanced solution services and product revenues under this multi-year initiative, we believe that our cost of sales may increase significantly as we add such engineers.  If our advanced solution revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.

 

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 more heavily in our own IT development to meet these new demands.  This investment includes significant planned expenditures to update our websites, as buying trends change and electronic commerce continues to grow.

 

Our investments in IT infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.  While we have not yet finalized our decisions regarding the areas of future investment in our IT infrastructure, we expect to increase our capital investments in our IT infrastructure in the next one to three years.  This will also likely increase SG&A expenses as assets are placed into service and depreciated.

 

RESULTS OF OPERATIONS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

    

2016

    

2015

    

2016

    

2015

  

 

Net sales (in millions)

 

$

708.5

 

$

680.8

 

$

1,957.0

 

$

1,889.7

 

 

Gross margin

 

 

13.7

%  

 

13.0

%  

 

14.0

%  

 

13.2

 

Selling, general and administrative expenses

 

 

10.5

%  

 

9.8

%  

 

11.0

%  

 

10.2

%

 

Income from operations

 

 

3.2

%  

 

3.2

%  

 

3.0

%  

 

3.0

%

 

 

Net sales in the third quarter of 2016 increased year over year by $27.7 million, or 4.1%, compared to the third quarter of 2015, due to increased sales in our SMB and Public Sector segments.  Our acquisition of Softmart on May 27, 2016 contributed $42.0 million of the year-over-year increase, and our investments in advanced solution sales led to increased sales of software and mobility.    SG&A expenses increased year over year in dollars and as a percentage of net sales in the third quarter of 2016 due to the inclusion of a full quarter of Softmart’s SG&A, incremental variable compensation related to higher gross profit, and investments in advanced solution personnel.  Operating income in the third quarter of 2016 increased year over year in dollars due to higher gross profit, but remained unchanged as a percentage of net sales compared to the prior year 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

 

 

Nine Months Ended

 

 

September 30, 

 

2016

    

2015

 

 

2016

    

2015

 

 

Business Segment

 

 

 

 

 

 

 

 

 

 

 

SMB

 

43

%  

39

%  

 

43

%  

41

%  

 

Large Account

 

33

 

36

 

 

36

 

36

 

 

Public Sector

 

24

 

25

 

 

21

 

23

 

 

Total

 

100

%  

100

%  

 

100

%  

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Mix

 

 

 

 

 

 

 

 

 

 

 

Notebooks/Mobility

 

24

%  

24

%  

 

24

%  

23

%  

 

Software

 

21

 

15

 

 

20

 

16

 

 

Servers/Storage

 

9

 

11

 

 

10

 

13

 

 

Net/Com Product

 

8

 

9

 

 

8

 

8

 

 

Other Hardware/Services

 

38

 

41

 

 

38

 

40

 

 

Total

 

100

%  

100

%  

 

100

%  

100

%  

 

 

Gross margin

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 

 

2016

 

2015

 

 

2016

    

2015

 

 

Business Segment

 

 

 

 

 

 

 

 

 

 

 

SMB

 

15.4

%  

15.1

%  

 

15.8

%  

15.4

%  

 

Large Account

 

13.3

 

11.9

 

 

12.9

 

12.1

 

 

Public Sector

 

11.1

 

11.2

 

 

11.8

 

11.0

 

 

Total

 

13.7

%  

13.0

%  

 

14.0

%  

13.2

%  

 

 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

2016

 

2015

 

2016

 

2015

 

 

Personnel costs

 

$

58.6

 

$

51.2

 

$

167.2

 

$

147.7

 

 

Advertising

 

 

3.5

 

 

3.5

 

 

12.4

 

 

11.5

 

 

Facilities operations

 

 

3.5

 

 

3.3

 

 

10.1

 

 

9.6

 

 

Professional fees

 

 

1.8

 

 

1.8

 

 

5.4

 

 

5.5

 

 

Credit card fees

 

 

1.9

 

 

1.9

 

 

5.0

 

 

5.2

 

 

Depreciation and amortization

 

 

2.7

 

 

2.2

 

 

7.5

 

 

6.6

 

 

Other, net

 

 

2.5

 

 

2.8

 

 

6.8

 

 

7.4

 

 

Total

 

$

74.5

 

$

66.7

 

$

214.4

 

$

193.5

 

 

Percentage of net sales

 

 

10.5

%  

 

9.8

%  

 

11.0

%  

 

10.2

%  

 

 

 

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Table of Contents

Year-Over-Year Comparisons

 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

%

 

 

 

    

Amount

    

Net Sales

    

Amount

    

Net Sales

    

Change

   

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

$

302.4

 

42.7

%  

$

268.7

 

39.4

%  

12.5

%  

 

Large Account

 

 

233.8

 

33.0

 

 

242.8

 

35.7

 

(3.7)

 

 

Public Sector

 

 

172.3

 

24.3

 

 

169.3

 

24.9

 

1.8

 

 

Total

 

$

708.5

 

100.0

%  

$

680.8

 

100.0

%  

4.1

%

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SMB

 

$

46.6

 

15.4

%  

$

40.7

 

15.1

%  

14.7

%

 

Large Account

 

 

31.2

 

13.3

 

 

28.9

 

11.9

 

7.8

 

 

Public Sector

 

 

19.2

 

11.1

 

 

19.0

 

11.2

 

0.9

 

 

Total

 

$

97.0

 

13.7

%  

$

88.6

 

13.0

%  

9.5

%

 

 

Net sales increased in the third quarter of 2016 compared to the third quarter of 2015, as explained below:

 

·

Net sales for the SMB segment increased due to higher sales of software and notebook/mobility products.  The inclusion of Softmart revenue, which we acquired on May 27, 2016, and our investments in advanced solution sales including security and software services contributed to the higher software sales.  Net sales of notebooks/mobility products increased as mobility continues to be a strategic focus for SMB customers.

 

·

Net sales for the Large Account segment decreased due to a reduction of large project revenues in the quarter.  Net sales of servers/storage and notebooks/mobility products in this segment each decreased year over year but were partially offset by higher sales of software and net/com products.  The increase in software sales was primarily due to an increase in our sales of office productivity software.  

 

·

Net sales to the Public Sector segment increased in the quarter.  Net sales to the federal government increased by 21.6% due to higher sales made under federal government contracts.  Net sales to state and local government and educational institutions decreased by 4.3% due to lower sales to higher education and K-12 customers.  Sales of notebooks/mobility, and software in this segment each increased year over year but were offset by decreases in sales of accessories and net/com products.

 

Gross profit for the third quarter of 2016 increased year over year in dollars and as a percentage of net sales (gross margin), as explained below:

 

·

Gross profit for the SMB segment increased due to higher net sales and improved invoice selling margins.  Invoice selling margins increased by 59 basis points due to a shift in both client and product mix, including increased sales of higher-margin software products.

 

·

Gross profit for the Large Account segment increased despite lower net sales.  Invoice selling margins increased (208 basis points) and were partially offset by lower agency revenues (59 basis points).  We attribute our improved invoice selling margins to a shift to higher-margin software revenues and a reduction in large project revenues, which generally carry lower gross margins.

 

·

Gross profit for the Public Sector segment increased due to higher net sales.  Invoice selling margins decreased by 12 basis points due to a shift in both product and customer mix, including increased sales of lower-margin notebooks/mobility products.

 

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Selling, general and administrative expenses increased in dollars and as a percentage of net sales in the third quarter of 2016 compared to the prior year quarter.  SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

% of 

 

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Segment Net

 

 

 

 

Segment Net

 

%

 

 

 

    

Amount

    

Sales

    

Amount

    

Sales

    

Change

   

 

SMB

 

$

36.7

 

12.1

%  

$

30.2