UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
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incorporation or organization) |
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( | ||
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Large accelerated filer ☐ | |||
Non-accelerated filer ☐ | Smaller reporting company | ||
Emerging growth company |
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Yes
The number of shares outstanding of the issuer’s common stock as of November 6, 2020 was
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
September 30, | December 31, | |||||
| 2020 |
| 2019 | |||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
| |
| | ||
Inventories, net |
| |
| | ||
Income taxes receivable |
| — |
| | ||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, net |
| |
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Right-of-use assets | | | ||||
Goodwill |
| |
| | ||
Intangible assets, net |
| |
| | ||
Other assets |
| |
| | ||
Total Assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current Liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued payroll |
| |
| | ||
Accrued expenses and other liabilities |
| |
| | ||
Total current liabilities |
| |
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Deferred income taxes |
| |
| | ||
Noncurrent operating lease liabilities | | | ||||
Other liabilities |
| |
| | ||
Total Liabilities |
| |
| | ||
Stockholders’ Equity: | ||||||
Common stock | | | ||||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Treasury stock, at cost | ( | ( | ||||
Total Stockholders’ Equity |
| |
| | ||
Total Liabilities and Stockholders’ Equity | $ | | $ | |
See notes to unaudited condensed consolidated financial statements.
1
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands, except per share data)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
Net sales | $ | | $ | | $ | | $ | | |||||
Cost of sales |
| |
| |
| |
| | |||||
Gross profit |
| |
| |
| |
| | |||||
Selling, general and administrative expenses |
| |
| |
| |
| | |||||
Restructuring and other charges | — | — | | | |||||||||
Income from operations |
| |
| |
| |
| | |||||
Interest (expense) income, net |
| ( |
| |
| |
| | |||||
Income before taxes |
| |
| |
| |
| | |||||
Income tax provision |
| ( |
| ( |
| ( |
| ( | |||||
Net income | $ | | $ | | $ | | $ | | |||||
Earnings per common share: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Shares used in computation of earnings per common share: | |||||||||||||
Basic |
| |
| |
| |
| | |||||
Diluted |
| |
| |
| |
| |
See notes to unaudited condensed consolidated financial statements.
2
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(amounts in thousands)
Three months ended September 30, 2020 | |||||||||||||||||||
Total | |||||||||||||||||||
Common Stock | Additional | Retained | Treasury Stock | Stockholders' | |||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||
Balance at June 30, 2020 | | $ | $ | $ |
| ( | $ | ( | $ | ||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Restricted stock units vested | | — | — | — | — | — | — | ||||||||||||
Shares withheld for taxes paid on stock awards | — | — | ( | — | — | — | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balance at September 30, 2020 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | | |||||
Nine months ended September 30, 2020 | |||||||||||||||||||
Total | |||||||||||||||||||
Common Stock | Additional | Retained | Treasury Stock | Stockholders' | |||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||
Balance at December 31, 2019 | | $ | $ | $ | ( | $ | ( | $ | |||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Restricted stock units vested | | | — | — | — | — | | ||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | |
| — |
| |
| — |
| — |
| — |
| | ||||||
Shares withheld for taxes paid on stock awards | — | — | ( | — | — | — | ( | ||||||||||||
Repurchase of common stock for treasury | — | — | — | — | ( | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balance at September 30, 2020 | | $ | | $ | | $ | |
| ( | $ | ( | $ | |
See notes to unaudited condensed consolidated financial statements.
3
Three months ended September 30, 2019 | |||||||||||||||||||
Total | |||||||||||||||||||
Common Stock | Additional | Retained | Treasury Stock | Stockholders' | |||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||
Balance at June 30, 2019 | | $ | $ | $ |
| ( | $ | ( | $ | ||||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Restricted stock units vested |
| |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Shares withheld for taxes paid on stock awards |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( | |||||
Repurchase of common stock for treasury | — | — | — | — | ( | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balance at September 30, 2019 | | $ | | $ | | $ | |
| ( | $ | ( | $ | | ||||||
Nine months ended September 30, 2019 | |||||||||||||||||||
Total | |||||||||||||||||||
Common Stock | Additional | Retained | Treasury Stock | Stockholders' | |||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Equity | ||||||
Balance at December 31, 2018 | | $ | | $ | | $ | | ( | $ | ( | $ | ||||||||
Stock-based compensation expense | — | — | | — | — | — | | ||||||||||||
Restricted stock units vested | |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Issuance of common stock under Employee Stock Purchase Plan | | — | | — | — | — | | ||||||||||||
Shares withheld for taxes paid on stock awards | — | — | ( | — | — | — | ( | ||||||||||||
Repurchase of common stock for treasury | — | — | — | — | ( | ( | ( | ||||||||||||
Net income | — | — | — | | — | — | | ||||||||||||
Balance at September 30, 2019 | | $ | | $ | | $ | |
| ( | $ | ( | $ | |
See notes to unaudited condensed consolidated financial statements.
4
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Nine Months Ended | |||||||
September 30, | |||||||
| 2020 |
| 2019 |
| |||
Cash Flows provided by Operating Activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
Provision for doubtful accounts |
| |
| | |||
Stock-based compensation expense |
| |
| | |||
Deferred income taxes |
| — |
| | |||
Loss on disposal of fixed assets |
| |
| | |||
Changes in assets and liabilities: | |||||||
Accounts receivable |
| ( |
| ( | |||
Inventories |
| ( |
| ( | |||
Prepaid expenses, income tax receivables and other current assets |
| |
| | |||
Other non-current assets |
| ( |
| | |||
Accounts payable |
| |
| ( | |||
Accrued expenses and other liabilities |
| ( |
| | |||
Net cash provided by operating activities |
| |
| | |||
Cash Flows used in Investing Activities: | |||||||
Purchases of equipment | ( | ( | |||||
Net cash used in investing activities |
| ( |
| ( | |||
Cash Flows used in Financing Activities: | |||||||
Purchase of treasury shares |
| ( |
| ( | |||
Dividend payments |
| ( |
| ( | |||
Issuance of stock under Employee Stock Purchase Plan | | | |||||
Payments of payroll taxes on stock-based compensation through shares withheld |
| ( |
| ( | |||
Net cash used in financing activities |
| ( |
| ( | |||
Increase in cash and cash equivalents |
| |
| | |||
Cash and cash equivalents, beginning of period |
| |
| | |||
Cash and cash equivalents, end of period | $ | | $ | | |||
Non-cash Investing and Financing Activities: | |||||||
Accrued capital expenditures | $ | | $ | | |||
Supplemental Cash Flow Information: | |||||||
Income taxes paid | $ | | $ | |
See notes to unaudited condensed consolidated financial statements.
5
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three and nine months ended September 30, 2020 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 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.
The Company’s operations and financial performance in certain areas of its business were negatively impacted by the coronavirus pandemic (“COVID-19”) in the nine months ended September 30, 2020. The extent to which the COVID-19 pandemic impacts the Company’s financial results and operations for the remainder of 2020 and beyond will depend on future developments that are highly uncertain and cannot be predicted at this time. The Company updated its estimates and judgements in response to the economic uncertainty associated with COVID-19, which were reflected in the amounts reported in the accompanying condensed consolidated financial statements. The Company has experienced, and may continue to experience, delays in collecting amounts owed to it, and in some cases, may experience inabilities to collect altogether. As a result, the Company increased its customer allowance for doubtful accounts by $
Out of Period Adjustments
During the third quarter, the Company identified certain out of period adjustments, which were the result of errors identified related to revenue cutoff. The impact of these errors was an understatement of net sales, gross profit and net income for the three- and six-months ended June 30, 2020 by $
6
Restructuring and other charges
The restructuring and other charges recorded in the second quarter of 2020 were related to an involuntary reduction in workforce across our business segments and included cash severance and other related termination benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses and other liabilities at September 30, 2020. The Company did not record any restructuring and other charges in the three months ended September 30, 2020, and as of the date of this report, the Company has no ongoing restructuring plans.
The restructuring and other charges recorded in 2019 were related to a reduction in workforce in the Company’s Headquarters/Other group and included cash severance payments and other related benefits. Also included were exit costs incurred associated with the closing of
Restructuring and other charges are presented separately from selling, general and administrative (“SG&A”) expenses. Costs incurred were as follows:
Nine Months Ended September 30, | ||||||
2020 |
| 2019 | ||||
Employee separations | $ | | $ | | ||
Lease termination costs |
| — |
| | ||
Total restructuring and other charges | $ | | $ | |
Included in accrued expenses as of September 30, 2020 and 2019 were $
Adoption of Recently Issued Financial Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company has adopted this standard beginning January 1, 2020 for both interim and annual reporting periods. The Company expects to perform a step 1 annual goodwill impairment assessment in the fourth quarter of each calendar year, and more frequently if events or circumstances occur that would indicate a potential decline in fair value. As a result of the adoption, and in accordance with the new guidance, the Company would not perform a step two analysis in the event an impairment loss is identified.
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 beginning January 1, 2020 for both interim and annual reporting periods. At adoption, this ASU did not have a material impact on the Company’s consolidated financial statements. 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 will extend credit under its standard payment terms or may request alternative early payment actions. In addition, the 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.
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 exceptions to
7
the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The Company expects to adopt the guidance upon transition from LIBOR, but does not believe the adoption will have a material effect on its consolidated financial statements.
Note 2–Revenue
The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended September 30, 2020 and 2019, along with the reportable segment for each category.
Three Months Ended September 30, 2020 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | $ | | $ | | $ | | $ | | ||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage | |
| |
| | | ||||||
Net/Com Products |
| | | |
| | ||||||
Displays and Sound | |
| |
| | | ||||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services |
| | | |
| | ||||||
Total net sales | $ | | $ | | $ | | $ | |
Three Months Ended September 30, 2019 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | $ | | $ | | $ | | $ | | ||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage | |
| |
| | | ||||||
Net/Com Products | |
| |
| | | ||||||
Displays and Sound |
| | | |
| | ||||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services |
| | | |
| | ||||||
Total net sales | $ | | $ | | $ | | $ | |
The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2020 and 2019, along with the reportable segment for each category.
Nine Months Ended September 30, 2020 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | $ | | $ | | $ | | $ | | ||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage |
| |
| |
| |
| | ||||
Net/Com Products | | | | | ||||||||
Displays and Sound |
| |
| |
| |
| | ||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services | | | | | ||||||||
Total net sales | $ | | $ | | $ | | $ | |
8
Nine Months Ended September 30, 2019 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | | $ | | $ | | $ | | |||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage | |
| |
| |
| | |||||
Net/Com Products | |
| |
| |
| | |||||
Displays and Sound | | | | | ||||||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services | | | | | ||||||||
Total net sales | $ | | $ | | $ | | $ | |
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of September 30, 2020 and December 31, 2019.
| September 30, 2020 |
| December 31, 2019 | |||
Contract liabilities, which are included in "Accrued expenses and other liabilities" | $ | | $ | |
Changes in the contract liability balances during the nine months ended September 30, 2020 and 2019 are as follows (in thousands):
2020 | ||
Balances at December 31, 2019 | $ | |
Cash received in advance and not recognized as revenue |
| |
Amounts recognized as revenue as performance obligations satisfied |
| ( |
Balances at September 30, 2020 | $ | |
2019 | ||
Balances at December 31, 2018 | $ | |
Cash received in advance and not recognized as revenue |
| |
Amounts recognized as revenue as performance obligations satisfied |
| ( |
Balances at September 30, 2019 | $ | |
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 September 30, | Nine Months Ended September 30, | ||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
Numerator: | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Denominator: | |||||||||||||
Denominator for basic earnings per share |
| |
| |
| |
| | |||||
Dilutive effect of unvested employee stock awards |
| |