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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, 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 November 6, 2020 was 26,175,491.

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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, 2020 and December 31, 2019	1

	Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2020 and 2019	2

	Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2020 and 2019	3

	Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2020 and 2019	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	26

ITEM 4.	Controls and Procedures	27




	PART II OTHER INFORMATION

ITEM 1A.	Risk Factors	28

ITEM 6.	Exhibits	29

SIGNATURES		30

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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	$	108,051	$	90,060
Accounts receivable, net		588,960		549,626
Inventories, net		134,689		124,666
Income taxes receivable		—		1,388
Prepaid expenses and other current assets		12,016		10,671
Total current assets		843,716		776,411
Property and equipment, net		63,189		64,226
Right-of-use assets		13,768		13,842
Goodwill		73,602		73,602
Intangible assets, net		7,393		8,307
Other assets		1,666		947
Total Assets	$	1,003,334	$	937,335
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	283,163	$	235,641
Accrued payroll		20,200		28,050
Accrued expenses and other liabilities		34,997		45,232
Total current liabilities		338,360		308,923
Deferred income taxes		20,170		20,170
Noncurrent operating lease liabilities		10,579		10,330
Other liabilities		5,948		600
Total Liabilities		375,057		340,023
Stockholders’ Equity:
Common stock		289		288
Additional paid-in capital		119,762		118,045
Retained earnings		554,163		514,694
Treasury stock, at cost		(45,937)		(35,715)
Total Stockholders’ Equity		628,277		597,312
Total Liabilities and Stockholders’ Equity	$	1,003,334	$	937,335

See notes to unaudited condensed consolidated financial statements.

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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	$	652,752	$	729,410	$	1,914,603	$	2,103,407
Cost of sales		544,922		610,547		1,604,656		1,768,210
Gross profit		107,830		118,863		309,947		335,197
Selling, general and administrative expenses		86,753		86,226		256,640		252,125
Restructuring and other charges		—		—		992		703
Income from operations		21,077		32,637		52,315		82,369
Interest (expense) income, net		(17)		62		80		444
Income before taxes		21,060		32,699		52,395		82,813
Income tax provision		(4,130)		(8,949)		(12,926)		(22,668)
Net income	$	16,930	$	23,750	$	39,469	$	60,145

Earnings per common share:
Basic	$	0.65	$	0.90	$	1.51	$	2.28
Diluted	$	0.64	$	0.90	$	1.50	$	2.27

Shares used in computation of earnings per common share:
Basic		26,130		26,323		26,158		26,339
Diluted		26,311		26,479		26,337		26,496

See notes to unaudited condensed consolidated financial statements.

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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	28,892	$	289	$	119,628	$	537,233	(2,773)	$	(45,937)	$	611,213
Stock-based compensation expense	—		—		619		—	—		—		619
Restricted stock units vested	23		—		—		—	—		—		—
Shares withheld for taxes paid on stock awards	—		—		(485)		—	—		—		(485)
Net income	—		—		—		16,930	—		—		16,930
Balance at September 30, 2020	28,915	$	289	$	119,762	$	554,163	(2,773)	$	(45,937)	$	628,277

	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	28,870	$	288	$	118,045	$	514,694	(2,526)	$	(35,715)	$	597,312
Stock-based compensation expense	—		—		1,866		—	—		—		1,866
Restricted stock units vested	33		1		—		—	—		—		1
Issuance of common stock under Employee Stock Purchase Plan	12		—		536		—	—		—		536
Shares withheld for taxes paid on stock awards	—		—		(685)		—	—		—		(685)
Repurchase of common stock for treasury	—		—		—		—	(247)		(10,222)		(10,222)
Net income	—		—		—		39,469	—		—		39,469
Balance at September 30, 2020	28,915	$	289	$	119,762	$	554,163	(2,773)	$	(45,937)	$	628,277

See notes to unaudited condensed consolidated financial statements.

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	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	28,818	$	288	$	117,212	$	477,405	(2,500)	$	(34,738)	$	560,167
Stock-based compensation expense	—		—		426		—	—		—		426
Restricted stock units vested	22		—		—		—	—		—		—
Shares withheld for taxes paid on stock awards	—		—		(337)		—	—		—		(337)
Repurchase of common stock for treasury	—		—		—		—	(23)		(862)		(862)
Net income	—		—		—		23,750	—		—		23,750
Balance at September 30, 2019	28,840	$	288	$	117,301	$	501,155	(2,523)	$	(35,600)	$	583,144

	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	28,787	$	288	$	115,842	$	441,010	(2,391)	$	(31,237)	$	525,903
Stock-based compensation expense	—		—		1,259		—	—		—		1,259
Restricted stock units vested	34		—		—		—	—		—		—
Issuance of common stock under Employee Stock Purchase Plan	19		—		609		—	—		—		609
Shares withheld for taxes paid on stock awards	—		—		(409)		—	—		—		(409)
Repurchase of common stock for treasury	—		—		—		—	(132)		(4,363)		(4,363)
Net income	—		—		—		60,145	—		—		60,145
Balance at September 30, 2019	28,840	$	288	$	117,301	$	501,155	(2,523)	$	(35,600)	$	583,144

See notes to unaudited condensed consolidated financial statements.

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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	$	39,469	$	60,145
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,335		10,184
Provision for doubtful accounts		3,276		181
Stock-based compensation expense		1,866		1,259
Deferred income taxes		—		10
Loss on disposal of fixed assets		13		114
Changes in assets and liabilities:
Accounts receivable		(42,610)		(31,390)
Inventories		(10,023)		(6,883)
Prepaid expenses, income tax receivables and other current assets		43		3,702
Other non-current assets		(719)		319
Accounts payable		48,736		(3,167)
Accrued expenses and other liabilities		(3,987)		5,548
Net cash provided by operating activities		46,399		40,022
Cash Flows used in Investing Activities:
Purchases of equipment		(9,611)		(20,621)
Net cash used in investing activities		(9,611)		(20,621)
Cash Flows used in Financing Activities:
Purchase of treasury shares		(10,222)		(4,363)
Dividend payments		(8,427)		(8,452)
Issuance of stock under Employee Stock Purchase Plan		536		609
Payments of payroll taxes on stock-based compensation through shares withheld		(684)		(409)
Net cash used in financing activities		(18,797)		(12,615)
Increase in cash and cash equivalents		17,991		6,786
Cash and cash equivalents, beginning of period		90,060		91,703
Cash and cash equivalents, end of period	$	108,051	$	98,489

Non-cash Investing and Financing Activities:
Accrued capital expenditures	$	248	$	1,684
Supplemental Cash Flow Information:
Income taxes paid	$	13,798	$	18,972

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 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 $3,276 in the nine months ended September 30, 2020, compared to an increase of $181 for the same period in the prior year. The Company has also evaluated the potential impact of the pandemic on the carrying values of its goodwill and intangible assets, and based on the assessment, did not identify any indications to suggest that an impairment may exist. These estimates may change as new events occur and actual results could differ materially from these estimates.

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 $945, $4,214 and $2,955, respectively. The related accounts receivable, inventory, and accrued expenses and other liability were also understated at June 30, 2020 as a result of these errors. The Company corrected these errors in the three month period ended September 30, 2020, resulting in an overstatement of $945, $4,214 and $2,955 in net sales, gross profit, and net income, respectively. The Company evaluated the effect of these errors on the Company’s financial statements under Accounting Standards Codification (“ASC”) 250 – Accounting Changes and Error Corrections, along with Staff Accounting Bulletin No. 99 – Materiality. Based on a review of both quantitative and qualitative factors of the materiality of the amounts, the Company concluded that the errors were not material to any previously issued condensed consolidated financial statements or for the current period in which they were corrected.

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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 one of our office facilities, which were expensed as incurred.

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	$	992	$	553
Lease termination costs		—		150
Total restructuring and other charges	$	992	$	703

Included in accrued expenses as of September 30, 2020 and 2019 were $133 and $216, respectively, related to unpaid termination benefits.

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

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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 Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	72,694	$	63,093	$	66,761	$	202,548
Desktops		20,097		33,451		9,861		63,409
Software		33,061		26,336		17,698		77,095
Servers/Storage		20,209		23,832		12,292		56,333
Net/Com Products		19,140		27,941		15,420		62,501
Displays and Sound		21,161		16,511		17,304		54,976
Accessories		27,855		40,538		14,842		83,235
Other Hardware/Services		16,768		28,065		7,822		52,655
Total net sales	$	230,985	$	259,767	$	162,000	$	652,752


	Three Months Ended September 30, 2019
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	79,287	$	77,214	$	63,154	$	219,655
Desktops		34,806		36,821		20,499		92,126
Software		36,879		28,439		13,205		78,523
Servers/Storage		26,352		16,374		16,576		59,302
Net/Com Products		25,200		11,666		15,695		52,561
Displays and Sound		23,224		29,641		17,669		70,534
Accessories		26,306		46,546		14,545		87,397
Other Hardware/Services		21,702		31,594		16,016		69,312
Total net sales	$	273,756	$	278,295	$	177,359	$	729,410

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 Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility	$	226,959	$	222,139	$	146,035	$	595,133
Desktops		67,891		94,674		29,440		192,005
Software		93,710		77,394		33,340		204,444
Servers/Storage		69,685		63,042		32,058		164,785
Net/Com Products		54,916		72,172		32,674		159,762
Displays and Sound		64,338		58,603		38,433		161,374
Accessories		75,362		164,185		36,273		275,820
Other Hardware/Services		47,998		87,734		25,548		161,280
Total net sales	$	700,859	$	839,943	$	373,801	$	1,914,603

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	Nine Months Ended September 30, 2019
	Business Solutions		Enterprise Solutions		Public Sector Solutions		Total
Notebooks/Mobility		240,644	$	240,621	$	125,220	$	606,485
Desktops		96,377		112,067		50,074		258,518
Software		110,826		91,954		43,362		246,142
Servers/Storage		81,452		48,536		49,149		179,137
Net/Com Products		70,806		38,866		40,918		150,590
Displays and Sound		64,422		82,812		41,839		189,073
Accessories		72,036		162,601		35,112		269,749
Other Hardware/Services		61,177		94,512		48,024		203,713
Total net sales	$	797,740	$	871,969	$	433,698	$	2,103,407

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"	$	1,540	$	5,942

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	$	5,942
Cash received in advance and not recognized as revenue		7,978
Amounts recognized as revenue as performance obligations satisfied		(12,380)
Balances at September 30, 2020	$	1,540

	2019
Balances at December 31, 2018	$	2,679
Cash received in advance and not recognized as revenue		8,868
Amounts recognized as revenue as performance obligations satisfied		(8,222)
Balances at September 30, 2019	$	3,325

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	$	16,930	$	23,750	$	39,469	$	60,145
Denominator:
Denominator for basic earnings per share		26,130		26,323		26,158		26,339
Dilutive effect of unvested employee stock awards		181