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Table of Contents

b

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

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 July 29, 2022 was 26,273,602.

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–June 30, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Income–Three and Six months Ended June 30, 2022 and 2021

2

Condensed Consolidated Statements of Stockholders’ Equity–Three and Six Months Ended June 30, 2022 and 2021

3

Condensed Consolidated Statements of Cash Flows–Six Months Ended June 30, 2022 and 2021

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)

June 30, 

December 31, 

    

2022

    

2021

 

ASSETS

Current Assets:

Cash and cash equivalents

$

94,896

$

108,310

Accounts receivable, net

 

643,953

 

607,532

Inventories, net

 

223,158

 

206,555

Prepaid expenses and other current assets

 

13,368

 

10,016

Total current assets

 

975,375

 

932,413

Property and equipment, net

 

60,248

 

61,011

Right-of-use assets

8,267

9,579

Goodwill

 

73,602

 

73,602

Intangibles, net

 

5,258

 

5,868

Other assets

 

883

 

910

Total Assets

$

1,123,633

$

1,083,383

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

278,446

$

281,836

Accrued payroll

 

31,357

 

30,966

Accrued expenses and other liabilities

 

57,080

 

61,830

Total current liabilities

 

366,883

 

374,632

Deferred income taxes

 

19,278

 

19,278

Noncurrent operating lease liabilities

5,242

6,789

Other liabilities

 

231

 

211

Total Liabilities

 

391,634

 

400,910

Stockholders’ Equity:

Common Stock

 

290

 

290

Additional paid-in capital

 

124,690

 

122,354

Retained earnings

 

652,956

 

605,766

Treasury stock, at cost

(45,937)

(45,937)

Total Stockholders’ Equity

 

731,999

 

682,473

Total Liabilities and Stockholders’ Equity

$

1,123,633

$

1,083,383

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

 

Net sales

$

828,509

$

704,161

$

1,616,853

$

1,341,053

Cost of sales

 

691,608

 

587,834

 

1,351,646

 

1,124,206

Gross profit

 

136,901

 

116,327

 

265,207

 

216,847

Selling, general and administrative expenses

 

102,131

 

92,563

 

200,302

 

178,963

Income from operations

 

34,770

 

23,764

 

64,905

 

37,884

Other income, net

 

15

 

14

 

11

 

7

Income before taxes

 

34,785

 

23,778

 

64,916

 

37,891

Income tax provision

 

(9,387)

 

(6,486)

 

(17,726)

 

(10,415)

Net income

$

25,398

$

17,292

$

47,190

$

27,476

Earnings per common share:

Basic

$

0.97

$

0.66

$

1.80

$

1.05

Diluted

$

0.96

$

0.66

$

1.79

$

1.04

Shares used in computation of earnings per common share:

Basic

 

26,268

 

26,187

 

26,262

 

26,180

Diluted

 

26,429

 

26,359

 

26,417

 

26,361

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 June 30, 2022

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - March 31, 2022

 

29,034

$

290

$

123,571

$

627,558

 

(2,773)

$

(45,937)

$

705,482

Stock-based compensation expense

 

 

 

1,408

 

 

 

 

1,408

Restricted stock units vested

 

11

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(289)

 

 

 

 

(289)

Net income

 

 

 

 

25,398

 

 

 

25,398

Balance - June 30, 2022

 

29,045

$

290

$

124,690

$

652,956

 

(2,773)

$

(45,937)

$

731,999

Six Months Ended June 30, 2022

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2021

 

29,025

$

290

$

122,354

$

605,766

 

(2,773)

$

(45,937)

$

682,473

Stock-based compensation expense

 

 

 

2,790

 

 

 

 

2,790

Restricted stock units vested

 

20

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(454)

 

 

 

 

(454)

Net income

 

 

 

 

47,190

 

 

 

47,190

Balance - June 30, 2022

 

29,045

$

290

$

124,690

$

652,956

 

(2,773)

$

(45,937)

$

731,999

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

Three Months Ended June 30, 2021

Common Stock

Additional

Retained

Treasury Shares

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

Balance - March 31, 2021

 

28,948

$

289

$

120,875

$

572,268

 

(2,773)

$

(45,937)

$

647,495

Stock-based compensation expense

1,026

1,026

Restricted stock units vested

 

12

 

Shares withheld for taxes paid on stock awards

 

(242)

 

(242)

Net income

 

 

 

 

17,292

 

 

 

17,292

Balance - June 30, 2021

 

28,960

$

289

$

121,659

$

589,560

 

(2,773)

$

(45,937)

$

665,571

Six Months Ended June 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

2,092

2,092

Restricted stock units vested

 

17

 

Shares withheld for taxes paid on stock awards

 

(324)

 

(324)

Net income

 

 

 

 

27,476

 

 

 

27,476

Balance - June 30, 2021

 

28,960

$

289

$

121,659

$

589,560

 

(2,773)

$

(45,937)

$

665,571

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)

Six Months Ended

June 30, 

 

2022

    

2021

 

Cash Flows (used in) provided by Operating Activities:

Net income

$

47,190

$

27,476

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization

 

5,980

 

6,218

Adjustments to credit losses reserve

 

1,642

 

1,059

Stock-based compensation expense

 

2,790

 

2,092

Loss on disposal of fixed assets

 

13

 

Changes in assets and liabilities:

Accounts receivable

 

(38,063)

 

26,806

Inventories

 

(16,603)

 

(26,212)

Prepaid expenses and other current assets

 

(3,352)

 

(2,151)

Other non-current assets

 

27

 

317

Accounts payable

 

(3,445)

 

(9,134)

Accrued expenses and other liabilities

 

(4,574)

 

5,349

Net cash (used in) provided by operating activities

 

(8,395)

 

31,820

Cash Flows used in Investing Activities:

Purchases of equipment and capitalized software

(4,565)

(4,611)

Proceeds from life insurance

1,500

Net cash used in investing activities

 

(4,565)

 

(3,111)

Cash Flows used in Financing Activities:

Proceeds from short-term borrowings

 

26,054

 

Repayment of short-term borrowings

(26,054)

Dividend payments

 

 

(8,375)

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

 

(454)

 

(324)

Net cash used in financing activities

 

(454)

 

(8,699)

(Decrease) increase in cash and cash equivalents

 

(13,414)

 

20,010

Cash and cash equivalents, beginning of year

 

108,310

 

95,655

Cash and cash equivalents, end of period

$

94,896

$

115,665

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$

390

$

609

Supplemental Cash Flow Information:

Income taxes paid

$

21,509

$

13,141

Interest paid

$

3

$

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, 2021, 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 for the year ended December 31, 2021.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three and six months ended June 30, 2022 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2022.

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. Actual results could differ from those estimates and assumptions.

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 June 30, 2022 and 2021, along with the reportable segment for each category.

Three Months Ended June 30, 2022

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

123,176

$

117,407

$

67,211

$

307,794

Desktops

23,749

52,632

13,267

89,648

Software

39,567

21,572

10,508

71,647

Servers/Storage

29,698

11,857

9,598

51,153

Net/Com Products

24,430

24,244

6,640

55,314

Displays and Sound

 

30,969

 

37,732

 

19,207

 

87,908

Accessories

 

35,656

 

57,728

 

15,683

 

109,067

Other Hardware/Services

 

21,106

 

25,782

 

9,090

 

55,978

Total net sales

$

328,351

$

348,954

$

151,204

$

828,509

Three Months Ended June 30, 2021

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

97,401

$

94,472

$

62,501

$

254,374

Desktops

20,607

38,916

8,527

68,050

Software

33,102

26,162

11,858

71,122

Servers/Storage

21,086

27,106

7,635

55,827

Net/Com Products

22,360

20,691

7,211

50,262

Displays and Sound

 

25,825

 

29,343

 

12,743

 

67,911

Accessories

 

27,480

 

44,311

 

9,109

 

80,900

Other Hardware/Services

 

19,397

 

26,160

 

10,158

 

55,715

Total net sales

$

267,258

$

307,161

$

129,742

$

704,161

The following table represents a disaggregation of revenue from arrangements with customers for the six months ended June 30, 2022 and 2021, along with the reportable segment for each category.

Six Months Ended June 30, 2022

 

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

 

Notebooks/Mobility

$

253,609

$

238,747

$

124,061

$

616,417

Desktops

47,308

97,496

31,255

176,059

Software

74,475

42,582

15,777

132,834

Servers/Storage

51,862

27,228

19,228

98,318

Net/Com Products

 

47,057

46,435

14,667

 

108,159

Displays and Sound

63,793

 

74,811

 

32,630

171,234

Accessories

 

67,897

 

105,735

 

28,615

 

202,247

Other Hardware/Services

 

42,793

 

51,317

 

17,475

 

111,585

Total net sales

$

648,794

$

684,351

$

283,708

$

1,616,853

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Table of Contents

Six Months Ended June 30, 2021

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

191,836

$

176,663

$

119,475

$

487,974

Desktops

41,766

69,267

16,377

127,410

Software

60,264

48,667

19,067

127,998

Servers/Storage

 

41,659

44,262

14,282

 

100,203

Net/Com Products

 

40,764

40,517

17,572

 

98,853

Displays and Sound

45,599

 

52,748

 

26,736

125,083

Accessories

53,327

 

88,187

 

19,930

161,444

Other Hardware/Services

 

38,377

 

52,135

 

21,576

 

112,088

Total net sales

$

513,592

$

572,446

$

255,015

$

1,341,053

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of June 30, 2022 and December 31, 2021.

    

June 30, 2022

    

December 31, 2021

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

$

6,037

$

8,628

Changes in the contract liability balances during the six months ended June 30, 2022 and 2021 are as follows:

    

2022

Balance at December 31, 2021

$

8,628

Cash received in advance and not recognized as revenue

 

16,316

Amounts recognized as revenue as performance obligations satisfied

 

(18,907)

Balance at June 30, 2022

$

6,037

2021

Balance at December 31, 2020

$

3,509

Cash received in advance and not recognized as revenue

 

6,969

Amounts recognized as revenue as performance obligations satisfied

 

(5,566)

Balance at June 30, 2021

$

4,912

Note 3–Earnings Per Share

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

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

Three Months Ended June 30,

Six Months Ended June 30,

    

2022

    

2021

    

2022

    

2021

 

Numerator:

Net income

$

25,398

$

17,292

$

47,190

$

27,476

Denominator:

Denominator for basic earnings per share

 

26,268

 

26,187

 

26,262

 

26,180

Dilutive effect of employee stock awards

 

161

 

172

 

155

 

181

Denominator for diluted earnings per share

 

26,429

 

26,359

 

26,417

 

26,361

Earnings per share:

Basic

$

0.97

$

0.66

$

1.80

$

1.05

Diluted

$

0.96

$

0.66

$

1.79

$

1.04

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Table of Contents

For the three and six months ended June 30, 2022 and 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 4Leases

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 June 30, 2022 was $1,730 and a corresponding lease liability of $1,730 associated with related party leases.

As of June 30, 2022, 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 six months ended June 30, 2022 and 2021:

Three Months Ended June 30, 2022

 

Six Months Ended June 30, 2022

 

Related Parties

Others

Total

 

Related Parties

Others

Total

 

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

313

$

711

$

1,024

$

627

$

1,419

$

2,046

Short-term lease cost

 

107

 

21

 

128

 

214

 

42

 

256

Total lease cost

$

420

$

732

$

1,152

$

841

$

1,461

$

2,302

Other Information