Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2020. 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. 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. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013) .
Based on its assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the Company’s internal control over financial reporting as of December 31, 2020. This report appears below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of PC Connection, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of PC Connection, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) . In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 16, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2021
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Changes in Internal Control over Financial Reporting
In 2017, we began the process of implementing a new company-wide ERP system as part of a multi-year plan to integrate and upgrade our systems and processes. The system became operational in May 2020. As the implementation of the new ERP system has now been largely completed, we have experienced certain changes to our processes and procedures which, in turn, have resulted in changes to the design and operation of certain internal controls over financial reporting. We believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and we will continue to evaluate the design and operating effectiveness of related key controls during subsequent periods. While we ultimately expect the new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.
Furthermore, in response to the COVID-19 pandemic, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These changes have compelled us to modify some of our control procedures, however, those changes have so far not been material.
Except for the changes as described in detail above, there were no additional 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 year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.We are continually monitoring and assessing the potential impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
Item 9B. Other information
On March 15, 2021, the Company entered into Incentive and Retention Agreements (each the “Retention Agreement” and together, the “Retention Agreements”) with our President, Timothy McGrath, and our Chief Financial Officer, Thomas Baker (each individually, the “Executive”).
The Retention Agreements provide that if we terminate the Executive’s employment without Cause (as defined in the applicable Retention Agreement) then, subject to the Executive signing and not revoking a release of claims, the Executive will receive the following:
● continued base salary for a period of up to 24 months (subject to offset for salary or consulting fees earned during that period);
● a pro-rated portion of the Executive’s target bonus as in effect for the fiscal year in which the termination occurs; and
● continued payment by the Company of the share of COBRA premiums that the Company would pay for similarly situated employees, with such payment to extend for up to 24 months
In the event of a Change in Control (as defined in the applicable Retention Agreement), the Retention Agreements provide that 75% of the shares of our common stock underlying the unvested portion of each outstanding stock option and other equity award held by the Executive shall become fully vested, exercisable and otherwise free from forfeiture immediately prior to the closing of such Change in Control, with the remaining unvested portion of such equity awards continuing to vest and becoming fully exercisable and free from forfeiture on the first anniversary of the closing of the Change in Control (the “first anniversary vest date”). In the case of each restricted stock unit that vests on the first anniversary vest date, the Executive will be entitled to the greater of (i) the per share consideration paid with respect to the Company common stock in connection with the Change in Control and (ii) if the Company common stock converts into stock of the acquiring or succeeding entity in connection with the Change in Control, then such stock or the cash value thereof as of the first anniversary vest date, if higher than the per share consideration.
The Retention Agreements also provide that if we terminate the Executive’s employment without Cause, or if an Executive terminates his employment for Good Reason (as defined in the applicable Retention Agreement), and such termination
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occurs within the 12 month period following a Change of Control, then subject to the Executive signing and not revoking a release of claims, the Executive will receive the following
● continued base salary for a period of up to 24 months (subject to offset for salary or consulting fees earned during that period);
● the Executive’s full target bonus as in effect for the fiscal year in which the termination occurs;
● continued payment by the Company of the share of COBRA premiums that the Company would pay for similarly situated employees, with such payment to extend for up to 24 months; and
● all outstanding and unvested equity awards in each case that vest solely based on continued service that are then held by Executive shall become fully vested, exercisable and otherwise free from forfeiture and, in the case of any restricted stock units, will be entitled to the greater of (i) the per share consideration paid with respect to the Change in Control and (ii) if the Company common stock converts into stock of the acquiring or succeeding entity in connection with the Change in Control, then such stock or the cash value thereof as of the Executive’s termination date, if higher than the per share consideration.
Mr. McGrath’s Retention Agreement also terminated the limitation on the number of shares of our common stock that may be sold by Mr. McGrath in each calendar year contained in the restricted stock unit awards granted to Mr. McGrath on each of November 12, 2012 and February 13, 2018, and changed the vesting with respect to restricted stock units granted to Mr. McGrath on February 13, 2018 such that the tranches of such award that would have vested on or after January 1, 2028 will vest as two tranches, 50% on April 1, 2021 and 50% on July 1, 2021.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information included under the headings, “Information about our Executive Officers” in Part I hereof and “Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Business Conduct and Ethics Policy,” and “Board Committees – Audit Committee” in our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2020 (the “Proxy Statement”) is incorporated herein by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof.
We have adopted a Code of Business Conduct and Ethics that applies to our officers, including our principal executive, financial and accounting officers, and our directors and employees. We have posted the text of our Code of Business Conduct and Ethics under the “Investor Relations” section of our website, www.connection.com. We intend to disclose on our website any amendments to, or waivers from, the Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
Item 11. Executive Compensation
The information included under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information included under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information included under the headings “Certain Relationships and Related Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information included under the heading “Principal Accounting Fees and Services” in the Proxy Statement is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
List of Documents Filed as Part of this Report:
(1) Consolidated Financial Statements
The consolidated financial statements listed below are included in this document.
Consolidated Financial Statements
Page
References
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-4
Consolidated Statements of Income
F-5
Consolidated Statement of Changes in Stockholders’ Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-8
(2) Consolidated Financial Statement Schedule:
The following Consolidated Financial Statement Schedule, as set forth below, is filed with this report:
Schedule
Page
Reference
Schedule II—Valuation and Qualifying Accounts
S-1
All other schedules have been omitted because they are either not applicable or the relevant information has already been disclosed in the financial statements.
(3) The exhibits listed in the Exhibit Index in Item 15(b) below are filed as part of this Annual Report on Form 10-K.
(b)
Exhibits
The exhibits listed below are filed herewith or are incorporated herein by reference to other filings.
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EXHIBIT INDEX
Exhibits
3.1(5)
Amended and Restated Certificate of Incorporation of Registrant, as amended.
3.2(10)
Amended and Restated Bylaws of Registrant.
4.1(1)
Form of specimen certificate for shares of Common Stock, $0.01 par value per share, of the Registrant.
4.2 (28)
Description of Securities Registered Under Section 12 of the Exchange Act
9.1(1)*
Form of 1998 PC Connection Voting Trust Agreement among the Registrant, Patricia Gallup individually and as a trustee, and David Hall individually and as trustee.
10.1(1)*
Form of Registration Rights Agreement among the Registrant, Patricia Gallup, David Hall, and the 1998 PC Connection Voting Trust.
10.2*
Form of Incentive Stock Option Agreement for 2020 Stock Incentive Plan.
10.3(21)*
Amended and Restated 2007 Stock Incentive Plan, as amended.
10.4(23)*
Amended and Restated 1997 Employee Stock Purchase Plan, as amended.
10.5(9)*
Form of Incentive Stock Option Agreement for 2007 Stock Incentive Plan.
10.6(9)*
Form of Nonstatutory Stock Option Agreement for 2007 Stock Incentive Plan.
10.7(15)*
Amended and Restated Form of Restricted Stock Agreement for Amended and Restated 2007 Stock Incentive Plan.
10.8(15)*
Form of Restricted Stock Unit Agreement for Amended and Restated 2007 Stock Incentive Plan.
10.9(17)
Form of Stock Equivalent Unit Agreement for 2007 Amended and Restated Stock Incentive Plan.
10.10(19)*
Executive Bonus Plan, as amended.
10.11(1)*
Employment Agreement, dated as of January 1, 1998, between the Registrant and Patricia Gallup.
10.12(11)*
Employment Agreement, dated as of May 12, 2008, between the Registrant and Timothy McGrath.
10.13(7)
Agreement for Inventory Financing, dated as of October 31, 2002, by and among the Registrant, Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit Corporation.
10.14(7)
Guaranty, dated as of November 14, 2002, entered into by Registrant in connection with the Agreement for Inventory Financing, dated as of October 31, 2002, by and among the Registrant, Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit Corporation.
10.15(7)
Guaranty, dated as of November 14, 2002, entered into by PC Connection Sales Corporation in connection with the Agreement for Inventory Financing, dated as of October 31, 2002, by and among the Registrant, Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit Corporation.
10.16(7)
Acknowledgement, Waiver, and Amendment to Agreement for Inventory Financing, dated as of November 25, 2003, by and among the Registrant, Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit LLC.
10.17(8)
Second Amendment, dated May 9, 2004, to the Agreement for Inventory Financing between the Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.18(8)
Third Amendment, dated May 27, 2005, to the Agreement for Inventory Financing between the Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.19(18)
Fourth Amendment, dated May 11, 2006, to the Agreement for Inventory Financing between the Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.20(18)
Fifth Amendment, dated September 19, 2010, to the Agreement for Inventory Financing between the Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.21(18)
Sixth Amendment, dated January 10, 2012, to the Agreement for Inventory Financing between the Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.22(25)
Seventh Amendment, dated July 16, 2014, to the Agreement for Inventory Financing between the Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.23(25)
Eighth Amendment, dated July 13, 2015, to the Agreement for Inventory Financing between the Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
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10.24(25)
Ninth Amendment, dated January 4, 2017, to the Agreement for Inventory Financing between the Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
10.25(25)
Agreement for Credit, dated January 1, 2014, by and among the Registrant, and its subsidiaries PC Connection Sales Corporation, GovConnection, Inc., and MoreDirect, Inc., and Castle Pines Capital LLC.
10.26(16)
Third Amended and Restated Credit and Security Agreement, dated February 24, 2012, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as guarantors.
10.27(25)
First Amendment, dated December 24, 2013, to the Third Amended and Restated Credit and Security Agreement, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as guarantors.
10.28(24)
Second Amendment, dated February 10, 2017, to the Third Amended and Restated Credit and Security Agreement, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as guarantors.
10.29(1)
Amended and Restated Lease between the Registrant and G&H Post, LLC, dated December 29, 1997, for property located at Route 101A, Merrimack, New Hampshire.
10.30(2)
Amendment No. 1 to Amended and Restated Lease between the Registrant and G&H Post, LLC, dated December 29, 1998, for property located at Route 101A, Merrimack, New Hampshire.
10.31(14)
Amendment No. 2 to Amended and Restated Lease between the Registrant and G&H Post, LLC, dated December 29, 1998, for property located at Route 101A, Merrimack, New Hampshire.
10.32(20)
Amendment No. 3, dated May 9, 2014, to Amended and Restated Lease between the Registrant and G&H Post, LLC, dated December 29, 1998, for property located at Route 101A, Merrimack, New Hampshire.
10.33(12)
Lease between the Merrimack Services Corporation and G&H Post LLC, dated August 11, 2008, for property located at Merrimack, New Hampshire.
10.34(22)
Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3188 Progress Way, Building 11, Wilmington, Ohio.
10.35(3)
Lease between ComTeq Federal, Inc. and Rockville Office/Industrial Associates dated December 14, 1993, for property located at 7503 Standish Place, Rockville, Maryland.
10.36(3)
First Amendment, dated November 1, 1996, to the Lease Agreement between ComTeq Federal, Inc. and Rockville Office/Industrial Associates, dated December 14, 1993, for property located in Rockville, Maryland.
10.37(3)
Second Amendment, dated March 31, 1998, to the Lease Agreement between ComTeq Federal, Inc. and Rockville Office/Industrial Associates, dated December 14, 1993, for property located in Rockville, Maryland.
10.38(3)
Third Amendment, dated August 31, 2000, to the Lease Agreement between ComTeq Federal, Inc. and Rockville Office/Industrial Associates, dated December 14, 1993, property located in Rockville, Maryland.
10.39(6)
Fourth Amendment, dated November 20, 2002, to the Lease Agreement between GovConnection, Inc. (formerly known as ComTeq Federal, Inc.) and Metro Park I, LLC (formerly known as Rockville Office/Industrial Associates), dated December 14, 1993, for property located in Rockville, Maryland.
10.40(8)
Fifth Amendment, dated December 12, 2005, to the Lease Agreement between GovConnection, Inc. and Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
10.41(13)
Sixth Amendment, dated September 18, 2008, to the Lease Agreement between GovConnection, Inc. and Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
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10.42(17)
Seventh Amendment, dated May 21, 2012, to the Lease Agreement between GovConnection, Inc. and Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
10.43(26)*
Employment Agreement, dated March 1, 2019, between the Registrant and Thomas Baker
10.44(26)*
Letter Agreement, dated February 28, 2019, between the Registrant and Stephen Sarno.
10.45(27)
Amendment No. 1, dated April 16, 2015, to Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3336 Progress Way, Building 11, Wilmington, OH
10.46
Incentive and Retention agreement, dated as of March 15, 2021, between the Registrant and Timothy McGrath.
10.47
Incentvie and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker
10.48
Form of Restricted Stock Units Agreement for 2020 Stock Incentive Plan
21.1
Subsidiaries of Registrant.
23.1
Consent of Deloitte & Touche LLP.
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, Chief Financial Officer and Treasurer 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, Chief Financial Officer and Treasurer 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.PER **
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)
(1) Incorporated by reference from the exhibits filed with the Company’s registration statement (333-41171) on Form S-1 filed under the Securities Act of 1933.
(2) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 31, 1999.
(3) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 30, 2001.
(4) Incorporated by reference from exhibits filed with the Company’s proxy statement pursuant to Section 14(a), File Number 0-23827, filed on April 17, 2001.
(5) Incorporated by reference from the exhibits filed with the Company’s registration statement (333-63272) on Form S-4 filed under the Securities Act of 1933.
(6) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 31, 2003.
(7) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 30, 2004.
(8) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 30, 2006.
(9) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 10, 2007.
(10) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9, 2008.
(11) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 12, 2008.
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(12) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 11, 2008.
(13) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November 10, 2008.
(14) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on March 16, 2009.
(15) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November 10, 2010.
(16) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-23827, filed on February 28, 2012.
(17) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 8, 2012.
(18) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-23827, filed on March 4, 2013.
(19) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on May 29, 2013.
(20) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 9, 2014.
(21) Incorporated by reference from Appendix A filed with the Company’s proxy statement pursuant to Section 14(a), File Number 0-23827, filed on April 9, 2019.
(22) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 31, 2014.
(23) Incorporated by reference from Appendix B filed with the Company’s proxy statement pursuant to Section 14(a), File Number 0-23827, filed on April 9, 2019.
(24) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on February 16, 2017.
(25) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-23827, filed on March 3, 2017.
(26) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 2, 2019.
(27) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 30, 2019.
(28) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-K, filed on February 6, 2020.
* Management contract or compensatory plan or arrangement.
** Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018, and (v) Notes to Consolidated Financial Statements.
Item 16. Form 10-K Summary
None.
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SIGNATURE S
Pursuant to the requirements of Section 13 or 15 (d) 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: March 16, 2021
By:
/s/ TIMOTHY J. MCGRATH
Timothy J. McGrath
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ TIMOTHY J. MCGRATH
Timothy J. McGrath
President and Chief Executive Officer (Principal Executive Officer)
March 16, 2021
/s/ THOMAS C. BAKER
Thomas C. Baker
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March 16, 2021
/s/ PATRICIA GALLUP
Patricia Gallup
Chairman of the Board
March 16, 2021
/s/ DAVID BEFFA-NEGRINI
David Beffa-Negrini
Director
March 16, 2021
/s/ BARBARA DUCKETT
Barbara Duckett
Director
March 16, 2021
/s/ JACK FERGUSON
Jack Ferguson
Director
March 16, 2021
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PC CONNECTION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019
F-4
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
F-7
Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of PC Connection, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PC Connection, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Critical Audit Matter Description
As described in Note 1 to the consolidated financial statements, the Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
● Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as hardware, software and maintenance products as well as services related to the installation or implementation of products.
● Determination of stand-alone selling prices for each distinct performance obligation and for products and services.
● As a reseller, the determination if they are the principal or the agent for each performance obligation, which impacts whether the related revenue for each performance obligations is recognized on a gross or net basis.
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● The timing of transfer of control for each distinct performance obligation and the identification and treatment of contract terms that may impact the timing and amount of revenue recognized.
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
● We evaluated management's significant accounting policies related to these customer agreements for reasonableness.
● We selected a sample of customer contracts and performed the following procedures:
– Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
– Tested management's identification and treatment of contract terms.
– Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
● We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.
● We selected a sample of products and services sold and performed an evaluation of the Company’s determination of principal versus agent.
● We selected a sample of orders shipped at year end and evaluated whether revenue has been properly recognized by comparing the IT products shipped to the respective contract or customer purchase order if applicable and evidence of transfer of control.
● We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2021
We have served as the Company's auditor since 1984
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PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
December 31,
2020
2019
ASSETS
Current Assets:
Cash and cash equivalents
$
95,655
$
90,060
Accounts receivable, net
611,021
549,626
Inventories, net
140,867
124,666
Income taxes receivable
—
1,388
Prepaid expenses and other current assets
11,437
10,671
Total current assets
858,980
776,411
Property and equipment, net
61,537
64,226
Right-of-use assets
12,821
13,842
Goodwill
73,602
73,602
Intangibles assets, net
7,088
8,307
Other assets
1,345
947
Total Assets
$
1,015,373
$
937,335
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$
266,846
$
235,641
Accrued payroll
17,828
28,050
Accrued expenses and other liabilities
57,586
45,232
Total current liabilities
342,260
308,923
Deferred income taxes
18,525
20,170
Noncurrent operating lease liabilities
9,631
10,330
Other liabilities
8,630
600
Total Liabilities
379,046
340,023
Stockholders’ Equity:
Common Stock, $ .01 par value, 100,000 shares authorized, 28,943 and 28,870 issued, 26,170 and 26,345 outstanding at December 31, 2020 and 2019, respectively
289
288
Additional paid-in capital
119,891
118,045
Retained earnings
562,084
514,694
Treasury stock at cost, 2,773 and 2,526 shares at December 31, 2020 and 2019, respectively
( 45,937 )
( 35,715 )
Total Stockholders’ Equity
636,327
597,312
Total Liabilities and Stockholders’ Equity
$
1,015,373
$
937,335
See notes to consolidated financial statements.
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PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Years Ended December 31,
2020
2019
2018
Net sales
$
2,590,290
$
2,820,034
$
2,699,489
Cost of sales
2,171,483
2,368,724
2,288,403
Gross profit
418,807
451,310
411,086
Selling, general and administrative expenses
345,741
338,635
324,433
Restructuring and other charges
992
703
967
Income from operations
72,074
111,972
85,686
Interest expense
( 107 )
( 107 )
( 145 )
Interest income
168
814
3,123
Gain from life insurance
1,061
—
—
Income before taxes
73,196
112,679
88,664
Income tax provision
( 17,431 )
( 30,568 )
( 24,072 )
Net income
$
55,765
$
82,111
$
64,592
Earnings per common share:
Basic
$
2.13
$
3.12
$
2.42
Diluted
$
2.12
$
3.10
$
2.41
Shares used in computation of earnings per common share:
Basic
26,157
26,335
26,717
Diluted
26,336
26,505
26,854
See notes to consolidated financial statements.
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PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUIT Y
(amounts in thousands)
Common Stock
Additional
Retained
Treasury Shares
Shares
Amount
Paid-In Capital
Earnings
Shares
Amount
Total
Balance - December 31, 2017
28,709
$
287
$
114,154
$
383,673
( 1,856 )
$
( 15,862 )
$
482,252
Cumulative effect of adoption of ASC 606
—
—
—
1,197
—
—
1,197
Issuance of common stock under Employee Stock Purchase Plan
41
1
1,246
—
—
—
1,247
Stock-based compensation expense
—
—
1,080
—
—
—
1,080
Restricted stock units vested
37
—
—
—
—
—
—
Shares withheld for taxes paid on stock awards
—
—
( 638 )
—
—
—
( 638 )
Repurchase of common stock for treasury
—
—
—
—
( 535 )
( 15,375 )
( 15,375 )
Dividend declaration
—
—
—
( 8,452 )
—
—
( 8,452 )
Net income
—
—
—
64,592
—
—
64,592
Balance - December 31, 2018
28,787
$
288
$
115,842
$
441,010
( 2,391 )
$
( 31,237 )
$
525,903
Issuance of common stock under Employee Stock Purchase Plan
32
—
1,253
—
—
—
1,253
Stock-based compensation expense
—
—
1,863
—
—
—
1,863
Restricted stock units vested
51
—
—
—
—
—
—
Shares withheld for taxes paid on stock awards
—
—
( 913 )
—
—
—
( 913 )
Repurchase of common stock for treasury
—
—
—
—
( 135 )
( 4,478 )
( 4,478 )
Dividend declaration
—
—
—
( 8,427 )
—
—
( 8,427 )
Net income
—
—
—
82,111
—
—
82,111
Balance - December 31, 2019
28,870
$
288
$
118,045
$
514,694
( 2,526 )
$
( 35,715 )
$
597,312
Issuance of common stock under Employee Stock Purchase Plan
12
—
536
—
—
—
536
Stock-based compensation expense
—
—
2,668
—
—
—
2,668
Restricted stock units vested
61
1
( 1 )
—
—
—
—
Shares withheld for taxes paid on stock awards
—
—
( 1,357 )
—
—
—
( 1,357 )
Repurchase of common stock for treasury
—
—
—
—
( 247 )
( 10,222 )
( 10,222 )
Dividend declaration
—
—
—
( 8,375 )
—
—
( 8,375 )
Net income
—
—
—
55,765
—
—
55,765
Balance - December 31, 2020
28,943
$
289
$
119,891
$
562,084
( 2,773 )
$
( 45,937 )
$
636,327
See notes to consolidated financial statements.
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PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Years Ended December 31,
2020
2019
2018
Cash Flows provided by Operating Activities:
Net income
$
55,765
$
82,111
$
64,592
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
13,603
13,314
14,063
Provision for credit losses
3,316
25
1,680
Stock-based compensation expense
2,668
1,863
1,080
Deferred income taxes
( 1,645 )
2,986
1,488
Gain from life insurance
( 1,061 )
—
—
Loss on disposal of fixed assets
28
213
51
Changes in assets and liabilities:
Accounts receivable
( 63,650 )
( 101,953 )
14,872
Inventories
( 16,201 )
( 5,471 )
( 23,311 )
Prepaid expenses, income tax receivables and other current assets
622
( 1,476 )
( 1,045 )
Other non-current assets
( 398 )
264
2,403
Accounts payable
32,515
34,960
5,722
Accrued expenses and other liabilities
10,536
9,767
5,244
Net cash provided by operating activities
36,098
36,603
86,839
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
( 11,033 )
( 25,656 )
( 21,238 )
Net cash used in investing activities
( 11,033 )
( 25,656 )
( 21,238 )
Cash Flows (used in) provided by Financing Activities:
Proceeds from short-term borrowings
—
—
859
Repayment of short-term borrowings
—
—
( 859 )
Purchase of treasury shares
( 10,222 )
( 4,478 )
( 15,375 )
Dividend payments
( 8,427 )
( 8,452 )
( 9,122 )
Issuance of stock under Employee Stock Purchase Plan
536
1,253
1,247
Payment of payroll taxes on stock-based compensation through shares withheld
( 1,357 )
( 913 )
( 638 )
Net cash used in financing activities
( 19,470 )
( 12,590 )
( 23,888 )
Increase (decrease) in cash and cash equivalents
5,595
( 1,643 )
41,713
Cash and cash equivalents, beginning of year
90,060
91,703
49,990
Cash and cash equivalents, end of year
$
95,655
$
90,060
$
91,703
Non-cash Investing and Financing Activities:
Accrued capital expenditures
$
442
$
1,463
$
2,422
Life insurance recorded as receivable
1,500
—
—
Dividend declarations
8,375
8,427
8,452
Supplemental Cash Flow Information:
Income taxes paid
$
19,441
$
28,460
$
19,945
See notes to consolidated financial statements.
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PC CONNECTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PC Connection, Inc. is a leading solutions provider of a wide range of information technology, or IT, solutions. The Company help its customers design, enable, manage, and service their IT environments. The Company provides IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that it purchases from manufacturers, distributors, and other suppliers. The Company also offers services involving design, configuration, and implementation of IT solutions. These services are performed by the Company’s personnel and by first-party service providers. The Company operates through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through its PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through its MoreDirect subsidiary, and (c) the Public Sector Solutions segment, which serves federal, state, and local governmental and educational institutions, through its GovConnection subsidiary.
The following is a summary of the Company’s significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of PC Connection, Inc. and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances are eliminated in consolidation.
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 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, including estimates of the impact of the coronavirus pandemic (“COVID-19 pandemic”). By nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates and assumptions, including the impact of the COVID-19 pandemic.
Revenue Recognition
On January 1, 2018, the Company adopted ASC 606— Revenue from Contracts with Customers (“ASC 606”), which replaced existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters 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. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time. The Company accounts for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. The Company generally obtains oral or written purchase authorizations from its customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company generally invoices for its products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.
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Cost of Sales and Certain Other Costs
Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances.
Cash and Cash Equivalents
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 our cash equivalents approximates fair value. The majority of payments due from credit card processors and banks for third-party credit card and debit card transactions process within one to five business days. All credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents. Amounts due from banks for credit card transactions classified as cash equivalents totaled $ 3,776 and $ 5,553 at December 31, 2020 and 2019, respectively.
Accounts Receivable
Account Receivable are recorded at the invoice amount, net of allowances. Customers are evaluated for their credit worthiness at the time of contract inception and, the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on payment history and customer creditworthiness. 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. The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 pandemic in the year ended December 31, 2020. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable. Historical information is utilized beyond reasonable and supportable forecast periods. Amounts are charged against the allowance when it is determined that expected credit losses may occur. We assessed collectability by reviewing account receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with collectability issues, and if necessary, records a reserve against those receivables it determines may not be collectable. Trade receivables are written off in the period in which they are deemed uncollectible. Recoveries of trade receivables previously charged are recorded when received. As of December 31, 2020, allowances include collectability concerns stemming from business and market disruption caused by the COVID-19 pandemic and may fluctuate materially in future periods as the duration and severity of the impact of the COVID-19 pandemic remains uncertain.
Inventories
Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment, are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or net realizable value, whichever is lower. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.
Vendor Consideration
The Company receives funding from merchandise vendors for price protections, discounts, product rebates, and other programs. These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales. Allowances for product rebates that require certain volumes of product sales or purchases are recorded as the related milestones are probable of being met.
Advertising Costs and Vendor Consideration
Vendors have the ability to fund advertising activities for which the Company receives advertising consideration. This vendor consideration, to the extent that it represents specific reimbursements of incremental and identifiable costs, is offset against selling, general and administrative expenses (“SG&A”) expenses. Advertising consideration that cannot
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be associated with a specific program or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales. The Company’s vendor partners generally consolidate their funding of advertising and other marketing programs, and accordingly, the Company classifies substantially all vendor consideration as a reduction of cost of sales rather than a reduction of advertising expense. Other advertising costs are expensed as incurred. Advertising expense, which is classified as a component of SG&A expenses, totaled $ 14,021 , $ 19,407 , and $ 16,244 for the years ended December 31, 2020, 2019, and 2018, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is provided for financial reporting purposes over the estimated useful lives of the assets ranging from three to seven years . Computer software, including licenses and internally developed software, is capitalized and amortized over lives generally ranging from three to ten years . Depreciation is recorded using the straight-line method. Leasehold improvements and facilities under capital leases are amortized over the terms of the related leases or their useful lives, whichever is shorter, whereas for income tax reporting purposes, they are amortized over the applicable tax lives.
Costs incurred to develop internal-use software during the application development stage are recorded in property and equipment at cost. External direct costs of materials and services consumed in developing or obtaining internal-use computer software and payroll-related costs for employees developing internal-use computer software projects, to the extent of their time spent directly on the project and specific to application development, are capitalized.
When events or circumstances indicate a potential impairment, the Company evaluates the carrying value of property and equipment based upon current and anticipated undiscounted cash flows. The Company recognizes impairment when it is probable that such estimated future cash flows will be less than the asset carrying value. No property and equipment impairment was recognized for each of the years ended December 31, 2020, 2019 and 2018.
Leases
The Company enters into operating lease contracts, as assessed at contract inception, primarily for real estate and equipment. On the lease commencement date, the Company records operating lease liabilities based on the present value of the future lease payments. In determining the present value of future lease payments, the Company utilized estimated rates that it would have incurred to borrow, over a similar term, the funds necessary to purchase the respective leased asset with cash.
The Company elects to apply the short-team lease exception to any leases with contractual obligations of one year or less. These leases will not have a right-of-use (“ROU”) assets and associated lease liabilities on the balance sheet. Instead, rent will be recognized on a straight-line
Goodwill and Other Intangible Assets
The Company’s intangible assets consist of (1) goodwill, which is not subject to amortization; (2) an internet domain name, which is an indefinite-lived intangible not subject to amortization; and (3) amortizing intangibles, which consist of customer lists, trade names, and customer relationships, which are being amortized over their useful lives.
Note 3 describes the annual impairment methodology that the Company uses each year in calculating the recoverability of goodwill and non-amortizing intangibles. This same impairment test is performed at other times during the course of a year should an event occur or circumstance change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Recoverability of amortizing intangible assets is assessed only when events have occurred that may give rise to impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets including such intangibles, are written down to
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their respective fair values. No intangible assets impairment was recognized for each of the years ended December 31, 2020, 2019 and 2018.
Concentrations
Concentrations of credit risk with respect to trade account receivables are limited due to the large number of customers comprising the Company’s customer base. No single customer accounted for more than 5 % of total net sales in 2020, 2019, and 2018. While no single agency of the federal government comprised more than 3 % of total sales, aggregate sales to the federal government as a percentage of total net sales were 4.6 %, 6.9 %, and 5.4 % in 2020, 2019, and 2018, respectively.
Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc. accounted for approximately 21 %, 15 % and 12 % respectively, of our total product purchases in 2020. Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc. accounted for approximately 21 %, 14 % and 8 % respectively, of our total product purchases in 2019. Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc. accounted for approximately 22 %, 12 % and 7 % respectively, of our total product purchases in 2018. No other singular vendor supplied more than 10% of our total product purchases in 2020, 2019 and 2018. In addition to these vendors, product purchases, whether purchased directly or from a wholesale distributor, from Dell and Tech Data comprised a total of 66 % of our product purchases in 2020. We believe that, while we may experience some short-term disruption if products from Ingram, Synnex, HP Inc., or any of these vendors become unavailable to us, alternative sources for these products are available.
Products manufactured by Hewlett Packard Enterprise and HP Inc. collectively represented approximately 18 % of the Company’s net sales in 2020, 19 % in 2019 and 18 % in 2018. We believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on the Company’s results of operations and cash flows.
Restructuring and other charges
Restructuring and other charges are presented separately from SG&A expenses. Costs incurred were as follows:
Year Ended December 31,
2020
2019
2018
Employee separations
$
992
$
553
$
967
Lease termination costs
—
150
—
Total restructuring and other charges
$
992
$
703
$
967
The restructuring and other charges recorded in 2020 were related to a reduction in workforce across our business segments and included cash severance and other related termination benefits.
The restructuring and other charges recorded in 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits. Also included in restructuring charges were exit costs incurred associated with the closing of one of our office facilities.
The restructuring and other charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.
Overall, restructuring and other charges consist primarily of employee termination benefits, which are accrued in the period incurred and paid within a year of termination. Included in accrued expenses at December 31, 2020, 2019, and 2018 were $ 181 , $ 110 , and $ 784 , respectively, related to unpaid employee termination benefits. The amount accrued as of December 31, 2020 is expected to be paid in 2021.
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All planned restructuring and other charges were incurred as of December 31, 2020 and the Company has no ongoing restructuring plans.
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.
The following table sets forth the computation of basic and diluted earnings per share:
2020
2019
2018
Numerator:
Net income
$
55,765
$
82,111
$
64,592
Denominator:
Denominator for basic earnings per share
26,157
26,335
26,717
Dilutive effect of employee stock awards
179
170
137
Denominator for diluted earnings per share
26,336
26,505
26,854
Earnings per share:
Basic
$
2.13
$
3.12
$
2.42
Diluted
$
2.12
$
3.10
$
2.41
For the years ended December 31, 2020, 2019, and 2018, the Company did no t exclude any outstanding nonvested stock units or stock options from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.
Other Income, Net
Other income, net for the year ended December 31, 2020 consisted of $ 1,061 related to a gain from life insurance, which was realized upon the passing of one of our co-founders and a member of the Company’s Board of Directors, David H. Hall. Also included in other income, net for the year ended December 31, 2020 was interest income of $ 168 , partially offset by interest expense of $ 107 .
Other income, net for the year ended December 31, 2019 consisted of interest income of $ 810 , which was partially offset by interest expense of $ 103 .
Other income, net for the year ended December 31, 2018 consisted of $ 2,255 related to a gain, net of costs incurred of $ 745 , that was realized upon execution of a favorable $ 3,000 cash resolution of a contract dispute that arose in 2017. Also included in other income, net for the year ended December 31, 2018 was interest income of $ 868 , offset partially by interest expense of $ 145 .
Adoption of Recently Issued Financial Accounting Standards
ASU 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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.
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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 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.
2. REVENUE
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 is generally upon delivery to the customer. The Company recognizes revenue as the principal in the transaction with the customer (i.e., on a gross basis), as it controls the product prior to delivery to the customer and derive the economic benefits from the sales transaction given the Company’s control over customer pricing.
The Company does not recognize revenue for goods that remain in its 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 the Company has no ability to use the product or to direct it to another customer.
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. The Company is the principal in these transactions and recognizes revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license 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. The Company does not have control over the delivery of these performance obligations, and accordingly the Company is the agent in these transactions. The Company recognizes revenue for security software net of the related costs of sales at the point in time when its vendor and customer accept the terms and conditions in the sales arrangement. 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. The Company does not exercise control over these products or services and therefore is an agent in these transactions. The Company recognizes revenue for cloud products net of the related costs of sales at the point in time when its vendor and customer accept the terms and conditions in the sales arrangements.
Certain software sales include on-premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk support, 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 the Company sells these items separately. The Company recognizes revenue related to the software maintenance as the agent in these transactions because it does not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when the Company’s vendor and customer accept the terms and conditions in the sales arrangements.
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Certain of the Company’s 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, the Company’s vendors will transfer the license and bill the customer directly, paying resellers, such as the Company, an agency fee or commission on these sales. The Company records these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, the Company invoices the customer directly under an EA and account for the individual items sold based on the nature of each item. The Company’s vendors typically dictate how the EA will be sold to the customer.
The Company also offers extended service plans (“ESP”) on IT products, both as part of the initial arrangement and separately from the IT products. The Company recognizes revenue related to ESP as the agent in the transaction because it does not have control over the on-going ESP service and does not provide any service after the sale. Revenue allocated to ESP is recognized at the point in time when the Company’s vendor and customer accept the terms and conditions in the sales arrangement.
The Company uses its own engineering personnel to assist in projects involving the design and installation of systems and networks, and also engages third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as the Company performs the underlying services and satisfies its performance obligations. The Company evaluates such engagements to determine whether it is the principal or the agent in each transaction. For those transactions in which we do not control the service, the Company acts as an agent and recognizes the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.
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 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.
Significant Judgments
The Company’s contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether the Company is 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.
The Company estimates the standalone selling price (“SSP”) for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. The Company maximizes the use of observable inputs in the determination of the estimate for SSP for the items that it does not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.
The Company provides its customers with a limited thirty-day right of return, which is generally limited to defective merchandise, and gives rise to variable consideration. Revenue is recognized based on the most likely amount to which it is expected to be entitled. The estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty is resolved. The Company makes estimates of product returns based on significant historical experience. The Company records its sales return reserve as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses and as a reduction of cost of sales and an associated right of return asset.
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Description of 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 year ended December 31, 2020 and 2019, along with the reportable segment for each category.
For the Year Ended December 31, 2020
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
Total
Notebooks/Mobility
$
319,046
$
303,471
203,090
$
825,607
Desktops
89,828
129,011
36,744
255,583
Software
124,681
115,596
42,793
283,070
Servers/Storage
93,535
76,107
42,694
212,336
Net/Com Products
75,141
96,203
47,930
219,274
Displays and Sound
85,769
78,312
51,502
215,583
Accessories
113,402
201,562
47,504
362,468
Other Hardware/Services
64,630
115,307
36,432
216,369
Total net sales
$
966,032
$
1,115,569
$
508,689
$
2,590,290
For the Year Ended December 31, 2019
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
Total
Notebooks/Mobility
$
317,282
$
322,530
166,132
$
805,944
Desktops
127,373
154,602
63,949
345,924
Software
146,287
133,584
54,956
334,827
Servers/Storage
105,617
72,445
60,334
238,396
Net/Com Products
94,340
72,185
52,776
219,301
Displays and Sound
88,667
105,172
56,183
250,022
Accessories
98,890
211,772
46,647
357,309
Other Hardware/Services
81,593
121,530
65,188
268,311
Total net sales
$
1,060,049
$
1,193,820
$
566,165
$
2,820,034
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of December 31, 2020 and December 31, 2019:
December 31, 2020
December 31, 2019
Contract liabilities, which are included in "Accrued expenses and other liabilities"
$
3,509
$
5,942
Changes in the contract liability balances during the years ended December 31, 2020 and 2019 are as follows (in thousands):
2019
Balances at December 31, 2018
$
2,679
Cash received in advance and not recognized as revenue
15,835
Amounts recognized as revenue as performance obligations satisfied
( 12,572 )
Balances at December 31, 2019
$
5,942
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2020
Balances at December 31, 2019
$
5,942
Cash received in advance and not recognized as revenue
10,800
Amounts recognized as revenue as performance obligations satisfied
( 13,233 )
Balances at December 31, 2020
$
3,509
k
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is held by the Company’s Large Account and SMB segments. Goodwill and intangible assets with indefinite lives are subject to an annual impairment test as of November 30 and tested more frequently if events or circumstances occur that would indicate a potential decline in fair value.
In 2020, the Company used a discounted cash flow methodology to determine the fair value of each reporting unit. Internal forecasts were used to estimate the future year cash flow and long-term growth rates was estimated based on the most recent views of each reporting unit. Discount rate used in the model reflects the risk and uncertainty associated with the respective businesses.
For 2019, the Company performed a qualitative “Step 0” analysis. ASC 350— Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. This analysis allows the Company to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a more detailed quantitative analysis would be necessary. Factors considered when performing the “Step 0” impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in the Company’s stock price and market capitalization, and other relevant entity-specific events. Based on the analysis, there were no indications that an impairment was more than likely to exist.
Goodwill is held by the Company’s Large Account and SMB segments. The Company concluded that the fair values of the domain name and the two reporting units each exceeded the respective carrying values, and accordingly, an impairment was not identified in the annual test. The Company also did not identify any events or circumstances that would indicate that it is more likely than not that the carrying values of the reporting units or the domain name were in excess of the respective fair values during the years ended December 31, 2020 and 2019, respectively.
The Company concluded that the fair values of the domain name and the two reporting units each substantially exceeded the respective carrying values, and accordingly, an impairment was not identified in the annual test. The Company also did not identify any events or circumstances that would indicate that it is more likely than not that the
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carrying values of the reporting units or the domain name were in excess of the respective fair values during the year ended December 31, 2020.
The carrying amount of goodwill for the periods presented is detailed below:
Balance at December 31, 2019
SMB
Large Account
Public Sector
Total
Goodwill, gross
$
8,539
$
66,236
$
7,634
$
82,409
Accumulated impairment losses
( 1,173 )
─
( 7,634 )
( 8,807 )
Net balance
$
7,366
$
66,236
$
—
$
73,602
Balance at December 31, 2020
SMB
Large Account
Public Sector
Total
Goodwill, gross
$
8,539
$
66,236
$
7,634
$
82,409
Accumulated impairment losses
( 1,173 )
─
( 7,634 )
( 8,807 )
Net balance
$
7,366
$
66,236
$
—
$
73,602
Intangible Assets
At December 31, 2020, the Company’s intangible assets included a domain name for $ 450 , which has an indefinite life and is not subject to amortization. In addition, in 2016 the Company acquired customer relationships from its Softmart and GlobalServe acquisitions, which will be amortized on a straight-line basis over their estimated useful lives of 10 years . The Company’s remaining intangible assets are amortized in proportion to the estimates of the future cash flows underlying the valuation of the assets. Intangible assets and related accumulated amortization are detailed below:
December 31, 2020
December 31, 2019
Estimated
Gross
Accumulated
Net
Gross
Accumulated
Net
Useful Lives
Amount
Amortization
Amount
Amount
Amortization
Amount
Customer list
8
$
3,400
$
3,400
$
—
$
3,400
$
3,400
$
—
Tradename
5
1,190
1,190
—
1,190
1,190
—
Customer relationships
10
12,200
5,562
6,638
12,200
4,343
7,857
Total intangible assets
$
16,790
$
10,152
$
6,638
$
16,790
$
8,933
$
7,857
In 2020, 2019, and 2018, the Company recorded amortization expense of $ 1,220 , $ 1,257 , and $ 1,461 , respectively. The estimated amortization expense relating to intangible assets in each of the five succeeding years and thereafter is as follows:
For the Years Ended December 31,
2021
$
1,220
2022
1,220
2023
1,220
2024
1,220
2025
1,220
2026 and thereafter
538
$
6,638
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4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
December 31,
2020
2019
Trade
$
553,823
$
498,721
Vendor consideration, returns and other
66,461
56,459
Due from employees
159
114
Total gross accounts receivable
620,443
555,294
Allowances for:
Sales returns
( 4,014 )
( 3,466 )
Credit losses
( 5,408 )
( 2,202 )
Accounts receivable, net
$
611,021
$
549,626
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
2020
2019
Computer software, including licenses and internally-developed software
$
100,285
$
95,214
Furniture and equipment
35,788
36,098
Leasehold improvements
8,683
8,516
Total
144,756
139,828
Accumulated depreciation and amortization
( 83,219 )
( 75,602 )
Property and equipment, net
$
61,537
$
64,226
We recorded depreciation and amortization expense for property and equipment of $ 12,383 , $ 12,057 , and $ 12,602 in 2020, 2019, and 2018, respectively.
6. LEASES
The Company leases certain facilities from a related party, which is affiliated with the Company through common ownership. Included in the right-of-use asset as of December 31, 2020 was $ 3,460 and a corresponding lease liability of
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$ 3,460 associated with related party leases. As of December 31, 2020, the Company had no leases that were classified as financing leases and there were no additional operating or financing leases that have not yet commenced.
For the Year Ended December 31, 2020
Related Parties
Others
Total
Lease Cost
Capitalized operating lease cost
$
1,385
$
3,170
$
4,555
Short-term lease cost
295
14
309
Total lease cost
$
1,680
$
3,184
$
4,864
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
$
1,385
$
3,272
$
4,657
Weighted-average remaining lease term (in years):
Capitalized operating leases
2.92
5.57
4.89
Weighted-average discount rate:
Capitalized operating leases
3.92 %
3.92 %
3.92 %
As of December 31, 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
2021
$
1,253
$
3,090
$
4,343
2022
1,253
2,111
3,364
2023
1,149
1,675
2,824
2024
—
1,699
1,699
2025 and thereafter
—
2,482
2,482
3,655
11,057
14,712
Imputed interest
( 1,153 )
Lease liability balance at December 31, 2020
$
13,559
As of December 31, 2020, the ROU asset had a balance of $ 12,821 . The long-term lease liability was $ 9,631 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,928 .
As of December 31, 2019, the ROU asset had a balance of $ 13,842 . The long-term lease liability was $ 10,330 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 4,316 .
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
December 31,
2020
2019
Customer and vendor deposits
$
28,438
$
13,871
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Dividends payable
8,375
8,427
Sales taxes
8,400
9,374
Short-term lease liability
3,928
4,316
Other
8,445
9,244
Accrued expenses and other liabilities
$
57,586
$
45,232
8. GAIN ON LIFE INSURANCE
On November 14, 2020, David Hall, one of the Company co-founders and a member of the Company’s Board of Directors passed away. The Company owned and was the beneficiary of two life insurance policies on Mr. Hall. These policies had a total cash value of approximately $ 0.4 million recorded as “Other assets” on the Company’s balance sheet as of December 31, 2019. After the death of Mr. Hall, $ 1.5 million was recorded as receivable on the Company’s balance sheet. The difference between the total insurance proceeds and the cash surrender value of the policies was approximately $ 1.1 million, which was recorded as non-operating income. The life insurance proceeds are not subject to federal or state income taxes.
The Company also owns and is the beneficiary of one life insurance policy on Patricia Gallup, the Company’s Chair and Chief Administrative Officer. This policy had a total cash value recorded as “Other assets” on the Company’s balance sheet of approximately $ 0.2 million as of December 31, 2020 and $ 0.1 million as of December 31, 2019.
9. BANK BORROWINGS
The Company has a $ 50,000 credit facility collateralized by its account receivables that expires February 10, 2022 . This facility can be increased, at the Company’s option, to $ 80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate (“ LIBOR ”) ( 0.14 % at December 31, 2020) , plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ( 3.25 % at December 31, 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 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 the Company’s consolidated Adjusted EBITDA could limit its potential borrowing capacity under the credit facility. The Company had no outstanding bank borrowings at December 31, 2020 or 2019, and accordingly, the entire $ 50,000 facility was available for borrowings under the credit facility. As of December 31, 2020, the Company was in compliance with the financial covenants.
10. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Preferred Stock
The Company’s Amended and Restated Certificate of Incorporation (the “Restated Certificate”) authorizes the issuance of up to 10,000 shares of preferred stock, $ .01 par value per share (the “Preferred Stock”). Under the terms of the Restated Certificate, the Board is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue by a unanimous vote such shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such rights, preferences, privileges, and restrictions, including voting rights, dividend rights, redemption privileges, and liquidation preferences, as shall be determined by the Board. There were no preferred shares outstanding at December 31, 2020 or 2019.
Share Repurchase Authorization
As of December 31, 2017, there was $ 30.0 million authorized for share repurchase. In 2018, the Company’s Board approved a share repurchase program authorizing up to $ 25.0 million in additional share repurchases. There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on
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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.
The Company repurchased 247 , 135 , and 535 shares for $ 10.2 million, $ 4.5 million, $ 15.4 million during the years ended December 31, 2020, 2019, 2018, respectively, under Board-authorized repurchase programs. As of December 31, 2020, the Company has repurchased an aggregate of 2,599 shares for $ 42.3 million under Board-authorized repurchase programs, and the maximum approximate dollar value of shares that may yet be purchased under the Company’s existing Board-authorized program is $ 12.7 million.
Dividend Payments
The following table summarizes the Company’s special cash dividends declared in the years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Dividend per share
$
0.32
$
0.32
$
0.32
Stockholder record date
1/12/2021
12/27/2019
12/28/2018
Total dividend
$
8,375
$
8,427
$
8,452
Payment date
1/29/2021
1/10/2020
1/11/2019
The dividends paid in January 2021, 2020 and 2019 were included in accrued expenses and other liabilities at December 31, 2020, 2019, and 2018, respectively. Declaration of any future cash dividends will depend upon the Company’s financial position, strategic plans, and general business conditions.
Equity Compensation Plan Descriptions
In 2007, the Board adopted and the Company’s stockholders approved the 2007 Stock Incentive Plan. In 2010, the Board adopted and the stockholders approved the Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”), which, among other things, extended the term of the 2007 Plan to 2020. In May 2019, the Company’s stockholders approved an amendment to the 2007 Plan, which authorized the issuance of 1,900 shares of common stock. Under the terms of the 2007 Plan, the Company is authorized, for a ten-year period, to grant options, stock appreciation rights, nonvested stock, nonvested stock units, and other stock-based awards to employees, officers, directors, and consultants.
In 2020, the Board adopted and the Company’s stockholders approved the 2020 Stock Incentive Plan (the “2020 plan”), which replaces the Amended and Restated 2007 Stock Incentive Plan. The 2020 plan extended the term of the Restated 2007 plan and authorized the issuance of 350 shares of common stock plus any shares remain available for grant under the Restated 2007 plan. As of December 31, 2020, there were 356 shares eligible for future grants under the 2020 Plan.
1997 Employee Stock Purchase Plan
In November 1997, the Board adopted and the Company’s stockholders approved the 1997 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan authorizes the issuance of common stock to participating employees. Under the Purchase Plan, as amended, employees are eligible to purchase Company stock at 95 % of the purchase price as of the last business day of each six-month offering period. An aggregate of 1,203 shares of common stock has been reserved for issuance under the Purchase Plan, of which 1,200 shares have been purchased. In 2020, after the first offering was executed in June, 2020, the purchase plan was suspended by the Board.
Accounting for Share-Based Compensation
The Company measures the grant date fair value of equity awards given to employees and recognize that cost, adjusted for forfeitures, over the period that services are performed. The Company values grants with multiple vesting periods as a single award, estimate expected forfeitures based upon historical patterns of employee turnover, and record share-based compensation as a component of SG&A expenses.
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The following table summarizes the share-based compensation expenses included in the consolidated statements of net income (dollars in thousands):
2020
2019
2018
Pre-tax expense for nonvested units
$
2,668
$
1,863
$
1,080
Tax benefit
( 635 )
( 505 )
( 293 )
Net effect on net income
$
2,033
$
1,358
$
787
In 2020, 2019, and 2018, the Company issued nonvested stock units that settle in stock and vest over periods up to ten years . Recipients of nonvested stock units do not possess stockholder rights. The fair value of nonvested stock units is based on the end of day market value of our common stock on the grant date. The following table summarizes our nonvested stock unit activity in 2020:
Nonvested Stock Units
Weighted-Average
Grant Date
Shares
Fair Value
Nonvested at January 1, 2020
473
$
29.20
Granted
85
44.31
Vested
( 91 )
27.86
Canceled
( 7 )
34.77
Nonvested at December 31, 2020
460
32.17
The weighted-average grant-date fair value of nonvested stock units granted in 2020, 2019 and 2018 was $ 44.31 , $ 42.06 and $ 24.9 , respectively. The total fair value of nonvested stock units that vested in 2020, 2019, and 2018 was $ 4,044 , $ 3,476 , and $ 1,635 , respectively. Unearned compensation cost related to the nonvested portion of outstanding nonvested stock units was $ 13,780 as of December 31, 2020, and is expected to be recognized over a weighted-average period of approximately 4.6 years. The aggregate intrinsic value of the nonvested stock units at December 31, 2020, which is calculated based on the positive difference between the fair value of the Company’s stock on December 31, 2020 and the grant price of the underlying awards, was $ 21,749 .
Stock Equivalent Units
The Company has also previously issued stock equivalent units, (“SEUs”), which settle in cash and vest ratably over four years , to non-executive employees. The fair value of these liability awards is based on the closing market price of the Company’s common stock, and is remeasured at the end of each reporting period until the SEUs vest. The Company reports the compensation as a component of SG&A expense and the related liability as accrued payroll on the consolidated balance sheets.
2020
2019
2018
Units issued
—
—
—
Compensation expense
$
840
$
1,802
$
1,871
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11. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended December 31,
2020
2019
2018
Current:
Federal
$
13,350
$
20,481
$
16,643
State
5,726
7,101
6,370
Total current
19,076
27,582
23,013
Deferred:
Federal
( 1,108 )
2,186
1,087
State
( 537 )
800
( 28 )
Total deferred
( 1,645 )
2,986
1,059
Net provision
$
17,431
$
30,568
$
24,072
The components of the deferred taxes at December 31, 2020 and 2019 are as follows:
2020
2019
Deferred tax assets:
Allowance for credit losses
$
1,418
$
581
Inventory costs capitalized for tax purposes
165
134
Inventory valuation reserves
271
253
Sales return reserves
158
134
Deductible expenses, primarily employee-benefit related
661
177
Accrued compensation
3,295
2,448
Operating lease liability
3,559
3,858
Other
1,475
1,503
Compensation under non-statutory stock option agreements
393
143
State tax loss carryforwards
1,079
1,091
Total gross deferred tax assets
12,474
10,322
Less: Valuation allowance
( 942 )
( 992 )
Net deferred tax assets
11,532
9,330
Deferred tax liabilities:
Goodwill and other intangibles
( 13,625 )
( 13,287 )
Property and equipment
( 12,976 )
( 12,482 )
Right-of-use assets
( 3,366 )
( 3,647 )
Prepaid expenses
( 90 )
( 84 )
Total gross deferred tax liabilities
( 30,057 )
( 29,500 )
Net deferred tax liability
$
( 18,525 )
$
( 20,170 )
Current deferred tax assets
$
—
$
—
Noncurrent deferred tax liability
( 18,525 )
( 20,170 )
Net deferred tax liability
$
( 18,525 )
$
( 20,170 )
The Company has deferred tax assets from state net operating loss carryforwards aggregating $ 1,365 at December 31, 2020 representing state tax benefits, net of federal taxes, of approximately $ 1,079 . These loss carryforwards are subject to between five , fifteen , and twenty-year carryforward periods, with $ 3 expiring after 2021, $ 3 expiring after 2022, $ 4 expiring after 2023, $ 3 expiring after 2024, $ 4 expiring after 2025, $ 1,277 expiring beyond 2025, and $ 70 with no expiration. The Company has provided valuation allowances of $ 942 and $ 992 at December 31, 2020 and 2019, respectively, against the state tax loss carryforwards, representing the portion of carryforward losses that the Company
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believes are not likely to be realized. The net change in the total valuation allowance reflects a $ 50 decrease in 2020, and a $ 153 and $ 94 increase in 2019 and 2018.
A reconciliation of the Company’s 2020, 2019, and 2018 income tax provision to total income taxes at the statutory federal tax rate is as follows:
2020
2019
2018
Federal income taxes, at statutory tax rate
$
15,378
$
23,663
$
18,619
State income taxes, net of federal benefit
3,987
6,977
5,157
Nondeductible expenses
365
651
454
Tax credits
( 2,093 )
—
—
Other, net
( 206 )
( 723 )
( 158 )
Income tax provision
$
17,431
$
30,568
$
24,072
The Company files one consolidated U.S. Federal income tax return that includes all of its subsidiaries as well as several consolidated, combined, and separate Company returns in many U.S. state tax jurisdictions. The tax years 2016-2019 remain open to examination by the major state taxing jurisdictions in which the Company files. The tax years 2017-2019 remain open to examination by the Internal Revenue Service.
A reconciliation of unrecognized tax benefits for 2020, 2019, and 2018, is as follows:
2020
2019
2018
Balance at January 1,
$
—
$
368
$
368
Additions on tax positions of prior years
—
—
—
Lapses of applicable statute of limitations
—
( 368 )
—
Settlements
—
—
—
Balance at December 31,
$
—
$
—
$
368
For the year ended December 31, 2019, the unrecognized tax benefits decreased by $ 368 related to the expiration of various state statute of limitation periods.
Previously, the Company recognized interest and penalties related to unrecognized income tax benefits as a component of income tax expense, and the corresponding accrual was included as a component of our liability for unrecognized income tax benefits. The Company did no t recognize any interest and penalties for the years ended December 31, 2020, 2019 or 2018.
12. EMPLOYEE BENEFIT PLAN
The Company has a contributory profit-sharing and employee savings plan covering all qualified employees. No contributions to the profit-sharing element of the plan were made by the Company in 2020, 2019, or 2018. The Company made matching contributions to the employee savings element of such plan of $ 5,656 , $ 2,778 , $ 2,538 in 2020, 2019, and 2018, respectively.
13. COMMITMENTS AND CONTINGENCIES
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 effect on our business, financial position, results of operations, or cash flows.
The Company records a liability when it believes that a loss is both probable and reasonably estimable. On a quarterly basis, the Company reviews each of these legal proceedings to determine whether it is probable, reasonably possible, or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can
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be reasonably estimated. Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of such loss. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material. The Company expenses legal fees in the period in which they are incurred.
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, and such outcomes could have a material negative impact on our financial position, results of operations, and cash flows.
14. SEGMENT AND RELATED DISCLOSURES
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 reporting 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 government 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.
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Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s reportable operating segments for the years ended December 31, 2020, 2019, and 2018 is shown below:
Years Ended December 31,
2020
2019
2018
Net sales:
Business Solutions
$
966,032
$
1,060,049
$
1,027,918
Enterprise Solutions
1,115,569
1,193,820
1,165,142
Public Sector Solutions
508,689
566,165
506,429
Total net sales
$
2,590,290
$
2,820,034
$
2,699,489
Operating income (loss):
Business Solutions
$
32,351
$
52,557
$
40,188
Enterprise Solutions
59,382
67,837
61,663
Public Sector Solutions
( 2,763 )
7,319
( 2,260 )
Headquarters/Other
( 16,896 )
( 15,741 )
( 13,905 )
Total operating income
72,074
111,972
85,686
Other income, net
1,122
707
2,978
Income before taxes
$
73,196
$
112,679
$
88,664
Selected operating expense:
Depreciation and amortization:
Business Solutions
$
636
$
596
$
632
Enterprise Solutions
2,771
2,474
2,318
Public Sector Solutions
60
89
112
Headquarters/Other
10,136
10,155
11,001
Total depreciation and amortization
$
13,603
$
13,314
$
14,063
Total assets:
Business Solutions
$
365,366
$
308,522
Enterprise Solutions
588,264
548,666
Public Sector Solutions
96,233
91,826
Headquarters/Other
( 34,490 )
( 11,679 )
Total assets
$
1,015,373
$
937,335
The assets of the Company’s operating segments presented above consist primarily of accounts receivable, net intercompany receivable, goodwill, and other intangibles. Goodwill of $ 66,236 and $ 7,366 is held by the Enterprise Solutions and Business Solutions segments, respectively, as of December 31, 2020. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, property and equipment and intercompany balance, net. Total assets for the Headquarters/Other group are presented net of intercompany balances eliminations of $ 43,388 and $ 39,813 for the years ended December 31, 2020 and 2019, respectively. The Company’s capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade its management information systems. These systems serve all of the Company’s subsidiaries, to varying degrees, and as a result, the CODM does not evaluate capital expenditures on a segment basis.
Substantially all of the Company’s sales in 2020, 2019, and 2018 were made to customers located in the United States. Shipments to customers located in foreign countries were not more than 2 % of total net sales in 2020, 2019, and 2018. All of the Company’s assets at December 31, 2020 and 2019 were located in the United States. The Company’s primary target customers are SMBs, medium-to-large corporate accounts, and federal, state, and local government agencies, educational institutions, and medium-to-large corporate accounts. No single customer accounted for more than 5 % of total net sales in 2020, 2019, or 2018. While no single agency of the federal government comprised more than 3 % of total sales, aggregate sales to the federal government were 4.6 %, 6.9 %, and 5.4 % in 2020, 2019, and 2018, respectively.
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15. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly data of the Company for each of the calendar quarters in 2020 and 2019. This information has been prepared on the same basis as the annual financial statements, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the annual financial statements and the notes thereto included elsewhere in this document. The quarterly operating results are not necessarily indicative of future results of operations.
Quarters Ended
March 31,
June 30,
September 30,
December 31,
2020
2020
2020
2020
Net sales
$
711,850
$
550,002
$
652,752
$
675,686
Cost of sales
598,732
461,002
544,922
566,827
Gross profit
113,118
89,000
107,830
108,859
Selling, general and administrative expenses
92,468
77,420
86,753
89,100
Restructuring and other charges
—
992
—
—
Income from operations
20,650
10,588
21,077
19,759
Other income, net
92
5
( 17 )
1,042
Income before taxes
20,742
10,593
21,060
20,801
Income tax provision
( 5,846 )
( 2,950 )
( 4,130 )
( 4,505 )
Net income
$
14,896
$
7,643
$
16,930
$
16,296
Earnings per common share:
Basic
$
0.57
$
0.29
$
0.65
$
0.62
Diluted
$
0.56
$
0.29
$
0.64
$
0.62
Weighted average common shares outstanding:
Basic
26,236
26,107
26,130
26,156
Diluted
26,421
26,279
26,311
26,328
Quarters Ended
March 31,
June 30,
September 30,
December 31,
2019
2019
2019
2019
Net sales
$
632,921
$
741,076
$
729,410
$
716,627
Cost of sales
533,574
624,089
610,547
600,514
Gross profit
99,347
116,987
118,863
116,113
Selling, general and administrative expenses
81,235
84,664
86,226
86,510
Restructuring and other charges
703
—
—
—
Income from operations
17,409
32,323
32,637
29,603
Interest income, net
198
184
62
263
Income before taxes
17,607
32,507
32,699
29,866
Income tax provision
( 4,880 )
( 8,839 )
( 8,949 )
( 7,900 )
Net income
$
12,727
$
23,668
$
23,750
$
21,966
Earnings per common share:
Basic
$
0.48
$
0.90
$
0.90
$
0.84
Diluted
$
0.48
$
0.89
$
0.90
$
0.83
Weighted average common shares outstanding:
Basic
26,359
26,337
26,323
26,322
Diluted
26,525
26,494
26,479
26,523
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PC CONNECTION, INC. AND SUBSIDIARIES
SCHEDULE I I—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Balance at
Charged to
Balance at
Beginning
Costs and
Deductions/
End of
of Period
Expenses
Write-Offs
Period
Description
Allowance for Sales Returns
Year Ended December 31, 2018
$
3,308
28,504
( 28,415 )
$
3,397
Year Ended December 31, 2019
$
3,397
27,943
( 27,874 )
$
3,466
Year Ended December 31, 2020
$
3,466
29,435
( 28,887 )
$
4,014
Allowance for Credit Losses
Year Ended December 31, 2018
$
2,726
1,680
( 1,304 )
$
3,102
Year Ended December 31, 2019
$
3,102
25
( 925 )
$
2,202
Year Ended December 31, 2020
$
2,202
3,316
( 110 )
$
5,408
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