PC CONNECTION INC 10-Q

ITEM 1 FINANCIAL STATEMENTS ​ ​ PC CONNECTION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET S (Unaudited) (amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2020 2019 ASSETS ​ ​ ​ ​ ​ ​ Current Assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 108,051 ​ $ 90,060 Accounts receivable, net ​ 588,960 ​ 549,626 Inventories, net ​ 134,689 ​ 124,666 Income taxes receivable ​ — ​ 1,388 Prepaid expenses and other current assets ​ 12,016 ​ 10,671 Total current assets ​ 843,716 ​ 776,411 Property and equipment, net ​ 63,189 ​ 64,226 Right-of-use assets ​ ​ 13,768 ​ ​ 13,842 Goodwill ​ 73,602 ​ 73,602 Intangible assets, net ​ 7,393 ​ 8,307 Other assets ​ 1,666 ​ 947 Total Assets ​ $ 1,003,334 ​ $ 937,335 LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ Current Liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 283,163 ​ $ 235,641 Accrued payroll ​ 20,200 ​ 28,050 Accrued expenses and other liabilities ​ 34,997 ​ 45,232 Total current liabilities ​ 338,360 ​ 308,923 Deferred income taxes ​ 20,170 ​ 20,170 Noncurrent operating lease liabilities ​ ​ 10,579 ​ ​ 10,330 Other liabilities ​ 5,948 ​ 600 Total Liabilities ​ 375,057 ​ 340,023 Stockholders’ Equity: ​ ​ ​ ​ ​ ​ Common stock ​ ​ 289 ​ ​ 288 Additional paid-in capital ​ 119,762 ​ 118,045 Retained earnings ​ 554,163 ​ 514,694 Treasury stock, at cost ​ ​ ( 45,937 ) ​ ​ ( 35,715 ) Total Stockholders’ Equity ​ 628,277 ​ 597,312 Total Liabilities and Stockholders’ Equity ​ $ 1,003,334 ​ $ 937,335 ​ ​ ​ See notes to unaudited condensed consolidated financial statements. 1 Table of Contents PC CONNECTION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOM E (Unaudited) (amounts in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2020 2019 2020 2019 Net sales ​ $ 652,752 ​ $ 729,410 ​ $ 1,914,603 ​ $ 2,103,407 ​ Cost of sales ​ 544,922 ​ 610,547 ​ 1,604,656 ​ 1,768,210 ​ Gross profit ​ 107,830 ​ 118,863 ​ 309,947 ​ 335,197 ​ Selling, general and administrative expenses ​ 86,753 ​ 86,226 ​ 256,640 ​ 252,125 ​ Restructuring and other charges ​ ​ — ​ ​ — ​ ​ 992 ​ ​ 703 ​ Income from operations ​ 21,077 ​ 32,637 ​ 52,315 ​ 82,369 ​ Interest (expense) income, net ​ ( 17 ) ​ 62 ​ 80 ​ 444 ​ Income before taxes ​ 21,060 ​ 32,699 ​ 52,395 ​ 82,813 ​ Income tax provision ​ ( 4,130 ) ​ ( 8,949 ) ​ ( 12,926 ) ​ ( 22,668 ) ​ Net income ​ $ 16,930 ​ $ 23,750 ​ $ 39,469 ​ $ 60,145 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.65 ​ $ 0.90 ​ $ 1.51 ​ $ 2.28 ​ Diluted ​ $ 0.64 ​ $ 0.90 ​ $ 1.50 ​ $ 2.27 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shares used in computation of earnings per common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 26,130 ​ 26,323 ​ 26,158 ​ 26,339 ​ Diluted ​ 26,311 ​ 26,479 ​ 26,337 ​ 26,496 ​ ​ ​ ​ See notes to unaudited condensed consolidated financial statements. 2 Table of Contents ​ ​ PC CONNECTION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ Common Stock ​ Additional ​ Retained ​ Treasury Stock ​ Stockholders' ​ Shares Amount Paid-In Capital Earnings Shares Amount Equity Balance at June 30, 2020 ​ 28,892 ​ $ 289 ​ $ 119,628 ​ $ 537,233 ( 2,773 ) ​ $ ( 45,937 ) ​ $ 611,213 Stock-based compensation expense ​ — ​ ​ — ​ ​ 619 ​ ​ — ​ — ​ ​ — ​ ​ 619 Restricted stock units vested ​ 23 ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — Shares withheld for taxes paid on stock awards ​ — ​ ​ — ​ ​ ( 485 ) ​ ​ — ​ — ​ ​ — ​ ​ ( 485 ) Net income ​ — ​ ​ — ​ ​ — ​ ​ 16,930 ​ — ​ ​ — ​ ​ 16,930 Balance at September 30, 2020 28,915 ​ $ 289 ​ $ 119,762 ​ $ 554,163 ( 2,773 ) ​ $ ( 45,937 ) ​ $ 628,277 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ Common Stock ​ Additional ​ Retained ​ Treasury Stock ​ Stockholders' ​ Shares Amount Paid-In Capital Earnings Shares Amount Equity Balance at December 31, 2019 ​ 28,870 ​ $ 288 ​ $ 118,045 ​ $ 514,694 ​ ( 2,526 ) ​ $ ( 35,715 ) ​ $ 597,312 Stock-based compensation expense ​ — ​ ​ — ​ ​ 1,866 ​ ​ — ​ — ​ ​ — ​ ​ 1,866 Restricted stock units vested ​ 33 ​ ​ 1 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 1 Issuance of common stock under Employee Stock Purchase Plan ​ 12 ​ — ​ 536 ​ — — ​ — ​ 536 Shares withheld for taxes paid on stock awards ​ — ​ ​ — ​ ​ ( 685 ) ​ ​ — ​ — ​ ​ — ​ ​ ( 685 ) Repurchase of common stock for treasury ​ — ​ ​ — ​ ​ — ​ ​ — ​ ( 247 ) ​ ​ ( 10,222 ) ​ ​ ( 10,222 ) Net income ​ — ​ ​ — ​ ​ — ​ ​ 39,469 ​ — ​ ​ — ​ ​ 39,469 Balance at September 30, 2020 ​ 28,915 ​ $ 289 ​ $ 119,762 ​ $ 554,163 ( 2,773 ) ​ $ ( 45,937 ) ​ $ 628,277 ​ ​ ​ See notes to unaudited condensed consolidated financial statements. 3 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ Common Stock ​ Additional ​ Retained ​ Treasury Stock ​ Stockholders' ​ Shares Amount Paid-In Capital Earnings Shares Amount Equity Balance at June 30, 2019 ​ 28,818 ​ $ 288 ​ $ 117,212 ​ $ 477,405 ( 2,500 ) ​ $ ( 34,738 ) ​ $ 560,167 Stock-based compensation expense ​ — ​ ​ — ​ ​ 426 ​ ​ — ​ — ​ ​ — ​ ​ 426 Restricted stock units vested 22 ​ — ​ — ​ — — ​ — ​ — Shares withheld for taxes paid on stock awards — ​ — ​ ( 337 ) ​ — — ​ — ​ ( 337 ) Repurchase of common stock for treasury ​ — ​ ​ — ​ ​ — ​ ​ — ​ ( 23 ) ​ ​ ( 862 ) ​ ​ ( 862 ) Net income ​ — ​ ​ — ​ ​ — ​ ​ 23,750 ​ — ​ ​ — ​ ​ 23,750 Balance at September 30, 2019 ​ 28,840 ​ $ 288 ​ $ 117,301 ​ $ 501,155 ( 2,523 ) ​ $ ( 35,600 ) ​ $ 583,144 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ Common Stock ​ Additional ​ Retained ​ Treasury Stock ​ Stockholders' ​ Shares Amount Paid-In Capital Earnings Shares Amount Equity Balance at December 31, 2018 ​ 28,787 ​ $ 288 ​ $ 115,842 ​ $ 441,010 ​ ( 2,391 ) ​ $ ( 31,237 ) ​ $ 525,903 Stock-based compensation expense ​ — ​ ​ — ​ ​ 1,259 ​ ​ — ​ — ​ ​ — ​ ​ 1,259 Restricted stock units vested ​ 34 ​ — ​ — ​ — — ​ — ​ — Issuance of common stock under Employee Stock Purchase Plan ​ 19 ​ ​ — ​ ​ 609 ​ ​ — ​ — ​ ​ — ​ ​ 609 Shares withheld for taxes paid on stock awards ​ — ​ ​ — ​ ​ ( 409 ) ​ ​ — ​ — ​ ​ — ​ ​ ( 409 ) Repurchase of common stock for treasury ​ — ​ ​ — ​ ​ — ​ ​ — ​ ( 132 ) ​ ​ ( 4,363 ) ​ ​ ( 4,363 ) Net income ​ — ​ ​ — ​ ​ — ​ ​ 60,145 ​ — ​ ​ — ​ ​ 60,145 Balance at September 30, 2019 ​ 28,840 ​ $ 288 ​ $ 117,301 ​ $ 501,155 ( 2,523 ) ​ $ ( 35,600 ) ​ $ 583,144 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ See notes to unaudited condensed consolidated financial statements. 4 Table of Contents PC CONNECTION, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S (Unaudited) (amounts in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ September 30, ​ ​ 2020 2019 Cash Flows provided by Operating Activities: ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 39,469 ​ $ 60,145 ​ Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 10,335 ​ 10,184 ​ Provision for doubtful accounts ​ 3,276 ​ 181 ​ Stock-based compensation expense ​ 1,866 ​ 1,259 ​ Deferred income taxes ​ — ​ 10 ​ Loss on disposal of fixed assets ​ 13 ​ 114 ​ Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ( 42,610 ) ​ ( 31,390 ) ​ Inventories ​ ( 10,023 ) ​ ( 6,883 ) ​ Prepaid expenses, income tax receivables and other current assets ​ 43 ​ 3,702 ​ Other non-current assets ​ ( 719 ) ​ 319 ​ Accounts payable ​ 48,736 ​ ( 3,167 ) ​ Accrued expenses and other liabilities ​ ( 3,987 ) ​ 5,548 ​ Net cash provided by operating activities ​ 46,399 ​ 40,022 ​ Cash Flows used in Investing Activities: ​ ​ ​ ​ ​ ​ ​ Purchases of equipment ​ ​ ( 9,611 ) ​ ​ ( 20,621 ) ​ Net cash used in investing activities ​ ( 9,611 ) ​ ( 20,621 ) ​ Cash Flows used in Financing Activities: ​ ​ ​ ​ ​ ​ ​ Purchase of treasury shares ​ ( 10,222 ) ​ ( 4,363 ) ​ Dividend payments ​ ( 8,427 ) ​ ( 8,452 ) ​ Issuance of stock under Employee Stock Purchase Plan ​ ​ 536 ​ ​ 609 ​ Payments of payroll taxes on stock-based compensation through shares withheld ​ ( 684 ) ​ ( 409 ) ​ Net cash used in financing activities ​ ( 18,797 ) ​ ( 12,615 ) ​ Increase in cash and cash equivalents ​ 17,991 ​ 6,786 ​ Cash and cash equivalents, beginning of period ​ 90,060 ​ 91,703 ​ Cash and cash equivalents, end of period ​ $ 108,051 ​ $ 98,489 ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-cash Investing and Financing Activities: ​ ​ ​ ​ ​ ​ ​ Accrued capital expenditures ​ $ 248 ​ $ 1,684 ​ Supplemental Cash Flow Information: ​ ​ ​ ​ ​ ​ ​ Income taxes paid ​ $ 13,798 ​ $ 18,972 ​ ​ ​ ​ ​ ​ See notes to unaudited condensed consolidated financial statements. 5 Table of Contents PC CONNECTION, INC. AND SUBSIDIARIES PART I―FINANCIAL INFORMATION Item 1―Financial Statements NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT S (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 (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K. ​ 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 nine months ended September 30, 2020 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2020. ​ 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. ​ The Company’s operations and financial performance in certain areas of its business were negatively impacted by the coronavirus pandemic (“COVID-19”) in the nine months ended September 30, 2020. The extent to which the COVID-19 pandemic impacts the Company’s financial results and operations for the remainder of 2020 and beyond will depend on future developments that are highly uncertain and cannot be predicted at this time. The Company updated its estimates and judgements in response to the economic uncertainty associated with COVID-19, which were reflected in the amounts reported in the accompanying condensed consolidated financial statements. The Company has experienced, and may continue to experience, delays in collecting amounts owed to it, and in some cases, may experience inabilities to collect altogether. As a result, the Company increased its customer allowance for doubtful accounts by $ 3,276 in the nine months ended September 30, 2020, compared to an increase of $ 181 for the same period in the prior year. The Company has also evaluated the potential impact of the pandemic on the carrying values of its goodwill and intangible assets, and based on the assessment, did not identify any indications to suggest that an impairment may exist. These estimates may change as new events occur and actual results could differ materially from these estimates. ​ Out of Period Adjustments ​ During the third quarter, the Company identified certain out of period adjustments, which were the result of errors identified related to revenue cutoff. The impact of these errors was an understatement of net sales, gross profit and net income for the three- and six-months ended June 30, 2020 by $ 945 , $ 4,214 and $ 2,955 , respectively. The related accounts receivable, inventory, and accrued expenses and other liability were also understated at June 30, 2020 as a result of these errors. The Company corrected these errors in the three month period ended September 30, 2020, resulting in an overstatement of $ 945 , $ 4,214 and $ 2,955 in net sales, gross profit, and net income, respectively. The Company evaluated the effect of these errors on the Company’s financial statements under Accounting Standards Codification (“ASC”) 250 – Accounting Changes and Error Corrections , along with Staff Accounting Bulletin No. 99 – Materiality. Based on a review of both quantitative and qualitative factors of the materiality of the amounts, the Company concluded that the errors were not material to any previously issued condensed consolidated financial statements or for the current period in which they were corrected. 6 Table of Contents ​ Restructuring and other charges ​ The restructuring and other charges recorded in the second quarter of 2020 were related to an involuntary reduction in workforce across our business segments 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 and other liabilities at September 30, 2020. The Company did not record any restructuring and other charges in the three months ended September 30, 2020, and as of the date of this report, the Company has no ongoing restructuring plans. ​ The restructuring and other charges recorded in 2019 were related to a reduction in workforce in the Company’s Headquarters/Other group and included cash severance payments and other related benefits. Also included were exit costs incurred associated with the closing of one of our office facilities, which were expensed as incurred. ​ Restructuring and other charges are presented separately from selling, general and administrative (“SG&A”) expenses. Costs incurred were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ 2020 2019 Employee separations ​ $ 992 ​ $ 553 Lease termination costs ​ — ​ 150 Total restructuring and other charges ​ $ 992 ​ $ 703 ​ Included in accrued expenses as of September 30, 2020 and 2019 were $ 133 and $ 216 , respectively, related to unpaid termination benefits. ​ Adoption of Recently Issued Financial Accounting Standards ​ In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company has adopted this standard beginning January 1, 2020 for both interim and annual reporting periods. The Company expects to perform a step 1 annual goodwill impairment assessment in the fourth quarter of each calendar year, and more frequently if events or circumstances occur that would indicate a potential decline in fair value. As a result of the adoption, and in accordance with the new guidance, the Company would not perform a step two analysis in the event an impairment loss is identified. ​ In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses , which adds an impairment model for financial instruments, including trade receivables, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected losses, which is expected to result in more timely recognition of such losses. The Company adopted this new standard beginning January 1, 2020 for both interim and annual reporting periods. At adoption, this ASU did not have a material impact on the Company’s consolidated financial statements. The impact of the adoption of this standard was limited to the Company’s trade receivables as it does not currently have any other financial instruments that would be affected by this standard. Customers are evaluated for their credit worthiness at the time of contract inception. Based on the results of the credit assessments, the Company will extend credit under its standard payment terms or may request alternative early payment actions. In addition, the Company analyzes its aged receivables for collectability at least quarterly, and if necessary, records a reserve against those receivable it determines may not be collectable. ​ Recently Issued Financial Accounting Standards ​ In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This guidance provides temporary optional expedients and exceptions to 7 Table of Contents the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The Company expects to adopt the guidance upon transition from LIBOR, but does not believe the adoption will have a material effect on its consolidated financial statements. ​ Note 2–Revenue ​ The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. ​ The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended September 30, 2020 and 2019, along with the reportable segment for each category. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2020 ​ Business Solutions Enterprise Solutions Public Sector Solutions Total Notebooks/Mobility ​ $ 72,694 ​ $ 63,093 ​ $ 66,761 ​ $ 202,548 Desktops ​ ​ 20,097 ​ ​ 33,451 ​ ​ 9,861 ​ ​ 63,409 Software ​ ​ 33,061 ​ ​ 26,336 ​ ​ 17,698 ​ ​ 77,095 Servers/Storage ​ ​ 20,209 ​ 23,832 ​ 12,292 ​ ​ 56,333 Net/Com Products ​ 19,140 ​ ​ 27,941 ​ ​ 15,420 ​ 62,501 Displays and Sound ​ ​ 21,161 ​ 16,511 ​ 17,304 ​ ​ 54,976 Accessories ​ 27,855 ​ 40,538 ​ 14,842 ​ 83,235 Other Hardware/Services ​ 16,768 ​ ​ 28,065 ​ ​ 7,822 ​ 52,655 Total net sales ​ $ 230,985 ​ $ 259,767 ​ $ 162,000 ​ $ 652,752 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2019 ​ Business Solutions Enterprise Solutions Public Sector Solutions Total Notebooks/Mobility ​ $ 79,287 ​ $ 77,214 ​ $ 63,154 ​ $ 219,655 Desktops ​ ​ 34,806 ​ ​ 36,821 ​ ​ 20,499 ​ ​ 92,126 Software ​ ​ 36,879 ​ ​ 28,439 ​ ​ 13,205 ​ ​ 78,523 Servers/Storage ​ ​ 26,352 ​ 16,374 ​ 16,576 ​ ​ 59,302 Net/Com Products ​ ​ 25,200 ​ 11,666 ​ 15,695 ​ ​ 52,561 Displays and Sound ​ 23,224 ​ ​ 29,641 ​ ​ 17,669 ​ 70,534 Accessories ​ 26,306 ​ 46,546 ​ 14,545 ​ 87,397 Other Hardware/Services ​ 21,702 ​ ​ 31,594 ​ ​ 16,016 ​ 69,312 Total net sales ​ $ 273,756 ​ $ 278,295 ​ $ 177,359 ​ $ 729,410 ​ The following table represents a disaggregation of revenue from arrangements with customers for the nine months ended September 30, 2020 and 2019, along with the reportable segment for each category. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2020 ​ Business Solutions Enterprise Solutions Public Sector Solutions Total Notebooks/Mobility ​ $ 226,959 ​ $ 222,139 ​ $ 146,035 ​ $ 595,133 Desktops ​ ​ 67,891 ​ ​ 94,674 ​ ​ 29,440 ​ ​ 192,005 Software ​ ​ 93,710 ​ ​ 77,394 ​ ​ 33,340 ​ ​ 204,444 Servers/Storage ​ 69,685 ​ 63,042 ​ 32,058 ​ 164,785 Net/Com Products ​ ​ 54,916 ​ ​ 72,172 ​ ​ 32,674 ​ ​ 159,762 Displays and Sound ​ 64,338 ​ 58,603 ​ 38,433 ​ 161,374 Accessories ​ 75,362 ​ 164,185 ​ 36,273 ​ 275,820 Other Hardware/Services ​ ​ 47,998 ​ ​ 87,734 ​ ​ 25,548 ​ ​ 161,280 Total net sales ​ $ 700,859 ​ $ 839,943 ​ $ 373,801 ​ $ 1,914,603 8 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2019 ​ Business Solutions Enterprise Solutions Public Sector Solutions Total Notebooks/Mobility ​ ​ 240,644 ​ $ 240,621 ​ $ 125,220 ​ $ 606,485 Desktops ​ ​ 96,377 ​ ​ 112,067 ​ ​ 50,074 ​ ​ 258,518 Software ​ ​ 110,826 ​ ​ 91,954 ​ ​ 43,362 ​ ​ 246,142 Servers/Storage ​ ​ 81,452 ​ 48,536 ​ 49,149 ​ 179,137 Net/Com Products ​ ​ 70,806 ​ 38,866 ​ 40,918 ​ 150,590 Displays and Sound ​ ​ 64,422 ​ ​ 82,812 ​ ​ 41,839 ​ ​ 189,073 Accessories ​ 72,036 ​ 162,601 ​ 35,112 ​ 269,749 Other Hardware/Services ​ ​ 61,177 ​ ​ 94,512 ​ ​ 48,024 ​ ​ 203,713 Total net sales ​ $ 797,740 ​ $ 871,969 ​ $ 433,698 ​ $ 2,103,407 ​ Contract Balances ​ The following table provides information about contract liabilities from arrangements with customers as of September 30, 2020 and December 31, 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2020 December 31, 2019 Contract liabilities, which are included in "Accrued expenses and other liabilities" ​ $ 1,540 ​ $ 5,942 ​ Changes in the contract liability balances during the nine months ended September 30, 2020 and 2019 are as follows (in thousands): ​ ​ ​ ​ 2020 Balances at December 31, 2019 $ 5,942 Cash received in advance and not recognized as revenue 7,978 Amounts recognized as revenue as performance obligations satisfied ( 12,380 ) Balances at September 30, 2020 $ 1,540 ​ ​ ​ ​ 2019 Balances at December 31, 2018 $ 2,679 Cash received in advance and not recognized as revenue 8,868 Amounts recognized as revenue as performance obligations satisfied ( 8,222 ) Balances at September 30, 2019 $ 3,325 ​ ​ Note 3–Earnings Per Share ​ Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive. ​ The following table sets forth the computation of basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2020 2019 2020 2019 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 16,930 ​ $ 23,750 ​ $ 39,469 ​ $ 60,145 ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator for basic earnings per share ​ 26,130 ​ 26,323 ​ 26,158 ​ 26,339 ​ Dilutive effect of unvested employee stock awards ​ 181 ​ 156 ​ 179 ​ 157 ​ Denominator for diluted earnings per share ​ 26,311 ​ 26,479 ​ 26,337 ​ 26,496 ​ Earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.65 ​ $ 0.90 ​ $ 1.51 ​ $ 2.28 ​ Diluted ​ $ 0.64 ​ $ 0.90 ​ $ 1.50 ​ $ 2.27 ​ ​ 9 Table of Contents For the three and nine months ended September 30, 2020, the Company had no outstanding non-vested stock units that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect. ​ ​ ​ ​ ​ k Note 4—Leases ​ The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use asset (“ROU asset”) as of September 30, 2020 was $ 3,739 and a corresponding lease liability of $ 3,739 associated with related party leases. ​ As of September 30, 2020, 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 nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, 2020 Nine months ended September 30, 2020 ​ Related Parties ​ Others ​ Total Related Parties ​ Others ​ Total Lease Cost ​ ​ ​ ​ ​ Capitalized operating lease cost $ 313 ​ $ 798 ​ $ 1,111 ​ $ 1,071 ​ $ 2,379 ​ $ 3,450 Short-term lease cost 107 ​ 2 ​ 109 ​ 188 ​ 6 ​ 194 Total lease cost $ 420 ​ $ 800 ​ $ 1,220 ​ $ 1,259 ​ $ 2,385 ​ $ 3,644 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other Information ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows $ 313 ​ $ 832 ​ $ 1,145 ​ $ 1,071 ​ $ 2,439 ​ $ 3,510 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term (in years): ​ ​ ​ ​ ​ Capitalized operating leases ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3.17 ​ ​ 5.81 ​ ​ 5.13 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average discount rate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capitalized operating leases ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3.92 % ​ ​ 3.92 % ​ ​ 3.92 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, 2019 Nine months ended September 30, 2019 ​ Related Parties ​ Others ​ Total Related Parties ​ Others ​ Total Lease Cost ​ ​ ​ ​ ​ Capitalized operating lease cost $ 379 ​ $ 773 ​ $ 1,152 ​ $ 1,137 ​ $ 2,396 ​ $ 3,533 Short-term lease cost 41 ​ 2 ​ 43 ​ 123 ​ 6 ​ 129 Total lease cost $ 420 ​ $ 775 ​ $ 1,195 ​ $ 1,260 ​ $ 2,402 ​ $ 3,662 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other Information ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows $ 379 ​ $ 832 ​ $ 1,211 ​ $ 1,137 ​ $ 2,585 ​ $ 3,722 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term (in years): ​ ​ ​ ​ ​ Capitalized operating leases ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 4.11 ​ ​ 6.78 ​ ​ 5.92 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average discount rate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capitalized operating leases ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3.92 % ​ ​ 3.92 % ​ ​ 3.92 % ​ 10 Table of Contents As of September 30, 2020, future lease payments over the remaining term of capitalized operating leases were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ Related Parties ​ Others ​ Total 2020, excluding the nine months ended September 30, 2020 ​ $ 313 ​ $ 833 ​ $ 1,146 2021 ​ 1,253 ​ 3,092 ​ 4,345 2022 ​ 1,253 ​ 2,111 ​ 3,364 2023 ​ 1,149 ​ 1,675 ​ 2,824 2024 ​ ​ — ​ ​ 1,699 ​ ​ 1,699 2025 ​ ​ — ​ ​ 1,594 ​ ​ 1,594 Thereafter ​ ​ — ​ ​ 888 ​ ​ 888 ​ ​ $ 3,968 ​ $ 11,892 ​ $ 15,860 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Imputed interest ​ ​ ​ ​ ​ ​ ​ ​ ( 1,292 ) Lease liability balance at September 30, 2020 ​ ​ ​ ​ ​ ​ ​ $ 14,568 ​ As of September 30, 2020, the ROU asset had a balance of $ 13,768 . The long-term lease liability was $ 10,579 and the short-term lease liability , which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,989 . ​ Note 5–Segment Information ​ The internal reporting structure used by the Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable 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 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. 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. ​ 11 Table of Contents Segment information applicable to our reportable operating segments for the three and nine months ended September 30, 2020 and 2019 is shown below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2020 2019 2020 2019 Net sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Business Solutions ​ $ 230,985 ​ $ 273,756 ​ $ 700,859 ​ $ 797,740 ​ Enterprise Solutions ​ 259,767 ​ 278,295 ​ 839,943 ​ 871,969 ​ Public Sector Solutions ​ 162,000 ​ 177,359 ​ 373,801 ​ 433,698 ​ Total net sales ​ $ 652,752 ​ $ 729,410 ​ $ 1,914,603 ​ $ 2,103,407 ​ Operating income (loss): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Business Solutions ​ $ 8,827 ​ $ 13,533 ​ $ 21,579 ​ $ 38,509 ​ Enterprise Solutions ​ 14,843 ​ 16,346 ​ 45,233 ​ 50,927 ​ Public Sector Solutions ​ 3,165 ​ 7,082 ​ ( 1,964 ) ​ 4,677 ​ Headquarters/Other ​ ( 5,758 ) ​ ( 4,324 ) ​ ( 12,533 ) ​ ( 11,744 ) ​ Total operating income ​ 21,077 ​ 32,637 ​ 52,315 ​ 82,369 ​ Interest (expense) income, net ​ ( 17 ) ​ 62 ​ 80 ​ 444 ​ Income before taxes ​ $ 21,060 ​ $ 32,699 ​ $ 52,395 ​ $ 82,813 ​ Selected operating expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Business Solutions ​ $ 159 ​ $ 149 ​ $ 477 ​ $ 447 ​ Enterprise Solutions ​ 697 ​ 613 ​ 2,057 ​ 1,858 ​ Public Sector Solutions ​ 15 ​ 22 ​ 45 ​ 68 ​ Headquarters/Other ​ 2,962 ​ 2,323 ​ 7,756 ​ 7,811 ​ Total depreciation and amortization ​ $ 3,833 ​ $ 3,107 ​ $ 10,335 ​ $ 10,184 ​ Total assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Business Solutions ​ ​ ​ ​ ​ ​ ​ $ 343,010 ​ $ 300,360 ​ Enterprise Solutions ​ ​ ​ ​ ​ ​ ​ 551,914 ​ 488,867 ​ Public Sector Solutions ​ ​ ​ ​ ​ ​ ​ 123,520 ​ 90,437 ​ Headquarters/Other ​ ​ ​ ​ ​ ​ ​ ( 15,110 ) ​ ( 9,016 ) ​ Total assets ​ ​ ​ ​ ​ ​ ​ $ 1,003,334 ​ $ 870,648 ​ ​ The assets of our 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, inventory, property and equipment, right-of-use assets, and intercompany balance, net. As of September 30, 2020 and 2019, total assets for the Headquarters/Other group are presented net of intercompany balance eliminations of $ 60,802 and $ 36,077 , respectively. 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-by-segment basis. Note 6–Commitments and Contingencies ​ The Company is 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, adverse effect on our 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 our financial position, results of operations, and/or cash flows. ​ Note 7–Bank Borrowings ​ The Company has a $ 50,000 credit facility collateralized by our account receivables that expires February 10, 2022 . This facility can be increased, at our option, to $ 80,000 for permitted acquisitions or other uses authorized by the lender 12 Table of Contents on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR ( 0.15 % at September 30, 2020), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ( 3.25 % at September 30, 2020). 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 trailing twelve months 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 trailing twelve months Adjusted EBITDA could limit our potential borrowing capacity under the credit facility. The Company had no outstanding bank borrowings at September 30, 2020 or 2019, and accordingly, the entire $ 50,000 facility was available for borrowings under the credit facility. ​ ​ ​ ​ ​ ​ 13 Table of Contents PC CONNECTION, INC. AND SUBSIDIARIES PART I―FINANCIAL INFORMATION