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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 March 31, 2023

☐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.

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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–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

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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.

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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
	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.

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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.

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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.

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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, 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.

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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.

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, 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;

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increases in shipping and postage costs reducing our margins and adversely affecting our results of operations;

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loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business;

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cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation; and

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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