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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, 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 July 26, 2023 was 26,256,784.

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, 2023 and December 31, 2022

1

Condensed Consolidated Statements of Income–Three and Six Months Ended June 30, 2023 and 2022

2

Condensed Consolidated Statements of Stockholders’ Equity–Three and Six Months Ended June 30, 2023 and 2022

3

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

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

ITEM 5.

Other Information

28

ITEM 6.

Exhibits

29

SIGNATURES

30

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

June 30, 

December 31, 

    

2023

    

2022

 

ASSETS

Current Assets:

Cash and cash equivalents

$

243,983

$

122,930

Accounts receivable, net

 

592,663

 

610,280

Inventories, net

 

159,734

 

208,682

Income taxes receivable

9,016

Prepaid expenses and other current assets

 

16,537

 

11,900

Total current assets

 

1,021,933

 

953,792

Property and equipment, net

 

58,012

 

59,171

Right-of-use assets

5,775

7,558

Goodwill

 

73,602

 

73,602

Intangibles, net

 

4,038

 

4,648

Other assets

 

915

 

1,055

Total Assets

$

1,164,275

$

1,099,826

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

277,235

$

232,638

Accrued payroll

 

20,257

 

24,071

Accrued expenses and other liabilities

 

49,813

 

53,808

Total current liabilities

 

347,305

 

310,517

Deferred income taxes

 

17,970

 

17,970

Noncurrent operating lease liabilities

4,196

4,994

Other liabilities

 

684

 

170

Total Liabilities

 

370,155

 

333,651

Stockholders’ Equity:

Common Stock

 

291

 

291

Additional paid-in capital

 

129,486

 

125,784

Retained earnings

 

715,726

 

686,037

Treasury stock, at cost

(51,383)

(45,937)

Total Stockholders’ Equity

 

794,120

 

766,175

Total Liabilities and Stockholders’ Equity

$

1,164,275

$

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

Six Months Ended

June 30, 

June 30, 

    

2023

    

2022

    

2023

    

2022

 

Net sales

$

733,547

$

828,509

$

1,461,092

$

1,616,853

Cost of sales

 

605,770

 

691,608

 

1,211,019

 

1,351,646

Gross profit

 

127,777

 

136,901

 

250,073

 

265,207

Selling, general and administrative expenses

 

100,960

 

102,131

 

204,242

 

200,302

Restructuring and other charges

1,746

2,643

Income from operations

 

25,071

 

34,770

 

43,188

 

64,905

Other income, net

 

1,874

 

15

 

3,160

 

11

Income before taxes

 

26,945

 

34,785

 

46,348

 

64,916

Income tax provision

 

(7,248)

 

(9,387)

 

(12,453)

 

(17,726)

Net income

$

19,697

$

25,398

$

33,895

$

47,190

Earnings per common share:

Basic

$

0.75

$

0.97

$

1.29

$

1.80

Diluted

$

0.75

$

0.96

$

1.28

$

1.79

Shares used in computation of earnings per common share:

Basic

 

26,256

 

26,268

 

26,291

 

26,262

Diluted

 

26,365

 

26,429

 

26,400

 

26,417

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 June 30, 2023

Common Stock

Additional

Retained

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Shares

    

Amount

    

Total

 

Balance - March 31, 2023

 

29,133

$

291

$

127,424

$

698,128

 

(2,852)

$

(49,360)

$

776,483

Stock-based compensation expense

 

 

 

1,783

 

 

 

 

1,783

Restricted stock units vested

 

12

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(258)

 

 

 

 

(258)

Repurchase of common stock for treasury

 

 

 

 

 

(50)

 

(1,969)

 

(1,969)

Excise tax on stock repurchases

 

 

 

 

 

 

(54)

 

(54)

Issuance of common stock under Employee Stock Purchase Plan

 

13

537

 

537

Dividend declaration ($0.08 per share)

 

 

 

 

(2,099)

 

 

 

(2,099)

Net income

 

 

 

 

19,697

 

 

 

19,697

Balance - June 30, 2023

 

29,158

$

291

$

129,486

$

715,726

 

(2,902)

$

(51,383)

$

794,120

Six Months Ended June 30, 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

 

 

 

3,636

 

 

 

 

3,636

Restricted stock units vested

 

22

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(471)

 

 

 

 

(471)

Repurchase of common stock for treasury

 

 

 

 

 

(129)

 

(5,392)

 

(5,392)

Excise tax on stock repurchases

 

 

 

 

 

 

(54)

 

(54)

Issuance of common stock under Employee Stock Purchase Plan

 

13

537

 

537

Dividend declaration ($0.08 per share)

 

 

 

 

(4,206)

 

 

 

(4,206)

Net income

 

 

 

 

33,895

 

 

 

33,895

Balance - June 30, 2023

 

29,158

$

291

$

129,486

$

715,726

 

(2,902)

$

(51,383)

$

794,120

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.

3

Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Six Months Ended

June 30, 

 

2023

    

2022

 

Cash Flows provided by (used in) Operating Activities:

Net income

$

33,895

$

47,190

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

Depreciation and amortization

 

6,167

 

5,980

Adjustments to credit losses reserve

 

1,247

 

1,642

Stock-based compensation expense

 

3,636

 

2,790

Loss on disposal of fixed assets

 

475

 

13

Changes in assets and liabilities:

Accounts receivable

 

16,370

 

(38,063)

Inventories

 

48,948

 

(16,603)

Prepaid expenses, income tax receivable, and other current assets

 

(13,653)

 

(3,352)

Other non-current assets

 

140

 

27

Accounts payable

 

44,584

 

(3,445)

Accrued expenses and other liabilities

 

(6,364)

 

(4,574)

Net cash provided by (used in) operating activities

 

135,445

 

(8,395)

Cash Flows used in Investing Activities:

Purchases of property and equipment

(4,860)

(4,565)

Net cash used in investing activities

 

(4,860)

 

(4,565)

Cash Flows used in Financing Activities:

Proceeds from short-term borrowings

 

67,895

 

26,054

Repayment of short-term borrowings

(67,895)

(26,054)

Purchase of common stock for treasury shares

 

(5,392)

 

Dividend payments

 

(4,206)

 

Issuance of stock under Employee Stock Purchase Plan

537

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

 

(471)

 

(454)

Net cash used in financing activities

 

(9,532)

 

(454)

Increase (decrease) in cash and cash equivalents

 

121,053

 

(13,414)

Cash and cash equivalents, beginning of year

 

122,930

 

108,310

Cash and cash equivalents, end of period

$

243,983

$

94,896

Non-cash Investing and Financing Activities:

Accrued purchases of property and equipment

$

205

$

390

Accrued excise tax on treasury purchases

$

54

$

Supplemental Cash Flow Information:

Income taxes paid

$

27,410

$

21,509

Interest paid

$

18

$

3

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 and six months ended June 30, 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.

Treasury Stock, at Cost

The total repurchases for the six months ended June 30, 2023 were recorded as treasury stock of $5,446. Such cost reflects the applicable one percent excise tax imposed by the Inflation Reduction Act of 2022 on the net value of certain stock repurchases made after December 31, 2022.

Restructuring and Other Charges

The restructuring and other charges recorded for the three and six months ended June 30, 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 June 30, 2023. The Company is currently evaluating additional restructuring activities for the third quarter of 2023 and beyond.

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

Three Months Ended June 30, 

Six Months Ended June 30, 

2023

2022

2023

2022

Employee separations

$

1,701

$

$

2,399

$

Other charges

 

45

 

 

244

 

Total restructuring and other charges

$

1,746

$

$

2,643

$

5

Table of Contents

Included in accrued expenses and other liabilities as of June 30, 2023 was $1,381 related to unpaid termination benefits.

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 adopted this standard in the current quarter. The adoption of this ASU along with the related expedients did not have an impact to the Company’s condensed 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 June 30, 2023 and 2022, along with the segment for each category (in thousands).

Three Months Ended June 30, 2023

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

88,081

$

87,590

$

74,231

$

249,902

Desktops

19,011

33,572

17,971

70,554

Software

33,828

17,561

13,059

64,448

Servers/Storage

22,605

18,705

11,959

53,269

Net/Com Products

28,584

28,727

22,233

79,544

Displays and Sound

 

23,654

 

27,322

 

16,785

 

67,761

Accessories

 

26,506

 

41,095

 

16,488

 

84,089

Other Hardware/Services

 

18,758

 

32,581

 

12,641

 

63,980

Total net sales

$

261,027

$

287,153

$

185,367

$

733,547

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

6

Table of Contents

The following tables represent a disaggregation of revenue from arrangements with customers for the six months ended June 30, 2023 and 2022, along with the segment for each category (in thousands).

Six Months Ended June 30, 2023

    

Business
Solutions

    

Enterprise
Solutions

    

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

183,000

$

201,908

$

126,005

$

510,913

Desktops

37,773

63,714

32,388

133,875

Software

68,404

56,795

22,976

148,175

Servers/Storage

46,896

31,212

21,946

100,054

Net/Com Products

 

56,888

49,259

35,553

 

141,700

Displays and Sound

46,467

 

54,042

 

29,987

130,496

Accessories

 

55,241

 

88,689

 

29,961

 

173,891

Other Hardware/Services

 

39,472

 

55,477

 

27,039

 

121,988

Total net sales

$

534,141

$

601,096

$

325,855

$

1,461,092

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

7

Table of Contents

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of June 30, 2023 and December 31, 2022 (in thousands).

    

June 30, 2023

    

December 31, 2022

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

$

6,563

$

4,266

Changes in the contract liability balances during the six months ended June 30, 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

 

11,980

Amounts recognized as revenue as performance obligations satisfied

 

(9,683)

Balance at June 30, 2023

$

6,563

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

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 June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

 

Numerator:

Net income

$

19,697

$

25,398

$

33,895

$

47,190

Denominator:

Denominator for basic earnings per share

 

26,256

 

26,268