10-Q 1 pccc-20180331x10q.htm 10-Q pccc_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended March 31, 2018

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 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 ☐

 

(Do not check if smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ☐    NO  ☑

The number of shares outstanding of the issuer’s common stock as of April 30, 2018 was 26,683,323.

 

 


 

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

Unaudited Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets–March 31, 2018 and December 31, 2017

1

 

 

 

 

Condensed Consolidated Statements of Income–Three Ended March 31, 2018 and 2017

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows–Three Months Ended March 31, 2018 and 2017

3

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

 

ITEM 2.

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

13

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

ITEM 4.

Controls and Procedures

23

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

ITEM 1A.

Risk Factors

24

 

 

 

ITEM 6.

Exhibits

24

 

 

 

SIGNATURES 

26

 

 

 

 

 


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,967

 

$

49,990

 

Accounts receivable, net

 

 

408,334

 

 

449,682

 

Inventories,net

 

 

85,582

 

 

106,753

 

Prepaid expenses and other current assets

 

 

6,437

 

 

5,737

 

Income taxes receivable

 

 

380

 

 

3,933

 

Total current assets

 

 

571,700

 

 

616,095

 

Property and equipment, net

 

 

44,019

 

 

41,491

 

Goodwill

 

 

73,602

 

 

73,602

 

Other intangibles, net

 

 

10,645

 

 

11,025

 

Long-term accounts receivable

 

 

1,890

 

 

 —

 

Other assets

 

 

1,714

 

 

5,638

 

Total Assets

 

$

703,570

 

$

747,851

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Borrowings under bank line of credit

 

$

859

 

$

 —

 

Accounts payable

 

 

152,115

 

 

194,257

 

Accrued expenses and other liabilities

 

 

23,434

 

 

31,096

 

Accrued payroll

 

 

17,207

 

 

22,662

 

Total current liabilities

 

 

193,615

 

 

248,015

 

Deferred income taxes

 

 

16,125

 

 

15,696

 

Other liabilities

 

 

1,871

 

 

1,888

 

Total Liabilities

 

 

211,611

 

 

265,599

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

287

 

 

287

 

Additional paid-in capital

 

 

114,361

 

 

114,154

 

Retained earnings

 

 

396,170

 

 

383,673

 

Treasury stock, at cost

 

 

(18,859)

 

 

(15,862)

 

Total Stockholders’ Equity

 

 

491,959

 

 

482,252

 

Total Liabilities and Stockholders’ Equity

 

$

703,570

 

$

747,851

 

 

 

See notes to unaudited condensed consolidated financial statements.

1


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Net sales

 

$

624,895

 

$

670,594

 

Cost of sales

 

 

528,523

 

 

583,861

 

Gross profit

 

 

96,372

 

 

86,733

 

Selling, general and administrative expenses

 

 

80,900

 

 

75,281

 

Income from operations

 

 

15,472

 

 

11,452

 

Interest income, net

 

 

116

 

 

19

 

Income before taxes

 

 

15,588

 

 

11,471

 

Income tax provision

 

 

(4,288)

 

 

(4,039)

 

Net income

 

$

11,300

 

$

7,432

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.28

 

Diluted

 

$

0.42

 

$

0.28

 

 

 

 

 

 

 

 

 

Shares used in computation of earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

26,835

 

 

26,697

 

Diluted

 

 

26,916

 

 

26,866

 

 

 

See notes to unaudited condensed consolidated financial statements.

2


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 1―Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

11,300

 

$

7,432

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,300

 

 

2,855

 

Deferred income taxes

 

 

429

 

 

38

 

Provision for doubtful accounts

 

 

417

 

 

545

 

Stock-based compensation expense

 

 

207

 

 

183

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

57,389

 

 

32,885

 

Inventories

 

 

10,302

 

 

(9,438)

 

Prepaid expenses, income tax receivables and other current assets

 

 

2,721

 

 

1,016

 

Other non-current assets

 

 

(1,880)

 

 

22

 

Accounts payable

 

 

(42,521)

 

 

(6,177)

 

Accrued expenses and other liabilities

 

 

(4,420)

 

 

(3,936)

 

Net cash provided by operating activities

 

 

37,244

 

 

25,425

 

Cash Flows used for Investing Activities:

 

 

 

 

 

 

 

Purchases of equipment

 

 

(5,007)

 

 

(1,487)

 

Net cash used for investing activities

 

 

(5,007)

 

 

(1,487)

 

Cash Flows used for Financing Activities:

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

859

 

 

 —

 

Purchase of treasury shares

 

 

(2,997)

 

 

 —

 

Dividend payment

 

 

(9,122)

 

 

(9,041)

 

Exercise of stock options

 

 

 —

 

 

1,678

 

Net cash used for financing activities

 

 

(11,260)

 

 

(7,363)

 

Increase in cash and cash equivalents

 

 

20,977

 

 

16,575

 

Cash and cash equivalents, beginning of period

 

 

49,990

 

 

49,180

 

Cash and cash equivalents, end of period

 

$

70,967

 

$

65,755

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

1,140

 

$

291

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Income taxes paid

 

$

320

 

$

1,546

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

3


 

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 condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America.  Such principles were applied on a basis consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”), other than the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) under the modified retrospective method as of January 1, 2018 as discussed below.  The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements contained in our Annual Report on Form 10-K.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated through the date of issuance of these financial statements.  The operating results for the three months ended March 31, 2018 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2018.

 

Revenue Recognition

 

On January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. See Adoption of Recently Issued Accounting Standards in this footnote for additional information.

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We account for a contract when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes a contract. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities.  We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our contracts.

 

Nature of Products and Services

 

Information technology (“IT”) products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which varies based on terms of the contract. We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing.

We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer.

 

4


 

Licenses for on premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We are the principal in these transactions and recognize revenue for the on premise license at the point in time when the software is made available to the customer and upon the commencement of the term of the software or when the renewal term begins, as applicable. 

 

For certain on premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance which provides software updates and other support services.  We do not have control over the delivery of these performance obligations and accordingly we are the agent in these transactions. We recognize revenue for security software net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales contract. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We do not exercise control over these products and therefore are an agent in these transactions. We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales contract.

 

Certain software sales include on premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk, and other support services transferred over the underlying contract period. On premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these separately. We determine the stand-alone selling price (“SSP”) of the license and the software maintenance and allocate the transaction price amongst the performance obligations. We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales contract.

 

Certain of our larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under enterprise agreements (“EAs”). Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most EAs, our vendors will transfer the license and bill the customer directly, paying resellers, such as us an agency fee or commission on these sales. We record these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature of each item. Our vendors typically dictate how the EA will be sold to the customer.

 

We also offer extended service plans (“ESP”) on IT products, both as part of the initial arrangement and separately from the IT products. When sold as one transaction, we determine the SSP of the IT products and the ESP and allocate the transaction price amongst the separate performance obligations.  We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales contract.

 

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to such shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.

 

We use our own engineering personnel in projects involving the design and installation of systems and networks, and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as we perform the underlying services and satisfy our performance obligations. We evaluate such engagements to determine whether we are the principal or the agent in each transaction. For those transactions in which we do not control the service, we act as an agent and recognize the transaction revenue on a net basis at a point in time when the vendor and customer agree on the sales contract.

 

Significant Judgments

 

Our contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether we are the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

 

5


 

Estimates may be required to determine SSP for each distinct performance obligation. We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premises license sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

 

We provide our customers with a limited thirty-day right of return generally limited to defective merchandise. Revenue is recognized at delivery and a reserve for sales returns is recorded. We make estimates of product returns based on significant historical experience and record our sales return reserves as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses.

 

Description of Revenue

 

We disaggregate revenue from the contracts with customers by types of products and services, as we believe it best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

The following table represents a disaggregation of revenue from contracts with customers for the three months ended March 31, 2018 and 2017, along with the reportable segment for each category.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

    

Business Solutions

    

Enterprise Solutions

    

Public Sector Solutions

    

Total

Software

$

34,424

$

28,441

$

6,863

$

69,728

Notebooks/Mobility

 

71,729

 

63,438

 

23,898

 

159,065

Servers/Storage

 

31,501

 

24,543

 

17,139

 

73,183

Net/Com products

 

27,026

 

12,368

 

12,758

 

52,152

Other hardware/services

 

98,598

 

128,454

 

43,715

 

270,767

 

 

 

 

 

 

 

 

 

Total net sales

$

263,278

$

257,244

$

104,373

$

624,895

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017

 

    

Business Solutions

    

Enterprise Solutions

    

Public Sector Solutions

    

Total

Software

$

59,803

$

54,882

$

14,626

$

129,311

Notebooks/Mobility

 

72,878

 

50,000

 

26,290

 

149,168

Servers/Storage

 

26,503

 

21,654

 

12,186

 

60,343

Net/Com products

 

22,969

 

16,471

 

17,524

 

56,964

Other hardware/services

 

91,480

 

109,911

 

73,417

 

274,808

 

 

 

 

 

 

 

 

 

Total net sales

$

273,633

$

252,918

$

144,043

$

670,594

 

Contract Balances

 

The following table provides information about contract liability from contracts with customers as of March 31, 2018 and January 1, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

January 1, 2018

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

 

 

3,087

 

 

2,914

 

6


 

Significant changes in the contract liability balances during the three months ended March 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

    

Contract Liabilities

Balances at January 1, 2018

 

$

2,914

Reclassification of the beginning contract liability to revenue, as the result of performance obligations satisfied

 

 

(1,146)

Cash received in advance and not recognized as revenue

 

 

1,319

Balances at March 31, 2018

 

$

3,087

 

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions.  These estimates and assumptions affect the amounts reported in the accompanying condensed consolidated financial statements.  Actual results could differ from those estimates.

 

Comprehensive Income

 

We had no items of comprehensive income, other than our net income for each of the periods presented.

 

Adoption of Recently Issued Accounting Standards

 

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASC 606, which amends the existing accounting standards for revenue recognition and expanded our disclosure requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

On January 1, 2018 we adopted ASC 606 using the modified retrospective transition method which resulted in an adjustment at January 1, 2018, to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date.  Upon adoption we recorded $1,197 as an increase retained earnings.  The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

The adoption resulted in acceleration of the timing of revenue recognized for certain transactions.  For example;

 

IT product revenue was previously recognized revenue at the time of delivery to the customer.  We have determined that control of the product may transfer prior to delivery to the customer for transaction where we have a legal right to payment upon shipment of the goods; title and risk of loss of/damage to the shipped goods are transferred to the customer, and the seller transfers physical possession of the shipped goods, and shipping terms do not affect customer acceptance.  In addition, certain transactions where product remains in our possession has been recognized as of the transaction date when all revenue recognition criteria have been met.

 

7


 

The following table presents the effect of the adoption of ASC 606 on our condensed consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

    

 

    

Adjustments

    

 

 

 

Balance at

 

Due to ASU

 

Balance at

 

 

December 31, 2017

 

2014-09

 

January 1, 2018

Balance Sheet

 

  

 

  

 

  

Assets

 

  

 

  

 

  

Accounts receivable, net

$

449,682

$

14,568

$

464,250

Inventories

 

106,753

 

(10,869)

 

95,884

Prepaid expenses and other current assets

 

5,737

 

(132)

 

5,605

Long-term accounts receivable

 

 —

 

1,890

 

1,890

Other assets

 

5,638

 

(3,914)

 

1,724

 

 

 

 

 

 

 

Liabilities

 

  

 

  

 

  

Accounts payable

 

194,257

 

(62)

 

194,195

Accrued expenses and other liabilities

 

31,096

 

(312)

 

30,784

Accrued payroll

 

22,662

 

291

 

22,953

Deferred income taxes

 

15,696

 

429

 

16,125

 

 

  

 

  

 

  

 

 

 

 

 

 

 

Stockholders' Equity

 

  

 

  

 

  

Retained earnings

$

383,673

$

1,197

$

384,870

 

 

In addition to the timing of revenue recognition impacted by the above described transactions, upon adoption of ASC 606, the amount of revenue to be recognized prospectively is affected by the presentation of revenue transactions as an agent instead of principal in the following transactions:

 

Revenue related to the sale of cloud products as well as certain security software will be recognized net of costs of sales as we have determined that we act as an agent in these transactions.  These sales are recorded on a net basis at a point in time when our vendor and the customer accepts the term and conditions in the sales contract.  In addition, we sell third-party software maintenance that is delivered over time either separately or bundled with the software license. We have determined that software maintenance is a distinct performance obligation that we do not control, and accordingly, we act as an agent in these transactions and will recognize the related revenue on a net basis under ASC 606. We previously recognized revenue for cloud products, security software, and software maintenance on a gross basis (i.e., acting as a principal). This change will reduce both net sales and cost of sales with no impact on reported gross profit as compared to our prior accounting policies.

 

The following tables present the effect of the adoption of ASC 606 on our condensed consolidated income statement and balance sheet as of and for the three-months ended March 31, 2018 and as of March 31, 2018, respectively:

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

    

 

    

 

    

Balances without

 

 

As 

 

 

 

Adoption of

 

 

Reported

 

Adjustments

 

ASC 606

Income statement

 

  

 

  

 

  

Revenues

 

  

 

  

 

  

Net sales

$

624,895

$

75,558

$

700,453

 

 

 

 

 

 

 

Costs and expenses

 

  

 

  

 

  

Cost of sales

 

528,523

 

76,168

 

604,691

 

 

 

 

 

 

 

Income from operations

 

15,472

 

(497)

 

14,975

Income before taxes

 

15,588

 

(497)

 

15,091

Net income

$

11,300

$

(362)

$

10,938

 

8


 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

 

    

 

    

Balances without

 

 

As

 

 

 

Adoption of

 

 

Reported

 

Adjustments

 

ASC 606

Balance Sheet

 

 

 

 

 

  

Assets

 

  

 

  

 

  

Accounts receivable, net

$

408,334

$

(17,182)

$

391,152

Inventories

 

85,582

 

13,503

 

99,085

Prepaid expenses and other current assets

 

6,437

 

247

 

6,684

Long-term receivables

 

1,890

 

(1,890)

 

 —

Other assets

 

1,714

 

3,914

 

5,628

 

 

 

 

 

 

 

Liabilities

 

  

 

  

 

  

Accounts payable

$

152,115

$

(234)

$

151,881

Accrued expenses and other liabilities

 

23,434

 

1,277

 

24,711

Accrued payroll

 

17,207

 

(327)

 

16,880

Deferred income taxes

 

16,125

 

(564)

 

15,561

 

 

 

 

 

 

 

Stockholders' Equity

 

  

 

  

 

  

Retained earnings

$

396,170

$

(1,559)

$

394,611

 

We have elected the use of certain practical expedients in our adoption of the new standard, which includes continuing to record revenue reported net of applicable taxes imposed on the related transaction and the application of the new standard to all contracts not completed as of the adoption date. We have also elected to use the practical expedient to not account for the shipping and handling as separate performance obligations.  Adoptions of the standard related to revenue recognition had no net impact on our condensed consolidated statement of cash flows.

 

 

Recently Issued Financial Accounting Standards

 

In February 2017, the FASB issued ASU 2017-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently assessing the potential impact of the adoption of ASU 2017-02 on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.  Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.  ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  ASU 2017-04 is effective for the Company beginning January 1, 2020 for both interim and annual reporting periods.  We are currently assessing the potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.

 

Note 2–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 nonvested stock units and stock options outstanding, if dilutive.

 

9


 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

    

2018

    

2017

 

Numerator:

 

 

 

 

 

 

 

Net income

 

$

11,300

 

$

7,432

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic earnings per share

 

 

26,835

 

 

26,697

 

Dilutive effect of employee stock awards

 

 

81

 

 

169

 

Denominator for diluted earnings per share

 

 

26,916

 

 

26,866

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.28

 

Diluted

 

$

0.42

 

$

0.28

 

 

For the three months ended March 31, 2018 and 2017, we had no outstanding nonvested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

 

 

 

 

 

k

 

Note 3–Segment and Related Disclosures

 

The internal reporting structure used by our chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments.  Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.

 

Our operations are organized under three reportable segments—the Business Solutions segment, which serves primarily small- and medium-sized businesses; the Enterprise Solutions segment, which serves primarily medium-to-large corporations; and the Public Sector Solutions segment, which serves primarily federal, state, and local governmental and educational institutions.  In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, 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.  We report 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.

 

   

   

10


 

Segment information applicable to our reportable operating segments for the three months ended March 31, 2018 and 2017 is shown below:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2018

    

2017

 

Net sales:

 

 

 

 

 

 

 

Business Solutions

 

$

263,278

 

$

273,633

 

Enterprise Solutions

 

 

257,244

 

 

252,918

 

Public Sector Solutions

 

 

104,373

 

 

144,043

 

Total net sales

 

$

624,895

 

$

670,594

 

Operating income (loss):

 

 

 

 

 

 

 

Business Solutions

 

$

9,482

 

$

8,607

 

Enterprise Solutions

 

 

12,678

 

 

9,057

 

Public Sector Solutions

 

 

(3,125)

 

 

(2,613)

 

Headquarters/Other

 

 

(3,563)

 

 

(3,599)

 

Total operating income

 

 

15,472

 

 

11,452

 

Interest income, net

 

 

116

 

 

19

 

Income before taxes

 

$

15,588

 

$

11,471

 

Selected operating expense:

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

Business Solutions

 

$

174

 

$

154

 

Enterprise Solutions

 

 

482

 

 

594

 

Public Sector Solutions

 

 

34

 

 

39

 

Headquarters/Other

 

 

2,610

 

 

2,068

 

Total depreciation and amortization

 

$

3,300

 

$

2,855

 

Total assets:

 

 

 

 

 

 

 

Business Solutions

 

$

255,230

 

 

 

 

Enterprise Solutions

 

 

406,303

 

 

 

 

Public Sector Solutions

 

 

52,709

 

 

 

 

Headquarters/Other

 

 

(10,672)

 

 

 

 

Total assets

 

$

703,570

 

 

 

 

 

The assets of our three operating segments presented above consist primarily of accounts receivable, intercompany receivable, goodwill, and other intangibles.  Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, and property and equipment.  Total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $10,431 as of March 31, 2018.  Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems.  These information systems serve all of our segments, to varying degrees, and accordingly, our CODM does not evaluate capital expenditures on a segment basis.

 

Note 4–Commitments and Contingencies

 

We are subject to various legal proceedings and claims, including patent infringement claims, which have arisen during the ordinary course of business.  In the opinion of management, the outcome of such matters is not expected to have a material effect on our financial position, results of operations, and cash flows.

 

We are 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, and such outcomes could have a material, negative impact on our financial position, results of operations, and cash flows.

 

11


 

Note 5–Bank Borrowing

 

We have a $50,000 credit facility collateralized by our accounts receivable that expires in February 2022.  This facility can be increased, at our option, to $80,000 for approved acquisitions or other uses authorized by the lender on substantially the same terms.  Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (4.75% at March 31, 2018).  The one-month LIBOR rate at March 31, 2018 was 1.88%.  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 to Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges).  The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0.  Decreases in our consolidated Adjusted EBITDA could limit our potential borrowings under the credit facility.  We had $859 outstanding under this credit facility at March 31, 2018, and had no outstanding bank borrowings at December 31, 2017.  The $859 was subsequently repaid to the lender on April 2, 2018.

 

 

 

 

 

 

12


 

PC CONNECTION, INC. AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

 

Statements contained or incorporated by reference in this Quarterly Report on Form 10‑Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.  These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.

 

We cannot assure investors that our assumptions and expectations will prove to have been correct.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.  These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.  We therefore caution you against undue reliance on any of these forward-looking statements.  Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed.  We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

 

OVERVIEW

 

We are a leading solutions provider of a wide range of information technology, or IT, solutions.  We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers.  We also offer services involving design, configuration, and implementation of IT solutions.  These services are performed by our personnel and by first-party service providers.  We operate through three sales segments, which serve primarily: (a) small- to medium-sized businesses, or Business Solutions segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Enterprise Solutions segment, through our MoreDirect subsidiary, and (c) federal, state, and local governmental and educational institutions, in our Public Sector Solutions segment, through our GovConnection subsidiary.

 

We generate sales primarily through outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets, our websites, and inbound calls from customers responding to our catalogs and other advertising media.  We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

 

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software.  We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users.  However, certain manufacturers have on multiple occasions 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 eliminate our role.  We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs.  We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products.  Our

13


 

advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer 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 our Technology Solutions Group, 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 solutions that generally carry higher gross margins.  We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

 

The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales 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 are expanding our IT solution business, which requires the addition of highly-skilled services 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 sales will increase as we add service engineers.  If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.

 

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 more heavily in our own IT development to meet these new demands. 

 

Our investments in IT infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.  In October 2017, we began a multi-year initiative to upgrade our IT systems and infrastructure, and have incurred $6.6 million of capital expenditures through March 31, 2018.  We expect additional capital expenditures to range from $12.0 to $14.0 million over the next eighteen months.  In addition, in the first quarter of 2018, we incurred $0.1 million of third-party expenses related to this upgrade initiative and expect at least this level of period expense to continue over the next six quarters.

 

On January 1, 2018, we adopted ASC 606, which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expands related disclosure requirements. See Adoption of Recently Issued Accounting Standards in Note 1, “Basis of Presentation,” in the Notes to the unaudited condensed consolidated financial statements for additional information

 

RESULTS OF OPERATIONS

 

The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

2018

    

2017

  

 

Net sales (in millions)

$

624.9

 

$

670.6

 

 

Gross margin

 

15.4

%  

 

12.9

 

Selling, general and administrative expenses

 

12.9

%  

 

11.2

%

 

Income from operations

 

2.5

%  

 

1.7

%

 

 

Net sales in the first quarter of 2018 decreased year over year by $45.7 million, or 6.8%, compared to the first quarter of 2017.  Net sales were negatively impacted in the first quarter of 2018 by an increase in revenues reported on a net basis as a result of our adoption of ASC 606, discussed in Note 1 to our condensed consolidated financial statements.  Excluding the impact of the adoption of ASC 606, net sales would have increased by $29.9 million, or 4.5%, to $700.5 million.  See Note #1 to the condensed consolidated financial statements for a discussion of the impact of our adoption of ASC 606 and a reconciliation of this adoption on our condensed consolidated balance sheet and income statement. Gross profit dollars increased year over year by $9.6 million due to higher invoice selling margins realized on increased

14


 

sales of higher-margin advanced solution sales.  The increase in SG&A expenses in dollars was primarily related to incremental variable compensation associated with higher gross profits as well as increased investments in solution selling. The increase in SG&A expenses as a percentage of net sales is due primarily to our decrease in net sales as a result of the adoption of ASC 606.  Operating income in the first quarter of 2018 increased year over year in dollars and as a percentage of net sales.

 

Net Sales Distribution

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

2018

    

2017

 

 

Sales Segment

 

 

 

 

 

 

Business Solutions

 

42

%  

41

%  

 

Enterprise Solutions

 

41

 

38

 

 

Public Sector Solutions

 

17

 

21

 

 

Total

 

100

%  

100

%  

 

 

 

 

 

 

 

 

Product Mix

 

 

 

 

 

 

Notebooks/Mobility

 

26

%  

22

%  

 

Servers/Storage

 

12

 

 9

 

 

Software

 

11

 

19

 

 

Net/Com Product

 

 8

 

 9

 

 

Other Hardware/Services

 

43

 

41

 

 

Total

 

100

%  

100

%  

 

Our software revenues in the first quarter of 2018 decreased due to the adoption of ASC 606, which required the reporting of $78.6 million of software that previously would have been reported on a gross basis to be reported on a net basis.

 

Gross Profit Margin

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

2018

    

2017

 

 

Sales Segment

 

 

 

 

 

 

Business Solutions

 

17.6

%  

15.3

%  

 

Enterprise Solutions

 

14.3

 

12.5

 

 

Public Sector Solutions

 

12.9

 

9.2

 

 

Total

 

15.4

%  

12.9

%  

 

 

15


 

Operating Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

2018

 

2017

 

 

Personnel costs

 

$

62.7

 

$

58.9

 

 

Advertising, net

 

 

3.8

 

 

3.1

 

 

Facilities operations

 

 

4.1

 

 

3.5

 

 

Professional fees

 

 

2.4

 

 

2.1

 

 

Credit card fees

 

 

1.7

 

 

1.7

 

 

Depreciation and amortization

 

 

3.3

 

 

2.9

 

 

Other, net

 

 

2.9

 

 

3.1

 

 

Total

 

$

80.9

 

$

75.3

 

 

Percentage of net sales

 

 

12.9

%  

 

11.2

%  

 

 

 

Year-Over-Year Comparisons

 

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

%

 

 

 

    

Amount

    

Net Sales

    

Amount

    

Net Sales

    

Change

    

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Solutions

 

$

263.3

 

42.1

%  

$

273.6

 

40.8

%  

(3.8)

%  

 

Enterprise Solutions

 

 

257.2

 

41.2

 

 

252.9

 

37.7

 

1.7

 

 

Public Sector Solutions

 

 

104.4

 

16.7

 

 

144.1

 

21.5

 

(27.5)

 

 

Total

 

$

624.9

 

100.0

%  

$

670.6

 

100.0

%  

(6.8)

%  

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Solutions

 

$

46.2

 

17.6

%  

$

41.8

 

15.3

%  

10.3

%  

 

Enterprise Solutions

 

 

36.7

 

14.3

 

 

31.6

 

12.5

 

15.8

 

 

Public Sector Solutions

 

 

13.5

 

12.9

 

 

13.3

 

9.2

 

1.0

 

 

Total

 

$

96.4

 

15.4

%  

$

86.7

 

12.9

%  

11.1

%  

 

 

Net sales as reported decreased in the first quarter of 2018 compared to the first quarter of 2017, as explained below:

 

·

Net sales of $263.3 million for the Business Solutions segment reflect an increase of $25.0 million, but was offset by a decrease of $35.4 million related to the adoption of new revenue guidance under ASC 606.  Sales of advanced solution products increased year over year in dollars, with servers, storage, and net/com products increasing 25.4%, 11.1%, and 17.7%, respectively. On a dollar basis, sales of servers, storage, and net/com products increased by $3.6 million, $1.4 million, and $4.1 million, respectively.

 

·

Net sales of $257.2 million for the Enterprise Solutions segment reflect an increase of $37.2 million, but was offset by a decrease of $33.0 million related to the adoption of new revenue guidance under ASC 606. Sales of notebooks and desktops increased by $13.4 million and $5.3 million, respectively, as customers continued the desktop refresh experienced in 2017. Storage and memory products each increased by $4.9 million and $8.5 million, respectively, as several large roll-outs were completed in the quarter. 

 

·

Net sales of $104.4 million for the Public Sector Solutions segment reflect a decrease of $32.5 million and a decrease of $7.2 million related to the adoption of new revenue guidance under ASC 606.  Net sales to the federal government decreased by $22.1 million as revenues in the first quarter of 2017 included a large sale of

16


 

desktops to a federal agency that did not repeat in 2018. Net sales to state and local government and educational institutions decreased by $17.6 million primarily due to lower sales to higher education customers.  Sales of desktops and notebooks decreased year over year by $29.8 million and $2.4 million; however sales of servers and memory increased by $5.3 million and $1.9 million, respectively.

 

Gross profit for the first quarter of 2018 increased year over year in dollars and as a percentage of net sales (gross margin), as explained below:

 

·

Gross profit for the Business Solutions segment increased due to higher invoice selling margins.  Invoice selling margins increased by 183 basis points due to the increase in revenues reported on a net basis and an increase in a shift in product mix to higher-margin advanced solution products (servers, storage, and net/com) discussed above.  We also receive agency fees from suppliers for certain software and hardware sales which are recorded as revenue with no corresponding cost of goods sold, and accordingly such fees have a positive impact on gross margin.  Agency fees from enterprise software agreements increased year over year by $0.6 million, which on a rate basis, represented a 26 basis-point increase.

 

·

Gross profit for the Enterprise Solutions segment increased due to higher invoice selling margins.  Invoice selling margins increased by 121 basis points in the quarter due primarily to the increase in revenues reported on a net basis.  Agency fees from enterprise software agreements increased year over year by $1.1 million, which on a rate basis, represented a 43 basis-point increase.