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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 March 31, 2023

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, $0.01 par value

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 April 27, 2023 was 26,277,597.

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–March 31, 2023 and December 31, 2022

1

Condensed Consolidated Statements of Income–Three Months Ended March 31, 2023 and 2022

2

Condensed Consolidated Statements of Stockholders’ Equity–Three Months Ended March 31, 2023 and 2022

3

Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2023 and 2022

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

ITEM 2.

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

11

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

21

ITEM 4.

Controls and Procedures

22

PART II OTHER INFORMATION

ITEM 1.

Legal Proceedings

23

ITEM 1A.

Risk Factors

23

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

ITEM 6.

Exhibits

24

SIGNATURES

25

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

March 31, 

December 31, 

    

2023

    

2022

 

ASSETS

Current Assets:

Cash and cash equivalents

$

134,810

$

122,930

Accounts receivable, net

 

621,844

 

610,280

Inventories, net

 

199,317

 

208,682

Prepaid expenses and other current assets

 

18,145

 

11,900

Total current assets

 

974,116

 

953,792

Property and equipment, net

 

58,372

 

59,171

Right-of-use assets

6,611

7,558

Goodwill

 

73,602

 

73,602

Intangibles, net

 

4,343

 

4,648

Other assets

 

1,013

 

1,055

Total Assets

$

1,118,057

$

1,099,826

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

239,058

$

232,638

Accrued payroll

 

24,304

 

24,071

Accrued expenses and other liabilities

 

54,947

 

53,808

Total current liabilities

 

318,309

 

310,517

Deferred income taxes

 

17,970

 

17,970

Noncurrent operating lease liabilities

4,623

4,994

Other liabilities

 

672

 

170

Total Liabilities

 

341,574

 

333,651

Stockholders’ Equity:

Common Stock

 

291

 

291

Additional paid-in capital

 

127,424

 

125,784

Retained earnings

 

698,128

 

686,037

Treasury stock, at cost

(49,360)

(45,937)

Total Stockholders’ Equity

 

776,483

 

766,175

Total Liabilities and Stockholders’ Equity

$

1,118,057

$

1,099,826

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

March 31, 

    

2023

    

2022

 

Net sales

$

727,545

$

788,344

Cost of sales

 

605,249

 

660,038

Gross profit

 

122,296

 

128,306

Selling, general and administrative expenses

 

103,282

 

98,172

Restructuring and other charges

897

Income from operations

 

18,117

 

30,134

Other income (expense), net

 

1,286

 

(3)

Income before taxes

 

19,403

 

30,131

Income tax provision

 

(5,205)

 

(8,339)

Net income

$

14,198

$

21,792

Earnings per common share:

Basic

$

0.54

$

0.83

Diluted

$

0.54

$

0.83

Shares used in computation of earnings per common share:

Basic

 

26,325

 

26,255

Diluted

 

26,436

 

26,405

See notes to unaudited condensed consolidated financial statements.

2

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Three Months Ended March 31, 2023

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2022

 

29,123

$

291

$

125,784

$

686,037

 

(2,773)

$

(45,937)

$

766,175

Stock-based compensation expense

 

 

 

1,853

 

 

 

 

1,853

Restricted stock units vested

 

10

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(213)

 

 

 

 

(213)

Repurchase of common stock for treasury

 

 

 

 

 

(79)

 

(3,423)

 

(3,423)

Dividend declaration ($0.08 per share)

 

 

 

 

(2,107)

 

 

 

(2,107)

Net income

 

 

 

 

14,198

 

 

 

14,198

Balance - March 31, 2023

 

29,133

$

291

$

127,424

$

698,128

 

(2,852)

$

(49,360)

$

776,483

Three Months Ended March 31, 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

 

 

 

1,382

 

 

 

 

1,382

Restricted stock units vested

 

9

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(165)

 

 

 

 

(165)

Net income

 

 

 

 

21,792

 

 

 

21,792

Balance - March 31, 2022

 

29,034

$

290

$

123,571

$

627,558

 

(2,773)

$

(45,937)

$

705,482

See notes to unaudited condensed consolidated financial statements.

3

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Three Months Ended

March 31, 

 

2023

    

2022

 

Cash Flows provided by (used in) Operating Activities:

Net income

$

14,198

$

21,792

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

Depreciation and amortization

 

3,073

 

2,991

Adjustments to credit losses reserve

 

(99)

 

567

Stock-based compensation expense

 

1,853

 

1,382

Loss on disposal of fixed assets

 

474

 

10

Changes in assets and liabilities:

Accounts receivable

 

(11,465)

 

(27,177)

Inventories

 

9,365

 

(28,046)

Prepaid expenses and other current assets

 

(6,245)

 

(4,572)

Other non-current assets

 

42

 

32

Accounts payable

 

5,859

 

(10,494)

Accrued expenses and other liabilities

 

2,450

 

5,230

Net cash provided by (used in) operating activities

 

19,505

 

(38,285)

Cash Flows used in Investing Activities:

Purchases of equipment and capitalized software

(1,882)

(2,451)

Net cash used in investing activities

 

(1,882)

 

(2,451)

Cash Flows used in Financing Activities:

Proceeds from short-term borrowings

 

59,310

 

1,385

Repayment of short-term borrowings

(59,310)

(1,385)

Purchase of common stock for treasury shares

 

(3,423)

 

Dividend payments

 

(2,107)

 

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

 

(213)

 

(165)

Net cash used in financing activities

 

(5,743)

 

(165)

Increase (decrease) in cash and cash equivalents

 

11,880

 

(40,901)

Cash and cash equivalents, beginning of year

 

122,930

 

108,310

Cash and cash equivalents, end of period

$

134,810

$

67,409

Non-cash Investing and Financing Activities:

Accrued capital expenditures

$

753

$

266

Supplemental Cash Flow Information:

Income taxes paid

$

7,279

$

287

Interest paid

$

17

$

See notes to unaudited condensed consolidated financial statements.

4

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, or the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America, or 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, 2022, 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, 2022.

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 months ended March 31, 2023 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2023.

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.

Restructuring and Other Charges

The restructuring and other charges recorded in the first quarter of 2023 were primarily related to an involuntary reduction in our headquarter workforce 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 as of March 31, 2023.

Restructuring and other charges are presented separately from selling, general and administrative expenses. Costs incurred were as follows (in thousands):

Three Months Ended March 31, 

2023

2022

Employee separations

$

698

$

Other charges

 

199

 

Total restructuring and other charges

$

897

$

Included in accrued expenses and other liabilities as of March 31, 2023 was $308 related to unpaid termination benefits.

5

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Recently Issued Financial Accounting Standards

In March 2020, the Financial Accounting Standards Board 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, or 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 amendments are effective as of March 12, 2020 through December 31, 2022; however, ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 has extended the effective date through December 31, 2024. 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.

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 March 31, 2023 and 2022, along with the segment for each category (in thousands).

Three Months Ended March 31, 2023

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

94,919

$

114,318

$

51,774

$

261,011

Desktops

18,762

30,142

14,417

63,321

Software

34,576

39,234

9,917

83,727

Servers/Storage

24,291

12,507

9,987

46,785

Net/Com Products

28,304

20,532

13,320

62,156

Displays and Sound

 

22,813

 

26,720

 

13,202

 

62,735

Accessories

 

28,735

 

47,594

 

13,473

 

89,802

Other Hardware/Services

 

20,714

 

22,896

 

14,398

 

58,008

Total net sales

$

273,114

$

313,943

$

140,488

$

727,545

Three Months Ended March 31, 2022

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

130,434

$

121,339

$

56,850

$

308,623

Desktops

23,559

44,864

17,988

86,411

Software

34,908

21,010

5,269

61,187

Servers/Storage

22,164

15,371

9,630

47,165

Net/Com Products

22,627

22,191

8,027

52,845

Displays and Sound

 

32,824

 

37,079

 

13,423

 

83,326

Accessories

 

32,241

 

48,007

 

12,932

 

93,180

Other Hardware/Services

 

21,687

 

25,535

 

8,385

 

55,607

Total net sales

$

320,444

$

335,396

$

132,504

$

788,344

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Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of March 31, 2023 and December 31, 2022 (in thousands).

    

March 31, 2023

    

December 31, 2022

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

$

7,534

$

4,266

Changes in the contract liability balances during the three months ended March 31, 2023 and 2022 are as follows (in thousands):

    

2023

Balance at December 31, 2022

$

4,266

Cash received in advance and not recognized as revenue

 

7,656

Amounts recognized as revenue as performance obligations satisfied

 

(4,388)

Balance at March 31, 2023

$

7,534

2022

Balance at December 31, 2021

$

8,628

Cash received in advance and not recognized as revenue

 

3,870

Amounts recognized as revenue as performance obligations satisfied

 

(5,455)

Balance at March 31, 2022

$

7,043

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 (in thousands, except per share data):

Three Months Ended March 31, 

    

2023

    

2022

 

Numerator:

Net income

$

14,198

$

21,792

Denominator:

Denominator for basic earnings per share

 

26,325

 

26,255

Dilutive effect of employee stock awards

 

111

 

150

Denominator for diluted earnings per share

 

26,436

 

26,405

Earnings per share:

Basic

$

0.54

$

0.83

Diluted

$

0.54

$

0.83

For the three months ended March 31, 2023 and 2022, 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, or ROU, asset as of March 31, 2023 was $826 and a corresponding lease liability of $826 associated with related party leases.

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As of March 31, 2023, 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 months ended March 31, 2023 and 2022 (dollars in thousands):

Three Months Ended March 31, 2023

 

Three Months Ended March 31, 2022

 

Related Parties

Others

Total

 

Related Parties

Others

Total

 

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

313

$

709

$

1,022

$

313

$

709

$

1,022

Short-term lease cost

 

107

 

21

 

128

 

107

 

21

 

128

Total lease cost

$

420

$

730

$

1,150

$

420

$

730

$

1,150

Other Information

 

  

 

  

 

  

 

  

 

  

 

  

Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:

 

 

 

 

 

 

Operating cash flows

$

313

$

643

$

956

$

313

$

687

$

1,000

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

Capitalized operating leases

0.67

3.81

3.45

1.67

4.34

3.79

Weighted-average discount rate:

Capitalized operating leases

3.92%

4.06%

4.04%

3.92%

3.91%

3.92%

As of March 31, 2023, future lease payments over the remaining term of capitalized operating leases were as follows (in thousands):

For the Years Ended December 31, 

    

Related Parties

    

Others

    

Total

2023, excluding the three months ended March 31, 2023

$

958

$

1,495

$

2,453

2024

 

163

 

1,697

 

1,860

2025

 

163

 

1,635

 

1,798

2026

 

163

 

952

 

1,115

2027

1

232

233

Thereafter

340

340

$

1,448

$

6,351

$

7,799

Imputed interest

(516)

Lease liability balance at March 31, 2023

$

7,283

As of March 31, 2023, the ROU asset had a balance of $6,611. The long-term lease liability was $4,623 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $2,660. As of March 31, 2022, the ROU asset had a balance of $9,201. The long-term lease liability was $6,077 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $3,777.

Note 5–Segment Information

The internal reporting structure used by the Company’s chief operating decision maker, or CODM, to assess performance and allocate resources determines the basis for the Company’s operating segments. The Company’s CODM is its Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.

The Company’s operations are organized under three segments—the Business Solutions segment, which serves primarily small- to medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local government and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human

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resources, information technology, or IT, 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. The Company reports 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.

Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the three months ended March 31, 2023 and 2022 is shown below (in thousands):

Three Months Ended

March 31, 

March 31, 

    

2023

    

2022

 

Net sales:

Business Solutions

$

273,114

$

320,444

Enterprise Solutions

 

313,943

 

335,396

Public Sector Solutions

 

140,488

 

132,504

Total net sales

$

727,545

$

788,344

Operating income (loss):

Business Solutions

$

16,553

$

20,673

Enterprise Solutions

 

6,522

 

14,314

Public Sector Solutions

 

29

 

(1,126)

Headquarters/Other

 

(4,987)

 

(3,727)

Total operating income

 

18,117

 

30,134

Other income (expense), net

 

1,286

 

(3)

Income before taxes

$

19,403

$

30,131

Selected operating expense:

Depreciation and amortization:

Business Solutions

$

159

$

167

Enterprise Solutions

 

424

 

534

Public Sector Solutions

 

19

 

20

Headquarters/Other

 

2,471

 

2,270

Total depreciation and amortization

$

3,073

$

2,991

Total assets:

Business Solutions

$

467,444

$

426,103

Enterprise Solutions

 

661,670

 

651,905

Public Sector Solutions

 

104,880

 

94,540

Headquarters/Other

 

(115,937)

 

(71,729)

Total assets

$

1,118,057

$

1,100,819

The assets of the Company’s three operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash and cash equivalents, inventories, property and equipment, ROU assets, and intercompany balance, net. As of March 31, 2023 and 2022, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $60,176 and $50,234, respectively. The Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade its management information systems. These information systems serve all of the Company’s segments, to varying degrees, and accordingly, the CODM does not evaluate capital expenditures on a segment-by-segment basis.

Note 6–Commitments and Contingencies

The Company is subject to various legal proceedings and claims, which have arisen during the ordinary course of business. The outcome of such matters is not expected to have a material, adverse effect on the Company’s financial position, results of operations, and/or cash flows.

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The Company is subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, but such outcomes are not expected to have a material, adverse impact on the Company’s financial position, results of operations, and/or cash flows.

Note 7–Bank Borrowings

The Company has a $50,000 credit facility collateralized by its account receivables that expires March 31, 2025. This facility can be increased, at the Company’s option, to $80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on the Company’s funded debt ratio, or in the absence of LIBOR, the prime rate (8.00% at March 31, 2023). 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. The credit facility does not include restrictions on future dividend payments. Funded debt ratio is the ratio of average outstanding advances under the credit facility for a given quarter to consolidated trailing twelve months Adjusted Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges, or Adjusted EBITDA. The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in the Company’s consolidated trailing twelve months Adjusted EBITDA could limit its potential borrowing capacity under the credit facility. As of March 31, 2023, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.

During the three months ended March 31, 2023, the Company borrowed $59,310 under the credit facility, which was fully repaid prior to March 31, 2023. The Company had no outstanding borrowings under the credit facility as of March 31, 2023 or 2022, and accordingly, the entire $50,000 credit facility was available for borrowings on such date.

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

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “would,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “anticipates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including

substantial competition reducing our market share;
significant price competition reducing our profit margins;
the loss of any of our major vendors adversely affecting the number of type of products we may offer;
virtualization of information technology, or IT, resources and applications, including networks, servers, applications, and data storage disrupting or altering our traditional distribution models;
service interruptions at third-party shippers negatively impacting our ability to deliver the products we offer to our customers;
increases in shipping and postage costs reducing our margins and adversely affecting our results of operations;
loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business;
cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation; and
macroeconomic factors facing the global economy, including disruptions in the capital markets, economic sanctions and economic slowdowns or recessions, rising inflation and changing interest rates reducing the level of investment our customers are willing to make in IT products.

Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.

Unless the context otherwise requires, we use the terms “Connection”, the “Company”, “we”, “us”, and “our” in this Quarterly Report on Form 10-Q to refer to PC Connection, Inc. and its subsidiaries.

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OVERVIEW

We are a Fortune 1000 Global Solutions Provider that simplifies the IT customer experience, guiding the connection between people and technology. Our dedicated account managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of in-country suppliers in over 150 countries.

The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, enterprise, and public sector markets.

Financial results for each of our segments are included in the financial statements attached hereto. We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We offer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, and VMware, and we partner with more than 2,500 suppliers. We are able to leverage our state-of-the art logistic capabilities to rapidly ship product to customers.

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, sold or 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 and, in some case successfully, eliminate our role. We believe that the success of these direct sales efforts by manufacturers will depend on their ability to meet our customers’ ongoing demands and provide solutions to meet their needs. We believe more of our customers are seeking out comprehensive and integrated IT solutions, rather than the ability to acquire specific IT products on a one-off basis. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customers’ individual 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 TSG, 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 gross margin improvements in this competitive environment.

The primary challenges we continue to face in effectively managing our business are (1) increasing our product and service revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general and administrative, or SG&A, expenses while making investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.

To support future growth, we are investing in our IT solutions business, which requires the addition of highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add additional service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.

Market and economic 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

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functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.

Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.

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 March 31, 

2023

    

2022

  

Net sales (dollars in millions)

$

727.5

$

788.3

Gross margin

16.8

%  

16.3

Selling, general and administrative expenses

 

14.2

%  

 

12.5

%

Income from operations

 

2.5

%  

 

3.8

%

Net sales of $727.5 million for the first quarter of 2023 reflected a decrease of $60.8 million, or 7.7% compared to the first quarter of 2022. The decrease was primarily driven by decreases in sales of notebooks/mobility, desktops, and displays and sound of $47.6 million, $23.1 million, and $20.6 million, respectively, as shown in the table in Note 2. These decreases were partially offset by increases in sales of software and net/com products of $22.5 million and $9.3 million, respectively. Gross profit decreased year-over-year by $6.0 million, or 4.7%, to $122.3 million as illustrated in the table and discussion beginning on page 15 of this Form 10-Q. Gross margin increased to 16.8% from 16.3% a year ago. The increase in gross margin was primarily driven by increased net sales of higher margin software, security, and networking solutions. SG&A expenses increased year-over-year by $5.1 million, or 5.2%, to $103.3 million. The increase in SG&A expenses was primarily driven by a $5.1 million increase in personnel cost related to investments in resources to strengthen our sales, technical sales, IT, and services organizations. SG&A expenses as a percentage of net sales increased to 14.2% compared to 12.5% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to the decrease in net sales, as discussed above. Operating income in the first quarter of 2023 decreased year-over-year both in dollars and as a percentage of net sales by $12.0 million and 130 basis points, respectively, primarily as a result of the decrease in gross profit combined with the increase in SG&A expenses.

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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 March 31, 

2023

    

2022

Operating Segment

Enterprise Solutions

43

%  

42

%  

Business Solutions

38

41

Public Sector Solutions

19

 

17

 

Total

100

%  

100

%  

Product Mix

Notebooks/Mobility

36

%  

39

%  

Desktops

9

11

Software

12

8

Servers/Storage

6

6

 

Net/Com Products

9

 

7

 

Displays and Sound

9

11

 

Accessories

12

12

Other Hardware/Services

7

 

6

 

Total

100

%  

100

%  

Gross Profit Margin

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

Three Months Ended March 31, 

2023

    

2022

Operating Segment

Enterprise Solutions

13.4

%  

14.6

%  

Business Solutions

21.9

19.4

Public Sector Solutions

14.5

 

13.1

 

Total Company

16.8

%  

16.3

%  

Operating Expenses

The following table reflects our SG&A expenses for the periods indicated:

Three Months Ended March 31, 

($ in millions)

2023

2022

Personnel costs

$

79.2

$

74.1

Advertising

 

6.6

 

4.6

Service contracts/subscriptions

5.2

4.9

Professional fees

 

3.8

 

3.9

Depreciation and amortization

 

3.1

 

3.0

Facilities operations

 

2.2

 

2.1

Credit card fees

 

1.5

 

1.7

Other

 

1.7

 

3.9

Total SG&A expense

$

103.3

$

98.2

As a percentage of net sales

14.2

%  

12.5

%  

Restructuring and Other Charges

In the first quarter of 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other charges of $0.9 million in the first quarter of 2023, which were primarily related to an

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