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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, 2024

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 24, 2024 was 26,293,202.

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, 2024 and December 31, 2023

1

Condensed Consolidated Statements of Income–Three and Six Months Ended June 30, 2024 and 2023

2

Condensed Consolidated Statements of Other Comprehensive Income–Three and Six Months Ended June 30, 2024 and 2023

3

Condensed Consolidated Statements of Stockholders’ Equity–Three and Six Months Ended June 30, 2024 and 2023

4

Condensed Consolidated Statements of Cash Flows–Six Months Ended June 30, 2024 and 2023

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

ITEM 2.

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

15

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

27

ITEM 4.

Controls and Procedures

28

PART II OTHER INFORMATION

ITEM 1.

Legal Proceedings

29

ITEM 1A.

Risk Factors

29

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

ITEM 5.

Other Information

29

ITEM 6.

Exhibits

30

SIGNATURES

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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, 

    

2024

    

2023

 

ASSETS

Current Assets:

Cash and cash equivalents

$

128,213

$

144,954

Short-term investments

257,590

152,232

Accounts receivable, net

 

598,826

 

606,834

Inventories, net

 

136,613

 

124,179

Income taxes receivable

9,281

4,348

Prepaid expenses and other current assets

 

16,982

 

16,092

Total current assets

 

1,147,505

 

1,048,639

Property and equipment, net

 

54,376

 

56,658

Right-of-use assets

3,917

4,340

Goodwill

 

73,602

 

73,602

Intangibles, net

 

2,819

 

3,428

Other assets

 

1,266

 

1,714

Total Assets

$

1,283,485

$

1,188,381

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$

317,111

$

263,682

Accrued payroll

 

23,004

 

20,440

Accrued expenses and other liabilities

 

48,527

 

43,843

Total current liabilities

 

388,642

 

327,965

Deferred income taxes

 

17,418

 

15,844

Noncurrent operating lease liabilities

2,497

3,181

Other liabilities

 

 

624

Total Liabilities

 

408,557

 

347,614

Stockholders’ Equity:

Common stock

 

293

 

293

Additional paid-in capital

 

134,967

 

130,878

Retained earnings

 

794,942

 

760,898

Accumulated other comprehensive (loss) income

(103)

81

Treasury stock, at cost

(55,171)

(51,383)

Total Stockholders’ Equity

 

874,928

 

840,767

Total Liabilities and Stockholders’ Equity

$

1,283,485

$

1,188,381

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

 

Net sales

$

736,479

$

733,547

$

1,368,504

$

1,461,092

Cost of sales

 

599,937

 

605,770

 

1,113,890

 

1,211,019

Gross profit

 

136,542

 

127,777

 

254,614

 

250,073

Selling, general and administrative expenses

 

105,208

 

100,960

 

209,816

 

204,242

Restructuring and other charges

415

1,746

415

2,643

Income from operations

 

30,919

 

25,071

 

44,383

 

43,188

Interest income, net

 

4,649

 

1,874

 

9,216

 

3,160

Income before taxes

 

35,568

 

26,945

 

53,599

 

46,348

Income tax provision

 

(9,407)

 

(7,248)

 

(14,284)

 

(12,453)

Net income

$

26,161

$

19,697

$

39,315

$

33,895

Earnings per common share:

Basic

$

0.99

$

0.75

$

1.49

$

1.29

Diluted

$

0.99

$

0.75

$

1.48

$

1.28

Shares used in computation of earnings per common share:

Basic

 

26,348

 

26,256

 

26,355

 

26,291

Diluted

 

26,520

 

26,365

 

26,522

 

26,400

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(Unaudited)

(amounts in thousands)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

 

Net income

$

26,161

$

19,697

$

39,315

$

33,895

Other comprehensive loss:

Unrealized losses on available-for-sale investments, net of tax of $11 and $49 for the three and six months ended June 30, 2024, respectively, and net of tax of $0 for the three and six months ended June 30, 2023, respectively

 

(41)

 

 

(184)

 

Comprehensive income

$

26,120

$

19,697

$

39,131

$

33,895

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Three Months Ended June 30, 2024

Common Stock

Additional

Retained

Accumulated Other

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Comprehensive (Loss) Income

    

Shares

    

Amount

    

Total

 

Balance - March 31, 2024

 

29,271

$

293

$

132,596

$

771,416

 

$

(62)

 

(2,905)

$

(51,571)

$

852,672

Stock-based compensation expense

 

 

 

2,248

 

 

 

 

 

 

2,248

Restricted stock units vested

 

14

 

 

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(414)

 

 

 

 

 

 

(414)

Repurchase of common stock for treasury

 

 

 

 

 

 

 

(57)

 

(3,600)

 

(3,600)

Issuance of common stock under Employee Stock Purchase Plan

 

9

537

 

537

Dividend declaration ($0.10 per share)

 

 

 

 

(2,635)

 

 

 

 

 

(2,635)

Net income

 

 

 

 

26,161

 

 

 

 

 

26,161

Other comprehensive loss, net of tax

(41)

(41)

Balance - June 30, 2024

 

29,294

$

293

$

134,967

$

794,942

 

$

(103)

 

(2,962)

$

(55,171)

$

874,928

Six Months Ended June 30, 2024

Common Stock

Additional

Retained

Accumulated Other

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Comprehensive (Loss) Income

    

Shares

    

Amount

    

Total

 

Balance - December 31, 2023

 

29,262

$

293

$

130,878

$

760,898

 

$

81

 

(2,902)

$

(51,383)

$

840,767

Stock-based compensation expense

 

 

 

4,197

 

 

 

 

 

 

4,197

Restricted stock units vested

 

23

 

 

 

 

 

 

 

 

Shares withheld for taxes paid on stock awards

 

 

 

(645)

 

 

 

 

 

 

(645)

Repurchase of common stock for treasury

 

 

 

 

 

 

 

(60)

 

(3,788)

 

(3,788)

Issuance of common stock under Employee Stock Purchase Plan

 

9

537

 

537

Dividend declaration ($0.10 per share)

 

 

 

 

(5,271)

 

 

 

 

 

(5,271)

Net income

 

 

 

 

39,315

 

 

 

 

 

39,315

Other comprehensive loss, net of tax

(184)

(184)

Balance - June 30, 2024

 

29,294

$

293

$

134,967

$

794,942

 

$

(103)

 

(2,962)

$

(55,171)

$

874,928

Three Months Ended June 30, 2023

Common Stock

Additional

Retained

Accumulated Other

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Comprehensive (Loss) Income

    

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)

 

(2,023)

 

(2,023)

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

Accumulated Other

Treasury Shares

 

    

Shares

    

Amount

    

Paid-In Capital

    

Earnings

    

Comprehensive (Loss) Income

    

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)

(5,446)

 

(5,446)

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

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Six Months Ended

June 30, 

 

2024

    

2023

 

Cash Flows provided by Operating Activities:

Net income

$

39,315

$

33,895

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

Depreciation and amortization

 

6,539

 

6,167

Adjustments to credit losses reserve

 

410

 

1,247

Stock-based compensation expense

 

4,197

 

3,636

Deferred income taxes

 

1,623

 

Amortization of discount on short-term investments

 

(5,593)

 

Loss on disposal of fixed assets

 

36

 

475

Changes in assets and liabilities:

Accounts receivable

 

7,598

 

16,370

Inventories

 

(12,434)

 

48,948

Prepaid expenses, income tax receivable, and other current assets

 

(5,823)

 

(13,653)

Other non-current assets

 

448

 

140

Accounts payable

 

53,172

 

44,584

Accrued expenses and other liabilities

 

6,188

 

(6,364)

Net cash provided by operating activities

 

95,676

 

135,445

Cash Flows used in Investing Activities:

Purchases of short-term investments

(203,278)

Maturities of short-term investments

103,280

Purchases of property and equipment

(3,427)

(4,860)

Net cash used in investing activities

 

(103,425)

 

(4,860)

Cash Flows used in Financing Activities:

Proceeds from short-term borrowings

 

10,560

 

67,895

Repayment of short-term borrowings

(10,560)

(67,895)

Purchase of common stock for treasury shares

 

(3,613)

 

(5,392)

Dividend payments

 

(5,271)

 

(4,206)

Issuance of stock under Employee Stock Purchase Plan

537

537

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

 

(645)

 

(471)

Net cash used in financing activities

 

(8,992)

 

(9,532)

(Decrease) increase in cash and cash equivalents

 

(16,741)

 

121,053

Cash and cash equivalents, beginning of period

 

144,954

 

122,930

Cash and cash equivalents, end of period

$

128,213

$

243,983

Non-cash Investing and Financing Activities:

Accrued purchases of property and equipment

$

347

$

205

Accrued purchase of common stock for treasury shares

$

211

$

Accrued excise tax on treasury purchases

$

18

$

54

Supplemental Cash Flow Information:

Income taxes paid

$

17,946

$

27,410

Interest paid

$

2

$

18

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1– Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries, 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, 2023, filed with the SEC. The accompanying unaudited 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, 2023.

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, 2024 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2024.

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.

Cash and Cash Equivalents and Investments

The Company considers all highly liquid short-term investments with original maturities of 90 days or less to be cash equivalents. The carrying value of the Company’s cash equivalents approximates fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

At the time of purchase, the Company determines the appropriate classification of investments based upon its intent with regard to such investments. All of the Company’s investments are classified as available-for-sale. The Company classifies investments as short-term when their remaining contractual maturities are one year or less from the balance sheet date, and as long-term when the investment has a remaining contractual maturity of more than one year from the balance sheet date. The Company records investments at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive (loss) income on the condensed consolidated balance sheets.

Included in interest income, net on the condensed consolidated statements of income is interest income on cash equivalents and short-term investments of $4,655 and $9,220 for the three and six months ended June 30, 2024, respectively, and $1,874 and $3,182 for the three and six months ended June 30, 2023, respectively.

6

Table of Contents

Treasury Stock, at Cost

The total repurchases for the six months ended June 30, 2024 and 2023 were recorded as treasury stock of $3,788 and $5,446, respectively. Such costs reflect 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, 2024 and 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, 2024.

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, 

2024

2023

2024

2023

Employee separations

$

415

$

1,701

$

415

$

2,399

Other charges

 

 

45

 

 

244

Total restructuring and other charges

$

415

$

1,746

$

415

$

2,643

Included in accrued expenses and other liabilities on the condensed consolidated balance sheets as of June 30, 2024 was $130 related to unpaid termination benefits.

Recently Issued Financial Accounting Standards

In November 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This guidance is intended to improve segment reporting disclosures on both an interim and annual basis, primarily through enhanced disclosures about significant segment expenses. This ASU is effective for the Company’s annual reporting periods beginning January 1, 2024, and for interim reporting periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to improve the transparency of income tax disclosures through, among other things, enhancement of the disclosure requirements within the rate reconciliation, as well as increased income tax disaggregation disclosures. This ASU is effective for the Company’s annual reporting periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statement disclosures.

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Table of Contents

Note 2–Revenue

The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended June 30, 2024 and 2023, along with the segment for each category (in thousands).

Three Months Ended June 30, 2024

    

Enterprise
Solutions

    

Business
Solutions

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

89,802

$

97,841

$

69,816

$

257,459

Desktops

52,680

20,105

12,792

85,577

Software

21,628

37,775

9,571

68,974

Servers/Storage

15,691

34,056

13,640

63,387

Net/Com Products

19,107

19,845

14,312

53,264

Displays and Sound

 

37,265

 

19,981

 

16,745

 

73,991

Accessories

 

38,645

 

28,663

 

11,470

 

78,778

Other Hardware/Services

 

23,990

 

19,932

 

11,127

 

55,049

Total net sales

$

298,808

$

278,198

$

159,473

$

736,479

Three Months Ended June 30, 2023

    

Enterprise
Solutions

    

Business
Solutions

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

87,590

$

88,081

$

74,231

$

249,902

Desktops

33,572

19,011

17,971

70,554

Software

17,561

33,828

13,059

64,448

Servers/Storage

18,705

22,605

11,959

53,269

Net/Com Products

28,727

28,584

22,233

79,544

Displays and Sound

 

27,322

 

23,654

 

16,785

 

67,761

Accessories

 

41,095

 

26,506

 

16,488

 

84,089

Other Hardware/Services

 

32,581

 

18,758

 

12,641

 

63,980

Total net sales

$

287,153

$

261,027

$

185,367

$

733,547

The following tables represent a disaggregation of revenue from arrangements with customers for the six months ended June 30, 2024 and 2023, along with the segment for each category (in thousands).

Six Months Ended June 30, 2024

    

Enterprise
Solutions

    

Business
Solutions

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

180,033

$

189,997

$

108,698

$

478,728

Desktops

90,717

38,223

21,539

150,479

Software

48,748

68,427

15,121

132,296

Servers/Storage

28,058

55,667

22,146

105,871

Net/Com Products

39,069

 

41,690

19,917

 

100,676

Displays and Sound

 

68,529

41,733

 

27,348

137,610

Accessories

 

80,177

 

59,036

 

19,066

 

158,279

Other Hardware/Services

 

46,136

 

39,294

 

19,135

 

104,565

Total net sales

$

581,467

$

534,067

$

252,970

$

1,368,504

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Table of Contents

Six Months Ended June 30, 2023

    

Enterprise
Solutions

    

Business
Solutions

Public Sector
Solutions

    

Total

Notebooks/Mobility

$

201,908

$

183,000

$

126,005

$

510,913

Desktops

63,714

37,773

32,388

133,875

Software

56,795

68,404

22,976

148,175

Servers/Storage

31,212

 

46,896

21,946

 

100,054

Net/Com Products

49,259

 

56,888

35,553

 

141,700

Displays and Sound

 

54,042

46,467

 

29,987

130,496

Accessories

 

88,689

55,241

 

29,961

173,891

Other Hardware/Services

 

55,477

 

39,472

 

27,039

 

121,988

Total net sales

$

601,096

$

534,141

$

325,855

$

1,461,092

Contract Balances

The following table provides information about contract liabilities from arrangements with customers as of June 30, 2024 and December 31, 2023 (in thousands).

    

June 30, 2024

    

December 31, 2023

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

$

7,100

$

4,206

Changes in the contract liability balances during the six months ended June 30, 2024 and 2023 are as follows (in thousands):

    

2024

Balance at December 31, 2023

$

4,206

Cash received in advance and not recognized as revenue

 

9,769

Amounts recognized as revenue as performance obligations satisfied

 

(6,875)

Balance at June 30, 2024

$

7,100

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

Note 3–Fair Value Measurements

Cash equivalents and short-term investments consist of the following (in thousands):

June 30, 2024

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Fair Value

Cash equivalents:

Money market funds

$

108,117

$

$

$

108,117

Short-term investments:

U.S. Government treasury securities

257,720

11

(141)

257,590

Total

$

365,837

$

11

$

(141)

$

365,707

December 31, 2023

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Fair Value

Cash equivalents:

Money market funds

$

129,123

$

$

$

129,123

Short-term investments:

U.S. Government treasury securities

152,129

103

152,232

Total

$

281,252

$

103

$

$

281,355

9

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Investments with maturities of 90 days or less from the date of purchase are classified as cash equivalents; investments with maturities of greater than 90 days from the date of purchase but less than one year are generally classified as short-term investments; and investments with maturities of one year or greater from the date of purchase are generally classified as long-term investments. All short-term investments had stated maturity dates of less than one year. The Company has recorded the securities at fair value on its condensed consolidated balance sheets and unrealized gains and losses are reported as a component of accumulated other comprehensive income. The amount of realized gains and losses reclassified into earnings and the related adjustments to deferred taxes are based on the specific identification of the securities sold or securities that reached maturity date.

Fair Value

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques are classified based on a three-level hierarchy, as follows:

Level 1 inputs: Quoted prices for identical assets or liabilities in active markets;

Level 2 inputs: Observable inputs other than those described as Level 1; and

Level 3 inputs: Unobservable inputs that are supported by little or no market activities and are based on significant assumptions and estimates.

As of June 30, 2024 and December 31, 2023, the fair value of the Company’s investments were all measured using level 1 inputs.

Note 4–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, 

    

2024

    

2023

    

2024

    

2023

 

Numerator:

Net income

$

26,161

$

19,697

$

39,315

$

33,895

Denominator:

Denominator for basic earnings per share

 

26,348

 

26,256

 

26,355

 

26,291

Dilutive effect of employee stock awards

 

172

 

109

 

167

 

109

Denominator for diluted earnings per share

 

26,520

 

26,365

 

26,522

 

26,400

Earnings per share:

Basic

$

0.99

$

0.75

$

1.49

$

1.29

Diluted

$

0.99

$

0.75

$

1.48

$

1.28

For the three and six months ended June 30, 2024 and 2023, 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 5Leases

The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership.

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As of June 30, 2024, there were no additional operating leases that have not yet commenced. Refer to the following table for quantitative information related to the Company’s leases for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Three Months Ended June 30, 2024

 

Six Months Ended June 30, 2024

 

Related Parties

Others

Total

 

Related Parties

Others

Total

 

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

$

485

$

485

$

$

944

$

944

Short-term lease cost

 

421

 

140

 

561

 

841

 

281

 

1,122

Total lease cost

$

421

$

625

$

1,046

$

841

$

1,225

$

2,066

Other Information

 

  

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

 

 

Operating cash flows

$

$

532

$

532

$

$

977

$

977

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

Capitalized operating leases

2.43

2.43

Weighted-average discount rate:

Capitalized operating leases

3.92%

4.28%

4.21%

Three Months Ended June 30, 2023

 

Six Months Ended June 30, 2023

Related Parties

Others

Total

 

Related Parties

Others

Total

Lease Cost

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating lease cost

$

314

$

590

$

904

$

627

$

1,299

$

1,926

Short-term lease cost

 

107

 

115

 

222

 

214

 

136

 

350

Total lease cost

$

421

$

705

$

1,126

$

841

$

1,435

$

2,276

Other Information

 

  

 

  

 

  

 

  

 

  

 

  

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

 

 

 

 

 

 

Operating cash flows

$

314

$

602

$

916

$

627

$

1,245

$

1,872

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

 

  

 

  

 

  

Capitalized operating leases

0.42

3.59

3.33

Weighted-average discount rate:

Capitalized operating leases

3.92%

4.06%

4.04%

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As of June 30, 2024, 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

2024, excluding the six months ended June 30, 2024

$

713

$

394

$

1,107

2025

 

163

 

1,817

 

1,980

2026

 

163

 

1,042

 

1,205

2027

 

1

 

236

 

237

2028

161

161

Thereafter

$

1,040

$

3,650

$

4,690

Imputed interest

(231)

Lease liability balance at June 30, 2024

$

4,459

As of June 30, 2024, the right-of-use, or ROU, asset had a balance of $3,917. The long-term lease liability was $2,497 and the short-term lease liability, which is included in accrued expenses and other liabilities on the condensed consolidated balance sheets, was $1,962. As of December 31, 2023, the ROU asset had a balance of $4,340. The long-term lease liability was $3,181 and the short-term lease liability, which is included in accrued expenses and other liabilities on the condensed consolidated balance sheets, was $1,733.

Note 6–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 Enterprise Solutions segment, which serves primarily medium-to-large corporations; the Business Solutions segment, which serves primarily small- to medium-sized businesses; 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 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.

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Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the three and six months ended June 30, 2024 and 2023 is shown below (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2024

    

2023

    

2024

    

2023

 

Net sales:

Enterprise Solutions

$

298,808

$

287,153

$

581,467

$

601,096

Business Solutions

278,198

261,027

534,067

534,141

Public Sector Solutions

 

159,473

 

185,367

 

252,970

 

325,855

Total net sales

$

736,479

$

733,547

$

1,368,504

$

1,461,092

Operating income (loss):

Enterprise Solutions

$

10,230

$

7,511

$

16,077

$

14,033

Business Solutions

22,229

18,831

38,018

35,384

Public Sector Solutions

 

2,714

 

1,650

 

(2,636)

 

1,679

Headquarters/Other

 

(4,254)

 

(2,921)

 

(7,076)

 

(7,908)

Total operating income

 

30,919

 

25,071

 

44,383

 

43,188

Interest income, net

 

4,649

 

1,874

 

9,216

 

3,160

Income before taxes

$

35,568

$

26,945

$

53,599

$

46,348

Selected operating expense:

Depreciation and amortization:

Enterprise Solutions

$

221

$

423

$

426

$

847

Business Solutions

147

158

310

317

Public Sector Solutions

 

23

 

20

 

46

 

39

Headquarters/Other

 

2,882

 

2,493

 

5,757

 

4,964

Total depreciation and amortization

$

3,273

$

3,094

$

6,539

$

6,167

Total assets:

Enterprise Solutions

$

729,450

$

678,104

Business Solutions

537,655

472,566

Public Sector Solutions

 

107,382

 

102,652

Headquarters/Other

 

(91,002)

 

(89,047)

Total assets

$

1,283,485

$

1,164,275

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, short-term investments, inventories, property and equipment, ROU assets, and intercompany balance, net. As of June 30, 2024 and 2023, total assets for the Headquarters/Other group were presented net of intercompany balance eliminations of $59,751 and $55,432, 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.

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Note 7–Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), which is included as a component of stockholders’ equity, is comprised of unrealized gains (losses) on short-term investments, net of tax. The changes in accumulated other comprehensive income (loss) were as follows (in thousands):

Six Months Ended

June 30, 2024

Balance - December 31, 2023

$

81

Other comprehensive income (loss) before reclassifications, net of tax

(158)

Less amounts reclassified from accumulated other comprehensive income (loss), net of tax

 

26

Net other comprehensive income (loss)

(184)

Balance - June 30, 2024

$

(103)

Six Months Ended

June 30, 2023

Balance - December 31, 2022

$

Other comprehensive income (loss) before reclassifications, net of tax

Less amounts reclassified from accumulated other comprehensive income (loss), net of tax

 

Net other comprehensive income (loss)

Balance - June 30, 2023

$

Note 8–Commitments and Contingencies

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

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 9–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 daily Bloomberg Short-Term Bank Yield Index, or BSBY Rate, plus a spread based on the Company’s funded debt ratio, or in the absence of BSBY Rate, the prime rate (8.50% at June 30, 2024). 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 June 30, 2024, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.

Cash receipts are automatically applied against any outstanding borrowings. During the six months ended June 30, 2024 and 2023, the Company borrowed incremental amounts that were each repaid in full. These borrowings for the six months ended June 30, 2024 and 2023 totaled $10,560 and $67,895, respectively; however, at no time were the outstanding borrowings greater than the $50,000 limit under the credit facility. The Company had no outstanding borrowings under the credit facility as of June 30, 2024 or 2023, 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 include statements concerning, among other things, our future financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), liabilities, impairment charges, competition, and the expected 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 and are based on assumptions as of the date of this report. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. 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), the execution of our business plans (including our inventory management, cost structure and 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 our Annual Report on Form 10-K for the year ended December 31, 2023, 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 caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the other subsequent filings we make with the Securities and Exchange Commission from time to time.

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. 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 except as required by law.

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 Organization, or TSO, 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 Enterprise Solutions, Connection Business Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to enterprise, small- to medium-sized businesses, 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 inside sales and field sales contacts by sales representatives focused on the business, educational, healthcare, retail, manufacturing, 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, Dell Inc., Hewlett-Packard Inc., Hewlett-Packard Enterprise, Intel, Lenovo, Microsoft Corporation, 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 products. We are dependent on our suppliers—manufacturers and distributors that historically have only sold 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 cases 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 our 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 TSO, 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 major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.

To support future growth, we have invested and expect to continue to invest 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.

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Market 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 functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT infrastructure 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 (dollars in millions):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2024

    

2023

    

2024

    

2023

  

Net sales

$

736.5

$

733.5

$

1,368.5

$

1,461.1

Gross margin

18.5

%  

17.4

%  

18.6

%  

17.1

Selling, general and administrative expenses

 

14.3

%  

 

13.8

%  

 

15.3

%  

 

14.0

%

Income from operations

 

4.2

%  

 

3.4

%  

 

3.2

%  

 

3.0

%

Net sales of $736.5 million for the second quarter of 2024 reflected an increase of $3.0 million, or 0.4% compared to the second quarter of 2023. The increase was primarily driven by increases in net sales of desktops, servers/storage, notebooks/mobility, displays and sound, and software of $15.0 million, $10.1 million, $7.6 million, $6.2 million, and $4.5 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to our Unaudited Condensed Consolidated Financial Statements. These increases were partially offset by decreases in net sales of net/com products, other hardware/services, and accessories of $26.3 million, $8.9 million, and $5.3 million, respectively. Gross profit for the second quarter of 2024 increased year-over-year by $8.7 million, or 6.9%, to $136.5 million as illustrated in the table and the discussion beginning on page 19 of this Quarterly Report on Form 10-Q. Gross margin increased to 18.5% from 17.4% a year ago. The increase in gross margin was primarily driven by changes in customer mix resulting in improved invoice margins, most notably in the notebooks/mobility and desktops product categories. SG&A expenses increased year-over-year by $4.2 million, or 4.2%, to $105.2 million. SG&A expenses as a percentage of net sales increased to 14.3% compared to 13.8% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to an increase in personnel costs as shown in the table on page 18 of this Quarterly Report on Form 10-Q. Operating income for the second quarter of 2024 increased year-over-year both in dollars and as a percentage of net sales by $5.8 million and 80 basis points, respectively, primarily as a result of the increase in gross profit partially offset by the increase in SG&A expenses as discussed above.

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Net Sales Distribution

The following table sets forth our percentage of net sales by segment and product mix for the periods indicated:

Three Months Ended June 30, 

Six Months Ended June 30, 

2024

    

2023

2024

    

2023

Operating Segment

Enterprise Solutions

40

%  

39

%  

43

%  

41

%  

Business Solutions

38

36

39

37

Public Sector Solutions

22

 

25

 

18

 

22

 

Total

100

%  

100

%  

100

%  

100

%  

Product Mix

Notebooks/Mobility

35

%  

34

%  

35

%  

35

%  

Desktops

12

10

11

9

Accessories

11

11

11

12

Displays and Sound

10

 

9

 

10

9

 

Software

9

9

10

10

 

Servers/Storage

9

 

7

 

8

7

 

Net/Com Products

7

 

11

 

7

 

10

Other Hardware/Services

7

 

9

 

8

 

8

 

Total

100

%  

100

%  

100

%  

100

%  

Gross Profit Margin

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

Three Months Ended June 30, 

Six Months Ended June 30, 

2024

2023

2024

    

2023

Operating Segment

Enterprise Solutions

15.4

%  

15.0

%  

15.3

%  

14.1

%  

Business Solutions

23.8

23.5

23.7

22.7

Public Sector Solutions

15.2

 

12.7

 

15.5

 

13.4

 

Total Company

18.5

%  

17.4

%  

18.6

%  

17.1

%  

Operating Expenses

The following table reflects our SG&A expenses for the periods indicated (dollars in millions):

Three Months Ended June 30, 

Six Months Ended June 30, 

2024

2023

2024

2023

Personnel costs

$

81.1

$

76.8

$

159.6

$

156.0

Advertising

 

5.2

 

5.2

 

12.6

 

11.8

Service contracts/subscriptions

5.7

5.3

11.7

10.4

Professional fees

 

3.1

 

2.9

 

6.5

 

6.7

Depreciation and amortization

 

3.2

 

3.1

 

6.5

 

6.2

Facilities operations

 

1.9

 

2.0

 

3.7

 

4.2

Credit card fees

 

1.7

 

1.7

 

3.3

 

3.2

Other

 

3.3

 

4.0

 

5.9

 

5.7

Total SG&A expense

$

105.2

$

101.0

$

209.8

$

204.2

As a percentage of net sales

14.3

%  

13.8

%  

15.3

%  

14.0

%  

Restructuring and Other Charges

During the three and six months ended June 30, 2024 and 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other charges of $0.4 million for each of the three and six

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months ended June 30, 2024 compared to restructuring and other charges of $1.7 million and $2.6 million for the three and six months ended June 30, 2023, respectively, which were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. The Company is currently evaluating additional restructuring activities for the third quarter of 2024 and beyond.

Year-Over-Year Comparisons

In this section and elsewhere in this Quarterly Report on Form 10-Q we refer to changes in year-over-year results. Unless context otherwise requires, such references refer to changes between the three months ended June 30, 2024 and the three months ended June 30, 2023; and changes between the six months ended June 30, 2024 and the six months ended June 30, 2023.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):

Three Months Ended June 30, 

2024

2023

% of

% of

$

%

    

Amount

    

Net Sales

    

Amount

    

Net Sales

    

Change

Change

    

Net Sales:

Enterprise Solutions

$

298.8

 

40.5

%  

$

287.1

 

39.1

%  

$

11.7

4.1

%  

Business Solutions

278.2

37.8

261.0

35.6

17.2

6.6

Public Sector Solutions

 

159.5

 

21.7

 

185.4

 

25.3

 

 

(25.9)

(14.0)

 

Total

$

736.5

100.0

%  

$

733.5

100.0

%  

$

3.0

0.4

%  

Gross Profit:

Enterprise Solutions

$

46.1

 

15.4

%  

$

42.9

 

15.0

%  

$

3.2

7.2

%  

Business Solutions

66.3

23.8

61.4

23.5

4.9

8.1

Public Sector Solutions

 

24.1

 

15.2

 

23.5

 

12.7

 

 

0.6

3.0

 

Total

$

136.5

18.5

%  

$

127.8

17.4

%  

$

8.7

6.9

%  

Net sales increased for the second quarter of 2024 compared to the second quarter of 2023, as explained by the year-over-year changes discussed below:

Net sales of $298.8 million for the Enterprise Solutions segment reflect an increase of $11.7 million, or 4.1%. The increase in net sales is primarily due to increases in net sales of desktops, displays and sound, software, and notebooks/mobility of $19.1 million, $9.9 million, $4.1 million, and $2.2 million, respectively. These increases were partially offset by decreases in net sales of net/com products, other hardware/services, servers/storage, and accessories of $9.6 million, $8.6 million, $3.0 million, and $2.5 million, respectively.

Net sales of $278.2 million for the Business Solutions segment reflect an increase of $17.2 million, or 6.6%. The increase in net sales is primarily due to increases in net sales of servers/storage, notebooks/mobility, software, accessories, other hardware/services, and desktops of $11.5 million, $9.8 million, $3.9 million, $2.2 million, $1.2 million, and $1.1 million, respectively. These increases were partially offset by decreases in net sales of net/com products and displays and sound of $8.7 million and $3.7 million, respectively.

Net sales of $159.5 million for the Public Sector Solutions segment reflect a decrease of $25.9 million, or 14.0%. Sales to the federal government decreased by $8.3 million, or 24.6%, compared to the prior year quarter, and sales to state and local government and educational institutions decreased by $17.6 million, or 11.6%. The decrease in net sales is primarily due to decreases in net sales of net/com products, desktops, accessories, notebooks/mobility, software, and other hardware/services $7.9 million, $5.2 million, $5.0 million, $4.4 million, $3.5 million, and $1.5 million, respectively. These decreases were partially offset by an increase in net sales of servers/storage of $1.7 million.

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Gross profit and gross margin for the second quarter of 2024 increased year-over-year, as explained by the year-over-year changes discussed below:

Gross profit for the Enterprise Solutions segment increased by $3.2 million primarily due to the increase in net sales as discussed in the preceding paragraph. Gross margin increased by 40 basis points primarily due to changes in customer mix resulting in improved invoice margins in notebooks/mobility and desktops.

Gross profit for the Business Solutions segment increased by $4.9 million primarily due to the increase in net sales as discussed in the preceding paragraph. Gross margin increased by 30 basis points primarily due to improved invoice margins in accessories, net/com products, software, and notebooks/mobility.

Gross profit for the Public Sector Solutions segment remained substantially the same year-over-year. Gross margin increased by 250 basis points primarily due to improved invoice margins in notebooks/mobility and desktops associated with a few low-margin deals from the prior period.

Selling, general and administrative expenses for the second quarter of 2024 increased both in dollars and as a percentage of net sales compared to the second quarter of 2023. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):

Three Months Ended June 30, 

2024

2023

% of 

% of

Segment Net

Segment Net

$

%

    

Amount

    

Sales

    

Amount

    

Sales

    

Change

Change

    

Enterprise Solutions

$

35.8

 

12.0

%  

$

34.4

 

12.0

%  

$

1.4

4.2

%  

Business Solutions

44.1

15.9

42.5

16.3

1.6

3.8

Public Sector Solutions

 

21.5

 

13.5

 

21.8

 

11.7

 

 

(0.3)

 

(1.4)

 

Headquarters/Other, unallocated

 

3.8

 

2.3

 

 

1.5

 

62.0

 

Total

$

105.2

14.3

%  

$

101.0

13.8

%  

$

4.2

4.2

%  

SG&A expenses for the Enterprise Solutions segment increased year-over-year in dollars but remained consistent as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to an increase in use of shared Headquarter services of $3.6 million, partially offset by decreases in personnel costs and advertising costs of $1.4 million and $0.4 million, respectively.

SG&A expenses for the Business Solutions segment increased year-over-year in dollars but decreased as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to increases in use of shared Headquarter services and advertising costs of $1.6 million and $0.8 million, respectively, partially offset by a decrease in other expenses of $1.0 million. SG&A expenses as a percentage of net sales were 15.9% for the Business Solutions segment for the second quarter of 2024, which reflects a decrease of 40 basis points and is primarily due to the increase in net sales discussed above.

SG&A expenses for the Public Sector Solutions segment remained substantially the same year-over-year in dollars but increased as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to decreases in other expenses, personnel costs, and advertising costs of $0.5 million, $0.3 million, and $0.2 million, respectively, partially offset by an increase in use of shared Headquarter services of $0.8 million. SG&A expenses as a percentage of net sales were 13.5% for the Public Sector Solutions segment for the second quarter of 2024, which reflects an increase of 180 basis points and is primarily due to the decrease in net sales discussed above.

SG&A expenses for the Headquarters/Other group increased year-over-year by $1.5 million primarily due to increases in personnel costs, service contracts/subscriptions, depreciation and amortization, and other expenses of $5.8 million, $0.7 million, $0.4 million, and $0.4 million, respectively, partially offset by a decrease in unallocated Headquarter overhead costs of $5.9 million. The Headquarters/Other group provides services to the three segments in areas such as finance, distribution center, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated allocation usage of the underlying services.

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Restructuring and other charges for the second quarter of 2024 were $0.4 million, compared to $1.7 million for the second quarter of 2023. The restructuring and other charges were primarily related to expenses incurred in connection with the involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.

Income from operations for the second quarter of 2024 increased to $30.9 million, compared to $25.1 million for the second quarter of 2023, primarily due to the increase in gross profit, partially offset by the increase in SG&A expenses, as discussed above. Income from operations as a percentage of net sales was 4.2% for the second quarter of 2024, compared to 3.4% for the prior year quarter, primarily due to the increase in gross profit, partially offset by the increase in SG&A expenses, as discussed above.

Interest income, net for the second quarter of 2024 increased to $4.6 million, compared to $1.9 million for the second quarter of 2023, primarily due to an increase in interest income of $2.8 million as a result of higher cash equivalent balances and interest rates on short-term investments.

Income taxes. Our provision for income taxes for the second quarter of 2024 increased to $9.4 million, compared to $7.2 million for the second quarter of 2023. Our effective tax rate decreased to 26.4% for the quarter ended June 30, 2024, compared to 26.9% for the quarter ended June 30, 2023, primarily due to non-recurring benefits included in the current year.

Net income for the second quarter of 2024 increased to $26.2 million, compared to $19.7 million for the second quarter of 2023, primarily due to a $5.8 million increase in income from operations and a $2.8 million increase in interest income, net, partially offset by an increase in the provision for income taxes of $2.2 million.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):

Six Months Ended June 30, 

2024

2023

% of

% of

$

%

    

Amount

    

Net Sales

    

Amount

    

Net Sales

    

Change

Change

    

Net Sales:

Enterprise Solutions

$

581.4

 

42.5

%  

$

601.1

 

41.1

%  

$

(19.7)

(3.3)

%  

Business Solutions

534.1

39.0

534.1

36.6

Public Sector Solutions

 

253.0

 

18.5

 

325.9

 

22.3

 

 

(72.9)

(22.4)

 

Total

$

1,368.5

100.0

%  

$

1,461.1

100.0

%  

$

(92.6)

(6.3)

%  

Gross Profit:

Enterprise Solutions

$

88.8

 

15.3

%  

$

85.0

 

14.1

%  

$

3.8

4.4

%  

Business Solutions

126.7

23.7

121.3

22.7

5.4

4.5

Public Sector Solutions

 

39.1

 

15.5

 

43.8

 

13.4

 

 

(4.7)

(10.6)

 

Total

$

254.6

18.6

%  

$

250.1

17.1

%  

$

4.5

1.8

%  

Net sales decreased for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, as explained by the year-over-year changes discussed below:

Net sales of $581.4 million for the Enterprise Solutions segment reflect a decrease of $19.7 million, or 3.3%. The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, net/com products, other hardware/services, accessories, software, and servers/storage of $21.9 million, $10.2 million, $9.3 million, $8.5 million, $8.0 million, and $3.2 million, respectively. These decreases were partially offset by increases in net sales of desktops and displays and sound of $27.0 million and $14.5 million, respectively.

Net sales of $534.1 million for the Business Solutions segment remained substantially the same year-over-year. Increases in net sales of servers/storage, notebooks/mobility, accessories, and desktops of $8.8 million, $7.0 million, $3.8 million, and $0.5 million, respectively, were offset by decreases in net sales of net/com products, displays and sound, and other hardware/services of $15.2 million, $4.7 million, and $0.2 million, respectively.

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Net sales of $253.0 million for the Public Sector Solutions segment reflect a decrease of $72.9 million, or 22.4%. Sales to the federal government decreased by $47.7 million, or 52.6%, and sales to state and local government and educational institutions decreased by $25.2 million, or 10.7%. The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, net/com products, accessories, desktops, other hardware/services, software, and displays and sound of $17.3 million, $15.6 million, $10.9 million, $10.8 million, $7.9 million, $7.9 million, and $2.6 million, respectively.

Gross profit and gross margin for the six months ended June 30, 2024 increased year-over-year, as explained by the year-over-year changes discussed below:

Gross profit for the Enterprise Solutions segment increased by $3.8 million primarily due to improved invoice margins in desktops, displays and other hardware/services. Gross margin increased by 120 basis points primarily due to improved invoice margins in desktops, displays, and other hardware/services, as well as an increase in the amount of software sales recognized on a net basis.

Gross profit for the Business Solutions segment increased by $5.4 million primarily due to improved invoice margins in software, notebooks/mobility, accessories, and other hardware/services. Gross margin increased by 100 basis points primarily due to improved invoice margins in software, notebooks/mobility, accessories, and other hardware/services, as well as an increase in the amount of software sales recognized on a net basis.

Gross profit for the Public Sector Solutions segment decreased by $4.7 million primarily due to the decrease in net sales as discussed in the preceding paragraph, partially offset by improved invoice margins in notebooks/mobility, server/storage, and other hardware/services. Gross margin increased by 210 basis points primarily due to improved invoice margins in notebooks/mobility, server/storage, and other hardware/services.

Selling, general and administrative expenses for the six months ended June 30, 2024 increased both in dollars and as a percentage of net sales compared to the six months ended June 30, 2023. SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):

Six Months Ended June 30, 

2024

2023

% of 

% of

Segment Net

Segment Net

$

%

    

Amount

    

Sales

    

Amount

    

Sales

    

Change

Change

    

Enterprise Solutions

$

72.7

 

12.5

%  

$

69.9

 

11.6

%  

$

2.8

4.0

%  

Business Solutions

88.7

16.6

85.8

16.1

2.9

3.3

Public Sector Solutions

 

41.8

 

16.5

 

42.0

 

12.9

 

 

(0.2)

(0.6)

 

Headquarters/Other, unallocated

 

6.6

 

6.5

 

 

0.1

3.1

 

Total

$

209.8

15.3

%  

$

204.2

14.0

%  

$

5.6

2.7

%  

SG&A expenses for the Enterprise Solutions segment increased year-over-year both in dollars and as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to an increase in use of shared Headquarter services of $6.8 million, partially offset by a decrease in personnel costs of $3.3 million. SG&A expenses as a percentage of net sales were 12.5% for the Enterprise Solutions segment for the six months ended June 30, 2024, which reflects an increase of 90 basis points and is primarily due to the decrease in net sales discussed above.

SG&A expenses for the Business Solutions segment increased year-over-year both in dollars and as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to increases in use of shared Headquarter services and advertising costs of $2.4 million and $1.4 million, respectively, partially offset by decreases in other expenses and personnel costs of $0.6 million and $0.4 million, respectively. SG&A expenses as a percentage of net sales were 16.6% for the Business Solutions segment for the six months ended June 30, 2024, which reflects an increase of 50 basis points and is primarily due to the increase in SG&A expenses.

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SG&A expenses for the Public Sector Solutions segment remained substantially the same year-over-year in dollars but increased as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to decreases in personnel costs and other expenses of $0.9 million and $0.6 million, respectively, partially offset by a $1.2 million increase in use of shared Headquarter services. SG&A expenses as a percentage of net sales were 16.5% for the Public Sector Solutions segment for the six months ended June 30, 2024, which reflects an increase of 360 basis points and is primarily due to the decrease in net sales discussed above.

SG&A expenses for the Headquarters/Other group remained substantially the same year-over-year primarily due to increases in personnel costs, service contracts/subscriptions, and depreciation and amortization of $8.1 million, $1.7 million, and $0.8 million, respectively, partially offset by a decrease in unallocated Headquarter overhead costs of $10.3 million. The Headquarters/Other group provides services to the three segments in areas such as finance, distribution center, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated allocation usage of the underlying services.

Restructuring and other charges for the six months ended June 30, 2024 were $0.4 million, compared to $2.6 million for the six months ended June 30, 2023. The restructuring and other charges were primarily related to expenses incurred in connection with the involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.

Income from operations for the six months ended June 30, 2024 increased to $44.4 million, compared to $43.2 million for the six months ended June 30, 2023, primarily due to the increase in gross profit and decrease in restructuring and other charges, partially offset by the increase in SG&A expenses, as discussed above. Income from operations as a percentage of net sales was 3.2% for the six months ended June 30, 2024, compared to 3.0% for the six months ended June 30, 2023, primarily due to the decrease in net sales discussed above.

Interest income, net for the six months ended June 30, 2024 increased to $9.2 million, compared to $3.2 million for the six months ended June 30, 2023, primarily due to an increase in interest income of $6.0 million as a result of higher cash equivalent balances and interest rates on short-term investments.

Income taxes. Our provision for income taxes for the six months ended June 30, 2024 increased to $14.3 million, compared to $12.5 million for the six months ended June 30, 2023. Our effective tax rate decreased to 26.6% for the six months ended June 30, 2024, compared to 26.9% for the six months ended June 30, 2023, primarily due to non-recurring benefits included in the current year.

Net income for the six months ended June 30, 2024 increased to $39.3 million, compared to $33.9 million for the six months ended June 30, 2023, primarily due to a $6.0 million increase in interest income, net, partially offset by a $1.8 million increase in the provision for income taxes.

Liquidity and Capital Resources

Our primary sources of liquidity are internally generated funds from operations, short-term investments, and borrowings under our credit facility. We have historically used and expect to use in the future those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, repurchases of our common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.

We believe that funds generated from operations, short-term investments, and the available capacity under our credit facility will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months and beyond such twelve calendar month period. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.

We expect to meet our cash requirements for the next twelve months and beyond through a combination of cash on hand, short-term investments, cash generated from operations, and borrowings under our credit facility, as follows:

Cash and Cash Equivalents. As of June 30, 2024, we had $128.2 million in cash and cash equivalents.

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Short-term Investments. As of June 30, 2024, we had $257.6 million in short-term investments.

Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate positive cash flow.

Credit Facility. As of June 30, 2024, no borrowings were outstanding under our $50.0 million credit facility, which is available until March 31, 2025. Accordingly, our entire line of credit was available for borrowing as of June 30, 2024. This maximum borrowing capacity under our credit facility can be increased, at our option, to up to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below. As of June 30, 2024, we were in compliance with the covenants of our credit facility.

Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, or our customers are materially adversely impacted by the developing macroeconomic trends characterized by inflation and increased interest rates, our cash flows from operations may be substantially affected.

Dividends

A summary of 2024 dividend activity for our common stock is as follows:

Dividend Amount

    

Declaration Date

    

Record Date

    

Payment Date

$

0.10

February 12, 2024

February 27, 2024

March 15, 2024

$

0.10

April 30, 2024

May 14, 2024

May 29, 2024

On July 31, 2024, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.10 per share. The dividend will be paid on August 30, 2024 to all stockholders of record as of the close of business on August 13, 2024. The declaration and payment of any future dividends is at the discretion of our Board of Directors and will depend upon our financial position, strategic plans, general business conditions and any other factors deemed relevant by our Board of Directors.

Summary of Sources and Uses of Cash

Cash flows from operating, investing and financing activities for the six months ended June 30, 2024 and 2023, as reflected in our Unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Quarterly Report on Form 10-Q, are summarized in the following table (in millions):

Six Months Ended June 30, 

    

2024

    

2023

Net cash provided by operating activities

$

95.7

$

135.4

Net cash used in investing activities

 

(103.4)

 

(4.8)

Net cash used in financing activities

 

(9.0)

 

(9.5)

(Decrease) increase in cash and cash equivalents

$

(16.7)

$

121.1

Cash provided by operating activities was $95.7 million for the six months ended June 30, 2024. Cash provided by operating activities resulted primarily from $39.3 million of net income and a $53.2 million increase in accounts payable. A decrease in accounts receivable of $7.6 million, an increase in accrued expenses and other liabilities of $6.2 million, and depreciation and amortization added back to net income of $6.5 million also contributed to the positive inflow of cash for the six months ended June 30, 2024. These inflows were partially offset by increases in inventory and prepaid expenses, income tax receivable, and other current assets of $12.4 million and $5.8 million, respectively. The increase in accounts payable was primarily driven by the timing of payments. For the six months ended June 30, 2023, cash provided by operating activities resulted primarily from net income adjusted for non-cash charges of $45.4 million, a decrease in inventory of $48.9 million, an increase in accounts payable of $44.6 million, and a decrease in accounts

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receivable of $16.4 million, partially offset by an increase in prepaid expenses and other current assets of $13.7 million and a decrease in accrued expenses and other liabilities of $6.4 million.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:

June 30, 

(in days)

2024

2023

Days of sales outstanding (DSO)(1)

68

68

Days of supply in inventory (DIO)(2)

21

24

Days of purchases outstanding (DPO)(3)

(48)

(42)

Cash conversion cycle

41

50

(1)Represents the trade receivable at the end of the quarter divided by average daily net sales for the same three-month period.

(2)Represents the inventory balance at the end of the quarter divided by average daily cost of sales for the same three-month period.

(3)Represents the accounts payable balance at the end of the quarter divided by average daily cost of sales for the same three-month period.

The cash conversion cycle decreased to 41 days at June 30, 2024, compared to 50 days at June 30, 2023. The decrease in DIO is consistent with the decrease in inventory for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in DPO is consistent with the increase in accounts payable as of June 30, 2024 compared to June 30, 2023.

Cash used in investing activities for the six months ended June 30, 2024 consisted of $203.3 million of purchases of U.S. Government treasury securities, $103.3 million of maturities of U.S. Government treasury securities, and $3.4 million of purchases of property and equipment. These property and equipment expenditures were primarily for computer equipment and capitalized internally developed software in connection with investments in our IT infrastructure. In the prior year period, we made similar property and equipment investments of $4.8 million.

Cash used in financing activities for the six months ended June 30, 2024 consisted of $10.6 million of aggregate borrowings and repayments, $3.6 million of treasury purchases, $5.3 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $0.6 million payments of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily consisted of $5.4 million of treasury purchases, $4.2 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $0.5 million payments of payroll taxes on stock-based compensation through shares withheld.

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit facility and other contractual obligations. For more information about the restrictive covenants in our credit facility, see “Factors Affecting Sources of Liquidity” below. For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.

Credit Facility. Our credit facility extends until March 2025 and is collateralized by our accounts receivable. As of June 30, 2024, our borrowing capacity under the credit facility was up to $50.0 million. Amounts outstanding under this facility bear interest at the greatest of (i) the prime rate (8.50% at June 30, 2024), (ii) the federal funds effective rate plus 0.50% per annum, and (iii) the daily BSBY Rate, plus 1.00% per annum, provided that the rate shall at no time be less than 0% per annum. In addition, we have the ability to increase our borrowing capacity under the credit facility up to an additional $30.0 million provided that we meet certain additional borrowing requirements and obtain the consent of the administrative agent. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity”. We did not have any borrowings outstanding under the credit facility as of June 30, 2024.

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Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the credit facility are classified as current in our condensed consolidated balance sheets. As of June 30, 2024, the entire $50.0 million facility was available for borrowing.

Operating Leases. We lease facilities from a related party, which is a company affiliated with us through common ownership, and facilities from third parties under non-cancelable operating leases. Certain leases require us to pay real estate taxes, insurance, and common area maintenance charges. See “Item 2. Properties” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding our operating leases.

Factors Affecting Sources of Liquidity

Internally Generated Funds. The key factors affecting our internally generated funds are our ability to manage costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.

Credit Facility. Our credit facility extends until March 2025 and is collateralized by our accounts receivable. As of June 30, 2024, the entire $50.0 million facility was available for borrowing. Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, and other distributions, investments, and liens) with which we and all of our subsidiaries must comply. Any failure to comply with these covenants would constitute a default and could prevent us from borrowing additional funds under this line of credit. This credit facility contains two financial tests:

The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated trailing twelve months Adjusted EBITDA) must not be more than 2.0 to 1.0. Such amount was calculated as 0.0 to 1.0 at June 30, 2024, and accordingly, the funded debt ratio did not limit potential borrowings as of June 30, 2024. Future decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowings under the line of credit.

Minimum consolidated net worth (defined as our consolidated total assets less our consolidated total liabilities) must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016 (loss quarters not counted). Such amount was calculated as $622.7 million at June 30, 2024, whereas our actual consolidated stockholders’ equity at that date was $874.9 million.

Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the IT industry, our financial performance and stock price, and the state of the capital markets. In addition, market volatility, inflation and interest rate fluctuations may increase our cost of financing or restrict our access to potential sources of future liquidity.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of our market risks, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2023. No material changes related to our market risks have occurred since December 31, 2023.

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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

For information related to legal proceedings, see the discussion in Note 8 - “Commitments and Contingencies” in the Notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated by reference into this Part II, Item 1.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial position, and results of operations. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our other public filings with the SEC, and those contained in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, incorporated by reference herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases under our stock repurchase program are made from time to time at management’s discretion in accordance with applicable federal securities laws. All repurchases of our common stock have been recorded as treasury stock. The following table summarizes information relating to purchases of common stock made by or on our behalf during the quarter ended June 30, 2024 (dollars in thousands, except per share data):

Issuer Purchases of Equity Securities

Total Number of

Approximate Dollar Value

Shares Purchased as

of Shares that May Yet Be

Total Number

Part of Publicly

Purchased Under the Plans

of Shares

Average Price Paid

Announced Plans or

or Programs

Period

    

Purchased

    

Per Share

    

Programs (1)

    

(in millions) (1)(2)

04/01/24-04/30/24

14,087

$

62.98

14,087

$

31.2

05/01/24-05/31/24

21,988

64.45

21,988

$

69.8

06/01/24-06/30/24

20,641

64.59

20,641

$

68.5

56,716

$

64.14

56,716

(1)We have repurchased in aggregate approximately 2.8 million shares of our common stock for approximately $51.5 million pursuant to the repurchase program approved by our Board of Directors.

(2)On March 28, 2001, we announced that our Board of Directors authorized the spending of up to $15.0 million to repurchase shares of our common stock. On each of February 11, 2014, December 17, 2018, November 22, 2022, and May 1, 2024, our Board of Directors approved increases of $15.0 million, $25.0 million, $25.0 million, and $40.0 million, respectively, to the repurchase program bringing the aggregate authorized amount under the repurchase program to $120.0 million. There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. The timing and amount of any share repurchases will be based on market conditions and other factors.

Item 5. Other Information

Director and Officer Trading Arrangements

None of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted or terminated a Rule 10b5-1 trading agreement or a non-Rule 10b5-1 trading agreement (as defined in Item 408(c) of Regulation S-K) during the second quarter of 2024.

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Item 6 - Exhibits

Exhibit
Number

Description

3.1

Amended and Restated Certificate of Incorporation of PC Connection, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company’s registration statement on Form S-4 (333-63272) filed on June 19, 2001).

3.2

Amended and Restated Bylaws of PC Connection, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K, filed on January 9, 2008).

31.1

*

Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

*

Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

*

Certification of the Company’s President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

*

Certification of the Company’s Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

*

Inline XBRL Instance Document* - The Instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH

*

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

*

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

*

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

*

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

*

Inline XBRL Taxonomy Presentation Linkbase Document.

104

*

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

*    Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2024 and December 31, 2023, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023, (iii) Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2024 and 2023, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2024 and 2023, (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PC CONNECTION, INC.

Date:

July 31, 2024

By:

/s/ TIMOTHY J. MCGRATH

Timothy J. McGrath

President and Chief Executive Officer

(Duly Authorized Officer)

Date:

July 31, 2024

By:

/s/ THOMAS C. BAKER

Thomas C. Baker

Senior Vice President, Chief Financial Officer and Treasurer  (Principal Financial and Accounting Officer)

31

Exhibit 31.1

CERTIFICATION

I, Timothy J. McGrath, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of PC Connection, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

6

Date: July 31, 2024

/s/ TIMOTHY J. MCGRATH

Timothy J. McGrath

President and Chief Executive Officer


Exhibit 31.2

CERTIFICATION

I, Thomas C. Baker, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of PC Connection, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2024

/s/ THOMAS C. BAKER

Thomas C. Baker

Senior Vice President, Chief Financial Officer and Treasurer


Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of PC Connection, Inc. (the “Company”) for the period ended June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Timothy J. McGrath, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 31, 2024

/s/ TIMOTHY J. MCGRATH

Timothy J. McGrath

President and Chief Executive Officer


Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of PC Connection, Inc. (the “Company”) for the period ended June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Thomas C. Baker, Senior Vice President, Chief Financial Officer and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 31, 2024

/s/ THOMAS C. BAKER

Thomas C. Baker

Senior Vice President, Chief Financial Officer and Treasurer