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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, 2021

OR

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

For the transition period from                     to                    

Commission file number: 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes      No  

The number of shares outstanding of the issuer’s common stock as of October 29, 2021 was 26,209,380.

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, 2021 and December 31, 2020

1

Condensed Consolidated Statements of Income–Three and Nine Months Ended September 30, 2021 and 2020

2

Condensed Consolidated Statements of Stockholders’ Equity–Three and Nine Months Ended September 30, 2021 and 2020

3

Condensed Consolidated Statements of Cash Flows–Nine Months Ended September 30, 2021 and 2020

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

ITEM 2.

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

13

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

25

ITEM 4.

Controls and Procedures

26

PART II OTHER INFORMATION

ITEM 1

Legal Proceedings

27

ITEM 1A

Risk Factors

27

ITEM 6.

Exhibits

28

SIGNATURES

29

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, 

    

2021

    

2020

 

ASSETS

Current Assets:

Cash and cash equivalents

$

89,728

$

95,655

Accounts receivable, net

 

585,380

 

611,021

Inventories, net

 

175,374

 

140,867

Prepaid expenses and other current assets

 

11,797

 

11,437

Total current assets

 

862,279

 

858,980

Property and equipment, net

 

60,623

 

61,537

Right-of-use assets

10,218

12,821

Goodwill

 

73,602

 

73,602

Intangibles assets, net

 

6,173

 

7,088

Other assets

 

1,031

 

1,345

Total Assets

$

1,013,926

$

1,015,373

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

217,084

$

266,846

Accrued payroll

 

24,023

 

17,828

Accrued expenses and other liabilities

 

52,241

 

57,586

Total current liabilities

 

293,348

 

342,260

Deferred income taxes

 

18,525

 

18,525

Noncurrent operating lease liabilities

7,353

9,631

Other liabilities

 

8,528

 

8,630

Total Liabilities

 

327,754

 

379,046

Stockholders’ Equity:

Common Stock

 

290

 

289

Additional paid-in capital

 

122,214

 

119,891

Retained earnings

 

609,605

 

562,084

Treasury stock, at cost

(45,937)

(45,937)

Total Stockholders’ Equity

 

686,172

 

636,327

Total Liabilities and Stockholders’ Equity

$

1,013,926

$

1,015,373

See notes to unaudited condensed consolidated financial statements.

1

Table of Contents

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, 

    

2021

    

2020

    

2021

    

2020

 

Net sales

$

751,368

$

652,752

$

2,092,421

$

1,914,603

Cost of sales

 

630,671

 

544,922

 

1,754,877

 

1,604,656

Gross profit

 

120,697

 

107,830

 

337,544

 

309,947

Selling, general and administrative expenses

 

93,369

 

86,753

 

272,332

 

256,640

Restructuring and other charges

992

Income from operations

 

27,328

 

21,077

 

65,212

 

52,315

Other (expenses) income, net

 

 

(17)

 

7

 

80

Income before taxes

 

27,328

 

21,060

 

65,219

 

52,395

Income tax provision

 

(7,283)

 

(4,130)

 

(17,698)

 

(12,926)

Net income

$

20,045

$

16,930

$

47,521

$

39,469

Earnings per common share:

Basic

$

0.77

$

0.65

$

1.81

$

1.51

Diluted

$

0.76

$

0.64

$

1.80

$

1.50

Shares used in computation of earnings per common share:

Basic

 

26,197

 

26,130

 

26,186

 

26,158

Diluted

 

26,368

 

26,311

 

26,362

 

26,337

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Three Months Ended September 30, 2021

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - June 30, 2021

 

28,960

$

289

$

121,659

$

589,560

 

(2,773)

$

(45,937)

$

665,571

Stock-based compensation expense

 

 

 

1,026

 

 

 

 

1,026

Restricted stock units vested

 

18

 

1

 

(1)

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(470)

 

 

 

 

(470)

Net income

 

 

 

 

20,045

 

 

 

20,045

Balance - September 30, 2021

 

28,978

$

290

$

122,214

$

609,605

 

(2,773)

$

(45,937)

$

686,172

Nine Months Ended September 30, 2021

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2020

 

28,943

$

289

$

119,891

$

562,084

 

(2,773)

$

(45,937)

$

636,327

Stock-based compensation expense

 

 

 

3,118

 

 

 

 

3,118

Restricted stock units vested

 

35

 

1

 

(1)

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(794)

 

 

 

 

(794)

Net income

 

 

 

 

47,521

 

 

 

47,521

Balance - September 30, 2021

 

28,978

$

290

$

122,214

$

609,605

 

(2,773)

$

(45,937)

$

686,172

See notes to unaudited condensed consolidated financial statements.

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Three Months Ended September 30, 2020

Common Stock

Additional

Retained

Treasury Shares

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

Balance - 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 - September 30, 2020

 

28,915

$

289

$

119,762

$

554,163

 

(2,773)

$

(45,937)

$

628,277

Nine Months Ended September 30, 2020

Common Stock

Additional

Retained

Treasury Shares

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

Balance - December 31, 2019

 

28,870

$

288

$

118,045

$

514,694

(2,526)

$

(35,715)

$

597,312

Stock-based compensation expense

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 - 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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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Nine Months Ended

September 30, 

 

2021

    

2020

 

Cash Flows provided by Operating Activities:

Net income

$

47,521

$

39,469

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

Depreciation and amortization

 

9,165

 

10,335

Adjustments to credit losses reserve

 

1,704

 

3,276

Stock-based compensation expense

 

3,118

 

1,866

Loss on disposal of fixed assets

 

2

 

13

Changes in assets and liabilities:

Accounts receivable

 

22,437

 

(42,610)

Inventories

 

(34,507)

 

(10,023)

Prepaid expenses and other current assets

 

(360)

 

43

Other non-current assets

 

314

 

(719)

Accounts payable

 

(49,997)

 

48,736

Accrued expenses and other liabilities

 

9,437

 

(3,987)

Net cash provided by operating activities

 

8,834

 

46,399

Cash Flows used in Investing Activities:

Purchases of equipment and capitalized software

(7,092)

(9,611)

Proceeds from life insurance

1,500

Net cash used in investing activities

 

(5,592)

 

(9,611)

Cash Flows used in Financing Activities:

Purchase of treasury shares

 

 

(10,222)

Dividend payments

 

(8,375)

 

(8,427)

Issuance of stock under Employee Stock Purchase Plan

536

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

 

(794)

 

(684)

Net cash used in financing activities

 

(9,169)

 

(18,797)

(Decrease) increase in cash and cash equivalents

 

(5,927)

 

17,991

Cash and cash equivalents, beginning of year

 

95,655

 

90,060

Cash and cash equivalents, end of period

$

89,728

$

108,051

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$

394

$

248

Supplemental Cash Flow Information:

Income taxes paid

$

20,600

$

13,798

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1–Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America (U.S.GAAP). 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, 2020, filed with 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, 2021 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2021.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period. Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances. By nature, estimates are subject to an inherent degree of uncertainty, including uncertainty in the current economic environment due to the coronavirus pandemic (“COVID-19 pandemic”). Actual results could differ from those estimates and assumptions, including the impact of the COVID-19 pandemic.

Recently Issued Financial Accounting Standards

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.

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Table of Contents

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, 2021 and 2020, along with the reportable segment for each category.

Three Months Ended September 30, 2021

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

109,910

$

117,017

$

77,192

$

304,119

Desktops

22,329

34,473

11,319

68,121

Software

28,761

22,829

9,678

61,268

Servers/Storage

25,775

12,560

13,407

51,742

Net/Com Products

21,091

23,887

8,259

53,237

Displays and Sound

 

26,321

 

33,490

 

15,287

 

75,098

Accessories

 

28,865

 

43,207

 

14,320

 

86,392

Other Hardware/Services

 

18,373

 

22,259

 

10,759

 

51,391

Total net sales

$

281,425

$

309,722

$

160,221

$

751,368

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

The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2021 and 2020, along with the reportable segment for each category.

Nine Months Ended September 30, 2021

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

 

Notebooks/Mobility

$

301,746

$

293,680

$

196,667

$

792,093

Desktops

64,095

103,740

27,696

195,531

Software

89,025

71,496

28,745

189,266

Servers/Storage

67,434

56,822

27,689

151,945

Net/Com Products

 

61,855

64,404

25,831

 

152,090

Displays and Sound

71,920

 

86,238

 

42,023

200,181

Accessories

 

82,192

 

131,394

 

34,250

 

247,836

Other Hardware/Services

 

56,750

 

74,394

 

32,335

 

163,479

Total net sales

$

795,017

$

882,168

$

415,236

$

2,092,421

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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

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of September 30, 2021 and December 31, 2020.

    

September 30, 2021

    

December 31, 2020

Contract liabilities, which are included in "Accrued expenses and other liabilities"

$

7,823

$

3,509

Changes in the contract liability balances during the nine months ended September 30, 2021 and 2020 are as follows:

    

2021

Balances at December 31, 2020

$

3,509

Cash received in advance and not recognized as revenue

 

(15,524)

Amounts recognized as revenue as performance obligations satisfied

 

19,838

Balances at September 30, 2021

$

7,823

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

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,

    

2021

    

2020

    

2021

    

2020

 

Numerator:

Net income

$

20,045

$

16,930

$

47,521

$

39,469

Denominator:

Denominator for basic earnings per share

 

26,197

 

26,130

 

26,186

 

26,158

Dilutive effect of employee stock awards

 

171

 

181

 

176

 

179

Denominator for diluted earnings per share

 

26,368

 

26,311

 

26,362

 

26,337

Earnings per share:

Basic

$

0.77

$

0.65

$

1.81

$

1.51

Diluted

$

0.76

$

0.64

$

1.80

$

1.50

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Table of Contents

For the three months and nine months ended September 30, 2021, the Company had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

k

Note 4—Leases

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset (“ROU asset”) as of September 30, 2021 was $2,608 and a corresponding lease liability of $2,608 associated with related party leases.

As of September 30, 2021, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021

 

Nine Months Ended September 30, 2021

Related Parties

Others

Total

 

Related Parties

Others

Total

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

313

$

753

$

1,066

$

940

$

2,304

$

3,244

Short-term lease cost

 

107

 

21

 

128

 

320

 

63

 

383

Total lease cost

$

420

$

774

$

1,194

$

1,260

$

2,367

$

3,627