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, 2022. 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
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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, 2022. 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, 2022, 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, 2022. 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, 2022, 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, 2022, 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, 2022, of the Company and our report dated March 6, 2023, 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 6, 2023
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other information
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
In addition to the information included below, the information required by this item, which is included under the headings “Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Delinquent Section 16(a) Reports,” “Code of Business Conduct and Ethics Policy,” “Director Candidates,” and “Board Committees – Audit Committee” in our definitive Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC (the “Proxy Statement”) is incorporated herein by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Annual Report on Form 10-K, the Proxy Statement is not being filed as a part hereof.
Information about our Executive Officers
Our executive officers and their ages as of March 6, 2023 are as follows:
Name
Age
Position
Patricia Gallup
68
Chair and Chief Administrative Officer
Timothy McGrath
64
President and Chief Executive Officer
Thomas Baker
57
Senior Vice President, Chief Financial Officer and Treasurer
Patricia Gallup is our co-founder and has served as Chair of our Board of Directors since September 1994, and as Chief Administrative Officer since August 2011. Ms. Gallup has served as a member of our executive management team since 1982.
Timothy McGrath has served as our Chief Executive Officer since August 2011, and as President since May 2010. Mr. McGrath has served as a member of our executive management team since he joined the Company in 2005.
Thomas Baker has served as our Chief Financial Officer and as a member of our executive management team since he joined the Company in March 2019. Prior to joining the Company, Mr. Baker had served as Corporate Vice President and Chief Financial Officer for the New Markets and Service Group at Applied Materials, Inc., a semiconductor capital equipment company, since 2013.
Code of Business Conduct and Ethics
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 required by this item, which is 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 required by this item, which is 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.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item, which is included under the headings “Certain Relationships and Related Transactions,” “Policies and Procedures for Related Person Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item, which is included under the heading “Principal Accounting Fees and Services” and “Pre-Approval Policies and Procedures” 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(3)
Amended and Restated Certificate of Incorporation of Registrant, as amended.
3.2(5)
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(19)
Description of Securities Registered Under Section 12 of the Exchange Act
10.1(1)*
Form of Registration Rights Agreement among the Registrant, Patricia Gallup, David Hall, and the 1998 PC Connection Voting Trust.
10.2**
2020 Stock Incentive Plan, as amended.
10.3(13)*
Amended and Restated 2007 Stock Incentive Plan, as amended.
10.4**
Amended and Restated 1997 Employee Stock Purchase Plan, as amended.
10.5(4)*
Form of Incentive Stock Option Agreement for 2007 Stock Incentive Plan.
10.6(4)*
Form of Nonstatutory Stock Option Agreement for 2007 Stock Incentive Plan.
10.7(9)*
Amended and Restated Form of Restricted Stock Agreement for Amended and Restated 2007 Stock Incentive Plan.
10.8(9)*
Form of Restricted Stock Unit Agreement for Amended and Restated 2007 Stock Incentive Plan.
10.9(11)
Form of Stock Equivalent Unit Agreement for 2007 Amended and Restated Stock Incentive Plan.
10.10**
Executive Bonus Plan, as amended.
10.11(1)*
Employment Agreement, dated as of January 1, 1998, between the Registrant and Patricia Gallup.
10.12(6)*
Employment Agreement, dated as of May 12, 2008, between the Registrant and Timothy McGrath.
10.13(10)
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.
10.14(16)
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.
10.15(15)
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.
10.16(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.
10.17(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.
10.18(8)
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.
10.19(12)
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.
10.20(7)
Lease between the Merrimack Services Corporation and G&H Post LLC, dated August 11, 2008, for property located at Merrimack, New Hampshire.
10.21(14)
Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3188 Progress Way, Building 11, Wilmington, Ohio.
10.22(17)*
Employment Agreement, dated March 1, 2019, between the Registrant and Thomas Baker
10.23(18)
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
10.24(20)
Form of Restricted Stock Units for 2020 Stock Incentive Plan
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10.25(21)
Third Amendment, dated December 2, 2021, 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.
10.26(22)
Incentive and Retention agreement, dated as of May 3, 2022, by and between PC Connection, Inc. and Timothy McGrath, as amended.
10.27(22)
Incentive and Retention agreement, dated as of May 3, 2022, by and between PC Connection, Inc. and Thomas Baker, as amended.
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 the exhibits filed with the Company’s registration statement (333-63272) on Form S-4 filed under the Securities Act of 1933.
(4) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 10, 2007.
(5) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9, 2008.
(6) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 12, 2008.
(7) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 11, 2008.
(8) 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.
(9) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November 10, 2010.
(10) 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.
(11) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 8, 2012.
(12) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 9, 2014.
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(13) 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.
(14) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 31, 2014.
(15) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on February 16, 2017.
(16) 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.
(17) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 2, 2019.
(18) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October 30, 2019.
(19) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-K, filed on February 6, 2020.
(20) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, filed on March 16, 2021.
(21) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, filed on March 14, 2022.
(22) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 5, 2022.
* Management contract or compensatory plan or arrangement.
** Management contract or compensatory plan or arrangement and submitted electronically herewith.
*** 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, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2021, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020, and (v) Notes to Consolidated Financial Statements.
Attached as Exhibit 104 to this report is the Cover Page Interactive Data File (embedded within the Inline XBRL document).
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 6, 2023
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 6, 2023
/s/ THOMAS C. BAKER
Thomas C. Baker
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March 6, 2023
/s/ PATRICIA GALLUP
Patricia Gallup
Chairman of the Board
March 6, 2023
/s/ DAVID BEFFA-NEGRINI
David Beffa-Negrini
Director
March 6, 2023
/s/ JAY BOTHWICK
Jay Bothwick
Director
March 6, 2023
/s/ BARBARA DUCKETT
Barbara Duckett
Director
March 6, 2023
/s/ JACK FERGUSON
Jack Ferguson
Director
March 6, 2023
/s/ GARY KINYON
Gary Kinyon
Director
March 6, 2023
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PC CONNECTION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No 34 )
F-2
Consolidated Balance Sheets as of December 31, 2022 and 202 1
F-4
Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 20 20
F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 20 20
F-7
Notes to Consolidated Financial Statements
F-8
F-1
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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, 2022 and 2021, the related consolidated statements of income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 6, 2023, 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 Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue — Refer to Notes 1 and 2 to the financial statements
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 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.
● As a reseller, the determination if the Company is 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.
F-2
Table of Contents
● The timing of transfer of control for each distinct performance obligation and the identification 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.
● 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 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 products shipped to the respective contract or customer purchase order if applicable and evidence of transfer of control.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 6, 2023
We have served as the Company's auditor since 1984
F-3
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PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
December 31,
2022
2021
ASSETS
Current Assets:
Cash and cash equivalents
$
122,930
$
108,310
Accounts receivable, net
610,280
607,532
Inventories, net
208,682
206,555
Prepaid expenses and other current assets
11,900
10,016
Total current assets
953,792
932,413
Property and equipment, net
59,171
61,011
Right-of-use assets
7,558
9,579
Goodwill
73,602
73,602
Intangibles, net
4,648
5,868
Other assets
1,055
910
Total Assets
$
1,099,826
$
1,083,383
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$
232,638
$
281,836
Accrued payroll
24,071
30,966
Accrued expenses and other liabilities
53,808
61,830
Total current liabilities
310,517
374,632
Deferred income taxes
17,970
19,278
Noncurrent operating lease liabilities
4,994
6,789
Other liabilities
170
211
Total Liabilities
333,651
400,910
Stockholders’ Equity:
Common Stock, $ .01 par value, 100,000 shares authorized, 29,123 and 29,025 issued, 26,350 and 26,252 outstanding at December 31, 2022 and 2021, respectively
291
290
Additional paid-in capital
125,784
122,354
Retained earnings
686,037
605,766
Treasury stock at cost, 2,773 and 2,773 shares at December 31, 2022 and 2021, respectively
( 45,937 )
( 45,937 )
Total Stockholders’ Equity
766,175
682,473
Total Liabilities and Stockholders’ Equity
$
1,099,826
$
1,083,383
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,
2022
2021
2020
Net sales
$
3,124,996
$
2,892,595
$
2,590,290
Cost of sales
2,598,819
2,428,016
2,171,483
Gross profit
526,177
464,579
418,807
Selling, general and administrative expenses
405,625
368,062
345,741
Restructuring and other charges
—
—
992
Income from operations
120,552
96,517
72,074
Other income, net
1,083
5
1,122
Income before taxes
121,635
96,522
73,196
Income tax provision
( 32,416 )
( 26,616 )
( 17,431 )
Net income
$
89,219
$
69,906
$
55,765
Earnings per common share:
Basic
$
3.40
$
2.67
$
2.13
Diluted
$
3.37
$
2.65
$
2.12
Shares used in computation of earnings per common share:
Basic
26,279
26,196
26,157
Diluted
26,443
26,364
26,336
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)
Additional
Common Stock
Paid-In
Retained
Treasury Shares
Shares
Amount
Capital
Earnings
Shares
Amount
Total
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
Stock-based compensation expense
—
—
4,231
—
—
—
4,231
Restricted stock units vested
82
1
( 1 )
—
—
—
—
Shares withheld for taxes paid on stock awards
—
—
( 1,767 )
—
—
—
( 1,767 )
Dividend declaration
—
—
—
( 26,224 )
—
—
( 26,224 )
Net income
—
—
—
69,906
—
—
69,906
Balance - December 31, 2021
29,025
$
290
$
122,354
$
605,766
( 2,773 )
$
( 45,937 )
$
682,473
Stock-based compensation expense
—
—
5,675
—
—
—
5,675
Restricted stock units vested
98
1
( 1 )
—
—
—
—
Shares withheld for taxes paid on stock awards
—
—
( 2,244 )
—
—
—
( 2,244 )
Dividend declaration
—
—
—
( 8,948 )
—
—
( 8,948 )
Net income
—
—
—
89,219
—
—
89,219
Balance - December 31, 2022
29,123
$
291
$
125,784
$
686,037
( 2,773 )
$
( 45,937 )
$
766,175
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,
2022
2021
2020
Cash Flows provided by Operating Activities:
Net income
$
89,219
$
69,906
$
55,765
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
11,978
12,202
13,603
Adjustments to credit losses reserve
3,252
3,307
3,316
Stock-based compensation expense
5,675
4,231
2,668
Deferred income taxes
( 1,308 )
753
( 1,645 )
Gain from life insurance
—
—
( 1,061 )
Loss (gain) on disposal of fixed assets
17
( 36 )
28
Changes in assets and liabilities:
Accounts receivable
( 6,000 )
( 1,318 )
( 63,650 )
Inventories
( 2,127 )
( 65,688 )
( 16,201 )
Prepaid expenses and other current assets
( 1,884 )
1,421
622
Other non-current assets
( 145 )
435
( 398 )
Accounts payable
( 49,056 )
14,814
32,515
Accrued expenses and other liabilities
( 14,732 )
17,727
10,536
Net cash provided by operating activities
34,889
57,754
36,098
Cash Flows used in Investing Activities:
Purchases of equipment and capitalized software
( 9,077 )
( 10,302 )
( 11,033 )
Proceeds from sale of equipment
—
69
—
Proceeds from life insurance
—
1,500
—
Net cash used in investing activities
( 9,077 )
( 8,733 )
( 11,033 )
Cash Flows used in Financing Activities:
Proceeds from short-term borrowings
36,463
—
—
Repayment of short-term borrowings
( 36,463 )
—
—
Purchase of treasury shares
—
—
( 10,222 )
Dividend payments
( 8,948 )
( 34,599 )
( 8,427 )
Issuance of stock under Employee Stock Purchase Plan
—
—
536
Payment of payroll taxes on stock-based compensation through shares withheld
( 2,244 )
( 1,767 )
( 1,357 )
Net cash used in financing activities
( 11,192 )
( 36,366 )
( 19,470 )
Increase in cash and cash equivalents
14,620
12,655
5,595
Cash and cash equivalents, beginning of year
108,310
95,655
90,060
Cash and cash equivalents, end of period
$
122,930
$
108,310
$
95,655
Non-cash Investing and Financing Activities:
Accrued capital expenditures
$
192
$
334
$
442
Dividend declarations
—
—
8,375
Life insurance recorded as receivable
—
—
1,500
Supplemental Cash Flow Information:
Income taxes paid
$
33,687
$
21,465
$
19,441
Interest paid
4
—
—
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 Fortune 1000 Global Solutions Provider that simplifies the IT customer experience, guiding the connection between people and technology. The Company’s dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. The Company provides a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that the Company purchases from manufacturers, distributors, and other suppliers. The Company also offers comprehensive portfolio of managed services and professional services. These services are performed by the Company’s personnel and by third-party providers. The Company’s GlobalServe offering ensures worldwide coverage for the Company’s multinational customers, delivering global procurement solutions through the Company’s network of in-country suppliers in over 150 countries.
The Company operates through three operating segments:
● Connection Enterprise Solutions – serving large enterprise customers
● Connection Business Solutions – serving SMBs
● Connection Public Sector Solutions – serving federal, state, and local government and educational institutions
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. By nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates and assumptions.
Revenue Recognition
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
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generally invoices for its products at the time of shipping, and accordingly there is not a significant financing component included in its arrangements.
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 the Company’s cash equivalents approximates fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance includes a fair value hierarchy that priorities the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
● Level 1: Quoted prices for identical assets or liabilities in active markets;
● Level 2: Observable inputs other than those described as Level 1; and
● Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.
The Company’s money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. It is included as cash equivalents within the Company’s consolidated balance sheet and is categorized as a level 1 measurement.
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 $ 6,862 and $ 4,748 at December 31, 2022 and 2021, respectively.
Accounts Receivable
Accounts 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. 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. The Company assesses collectability by reviewing account receivable on an aggregated basis where similar characteristics exist and on an individual basis when the Company identifies 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.
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Inventories
Inventories (all finished goods) are stated at cost (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.
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 SG&A expenses. Advertising consideration that cannot 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 $ 20,155 , $ 15,827 , and $ 14,021 for the years ended December 31, 2022, 2021, and 2020, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The estimated useful lives of the assets range 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, 2022, 2021 and 2020.
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 right-of-use, or ROU, assets and associated lease liabilities on the balance sheet. Instead, rent will be recognized on a straight-line basis.
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 asset not subject to amortization; and (3) amortizing intangibles,
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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 their respective fair values. No intangible assets impairment was recognized for each of the years ended December 31, 2022, 2021 and 2020.
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 4 % of total net sales in 2022, 2021, and 2020.
Product purchases from Ingram Micro, Inc., TD Synnex Corporation, and Dell Inc. accounted for approximately 23 %, 22 % and 15 % respectively, of the Company’s total product purchases in 2022. Product purchases from Ingram Micro, Inc., TD Synnex Corporation and Dell Inc. accounted for approximately 23 %, 23 % and 12 % respectively, of the Company’s total product purchases in 2021. Product purchases from Ingram Micro, Inc., TD Synnex Corporation and HP Inc. accounted for approximately 21 %, 15 % and 12 % respectively, of the Company’s total product purchases in 2020. No other singular vendor supplied more than 10% of the Company’s total product purchases in 2022, 2021 and 2020. The Company believes that, while it may experience some short-term disruption if products from Ingram Micro, Inc., TD Synnex Corporation, Dell Inc., and HP Inc., or any of these vendors become unavailable to it, alternative sources are available.
Products manufactured by HP Inc. collectively represented approximately 14 %, 15 % and 18 % of the Company’s net sales in 2022, 2021 and 2020, respectively. In the event the Company experiences 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. In the year ended December 31, 2020, the Company undertook actions across the business to lower its cost structure and align its business in an effort to improve its ability to execute its strategy. In connection with these restructuring initiatives, the Company incurred restructuring and related costs of $ 1.0 million for the year ended December 31, 2020. There were no restructuring related costs incurred for the years ended December 31, 2022 or 2021.
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.
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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
2022
2021
2020
Numerator:
Net income
$
89,219
$
69,906
$
55,765
Denominator:
Denominator for basic earnings per share
26,279
26,196
26,157
Dilutive effect of employee stock awards
164
168
179
Denominator for diluted earnings per share
26,443
26,364
26,336
Earnings per share:
Basic
$
3.40
$
2.67
$
2.13
Diluted
$
3.37
$
2.65
$
2.12
For the years ended December 31, 2022, 2021, and 2020, 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.
Recently Issued Financial Accounting Standards
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR, and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate, or SOFR. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022; however, ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 has extended the effective date through December 31, 2024. The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.
2. REVENUE
Nature of Products and Services
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 derives 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.
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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.
Certain of the Company’s larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under 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 accounts 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 ESPs on IT products, both as part of the initial arrangement and separately from the IT products. The Company recognizes revenue related to ESPs as the agent in the transaction because it does not have control over the on-going ESPs service and does not provide any service after the sale. Revenue allocated to ESPs 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 the Company does 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.
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The Company estimates the 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 ESPs. 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.
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 years ended December 31, 2022, 2021 and 2020, along with the segment for each category (in thousands).
For the Year Ended December 31, 2022
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
Total
Notebooks/Mobility
$
473,375
$
462,152
$
221,363
$
1,156,890
Desktops
88,127
165,509
56,804
310,440
Software
147,792
108,243
36,071
292,106
Servers/Storage
103,711
64,622
44,588
212,921
Net/Com Products
98,672
85,611
32,548
216,831
Displays and Sound
118,753
132,269
67,860
318,882
Accessories
133,017
202,452
58,413
393,882
Other Hardware/Services
81,863
103,504
37,677
223,044
Total net sales
$
1,245,310
$
1,324,362
$
555,324
$
3,124,996
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For the Year Ended December 31, 2021
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
Total
Notebooks/Mobility
$
426,022
$
428,868
$
241,146
$
1,096,036
Desktops
87,822
140,468
45,989
274,279
Software
120,104
119,423
39,611
279,138
Servers/Storage
92,922
66,027
37,081
196,030
Net/Com Products
81,681
86,454
34,336
202,471
Displays and Sound
99,474
125,610
59,153
284,237
Accessories
115,048
179,249
44,104
338,401
Other Hardware/Services
75,423
103,360
43,220
222,003
Total net sales
$
1,098,496
$
1,249,459
$
544,640
$
2,892,595
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
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of December 31, 2022 and December 31, 2021 (in thousands):
December 31, 2022
December 31, 2021
Contract liabilities, which are included in "Accrued expenses and other liabilities"
$
4,266
$
8,628
Changes in the contract liability balances during the years ended December 31, 2022 and 2021 are as follows (in thousands):
2022
Balance at December 31, 2021
$
8,628
Cash received in advance and not recognized as revenue
20,626
Amounts recognized as revenue as performance obligations satisfied
( 24,988 )
Balance at December 31, 2022
$
4,266
2021
Balance at December 31, 2020
$
3,509
Cash received in advance and not recognized as revenue
28,114
Amounts recognized as revenue as performance obligations satisfied
( 22,995 )
Balance at December 31, 2021
$
8,628
k
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3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill is held by the Company’s Business Solutions and Enterprise Solutions 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 2022 and 2021, 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 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 above qualitative analysis, the Company determined goodwill was not impaired as of December 31, 2022 and 2021.
The carrying amount of goodwill for the periods presented is detailed below (in thousands):
Balance at December 31, 2022
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
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, 2021
Business
Solutions
Enterprise
Solutions
Public Sector
Solutions
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, 2022, 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 are 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 (in thousands):
December 31, 2022
December 31, 2021
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
8,002
4,198
12,200
6,782
5,418
Total intangible assets
$
16,790
$
12,592
$
4,198
$
16,790
$
11,372
$
5,418
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In 2022, 2021, and 2020, the Company recorded amortization expense of $ 1,220 , $ 1,220 , and $ 1,220 , respectively. The estimated amortization expense relating to intangible assets in each of the five succeeding years and thereafter is as follows (in thousands):
For the Years Ended December 31,
2023
$
1,220
2024
1,220
2025
1,220
2026
538
2027 and thereafter
—
$
4,198
.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
December 31,
2022
2021
Trade
$
561,857
$
568,964
Vendor consideration, returns and other
57,388
47,506
Due from employees
108
105
Total gross accounts receivable
619,353
616,575
Allowances for:
Sales returns
( 3,806 )
( 4,218 )
Credit losses
( 5,267 )
( 4,825 )
Accounts receivable, net
$
610,280
$
607,532
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
December 31,
2022
2021
Computer software, including licenses and internally-developed software
$
87,645
$
96,264
Furniture and equipment
39,316
37,040
Leasehold improvements
8,964
8,668
Total
135,925
141,972
Accumulated depreciation and amortization
( 76,754 )
( 80,961 )
Property and equipment, net
$
59,171
$
61,011
The Company recorded depreciation and amortization expense for property and equipment of $ 10,758 , $ 10,982 , and $ 12,383 in 2022, 2021, and 2020, respectively.
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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 assets as of December 31, 2022 was $ 1,130 and a corresponding lease liability of $ 1,130 associated with related party leases.
As of December 31, 2022, 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. Refer to the following table for quantitative information related to the Company’s leases for the year ended December 31, 2022 and 2021 (dollars in thousands):
Year Ended December 31, 2022
Related Parties
Others
Total
Lease Cost
Capitalized operating lease cost
$
1,253
$
2,821
$
4,074
Short-term lease cost
428
121
549
Total lease cost
$
1,681
$
2,942
$
4,623
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
$
1,253
$
2,846
$
4,099
Weighted-average remaining lease term (in years):
Capitalized operating leases
0.92
4.03
3.60
Weighted-average discount rate:
Capitalized operating leases
3.92 %
4.05 %
4.03 %
Year Ended December 31, 2021
Related Parties
Others
Total
Lease Cost
Capitalized operating lease cost
$
1,253
$
3,021
$
4,274
Short-term lease cost
426
92
518
Total lease cost
$
1,679
$
3,113
$
4,792
Other Information
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:
Operating cash flows
$
1,253
$
3,128
$
4,381
Weighted-average remaining lease term (in years):
Capitalized operating leases
1.92
4.46
3.89
Weighted-average discount rate:
Capitalized operating leases
3.92 %
3.92 %
3.92 %
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As of December 31, 2022, future lease payments over the remaining term of capitalized operating leases were as follows (in thousands):
For the Years Ended December 31,
Related Parties
Others
Total
2023
$
1,312
$
2,097
$
3,409
2024
163
1,697
1,860
2025
163
1,635
1,798
2026
163
952
1,115
2027
1
232
233
Thereafter
—
342
342
$
1,802
$
6,955
$
8,757
Imputed interest
( 593 )
Lease liability balance at December 31, 2022
$
8,164
As of December 31, 2022, the ROU asset had a balance of $ 7,558 . The long-term lease liability was $ 4,994 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,170 .
As of December 31, 2021, the ROU asset had a balance of $ 9,579 . The long-term lease liability was $ 6,789 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,422 .
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following (in thousands):
December 31,
2022
2021
Customer and vendor deposits
$
32,594
$
33,429
Sales tax
2,816
10,471
Short term lease liability
3,170
3,422
Other
15,228
14,508
Accrued expenses and other liabilities
$
53,808
$
61,830
8. GAIN ON LIFE INSURANCE
The Company 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 $ 274 and $ 200 as of December 31, 2022 and December 31, 2021 respectively.
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. After the death of Mr. Hall, $ 1,500 was recorded as receivable on the Company’s balance sheet in 2020. The difference between the total insurance proceeds and the cash surrender value of the policies was $ 1,061 , which was recorded as non-operating income for the year ended December 31, 2020. The life insurance proceeds were received in 2021, which are not subject to federal or state income taxes.
9. BANK BORROWINGS
The Company has a $ 50,000 credit facility collateralized by its account receivables that expires March 31, 2025 . This facility can be increased, at the Company’s option, to $ 80,000 for permitted acquisitions or other uses authorized by
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the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on the Company’s funded debt ratio, or in the absence of LIBOR, the prime rate ( 7.50 % at December 31, 2022). 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 Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges, or Adjusted EBITDA. The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in the Company’s consolidated Adjusted EBITDA could limit its potential borrowing capacity under the credit facility. During 2022, the Company borrowed an aggregate of $ 36,463 under the credit facility during the year ended December 31, 2022, which was fully repaid prior to December 31, 2022. The Company had no outstanding bank borrowings as of December 31, 2022 or 2021, and accordingly, the entire $ 50,000 facility was available for borrowings under the credit facility. As of December 31, 2022, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.
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 as of December 31, 2022 or 2021.
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. In November 2022, the Company’s Board approved a $ 25.0 million increase to the Company’s existing share repurchase authorization, bringing the aggregate size of the share repurchase program to $ 80.0 million as of December 31, 2022. There is no fixed termination date for this repurchase program. Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. The timing and amount of any share repurchases will be based on market conditions and other factors.
There were no share repurchases during the years ended December 31, 2022 and 2021. The Company repurchased 247 shares for $ 10.2 million during the year ended December 31, 2020 under Board-authorized repurchase programs. As of December 31, 2022, 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 $ 37.7 million.
Dividend Payments
The following table summarizes the Company’s special cash dividends declared in the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data):
2022
2021
2020
Dividend per share
$
0.34
$
1.00
$
0.32
Stockholder record date
12/05/2022
11/18/2021
1/12/2021
Total dividend
$
8,948
$
26,224
$
8,375
Payment date
12/23/2022
12/03/2021
1/29/2021
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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 up to 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. In May 2022, the Company’s stockholders approved an amendment to the 2020 Plan, which authorized the issuance of 1,003 shares of common stock. As of December 31, 2022, there were 119 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. In May 2022, the Board adopted and the Company’s stockholders approved an amendment to the Purchase Plan, which reserved an aggregate of 1,303 shares of common stock for issuance under the Purchase Plan, of which 1,200 shares have been purchased as of December 31, 2022.
Accounting for Share-Based Compensation
The Company measures the grant date fair value of equity awards given to employees and recognizes that cost, adjusted for forfeitures, over the period that services are performed. The Company values grants with multiple vesting periods as a single award, estimates expected forfeitures based upon historical patterns of employee turnover, and records share-based compensation as a component of SG&A expenses.
The following table summarizes the share-based compensation expenses included in the consolidated statements of net income (in thousands):
2022
2021
2020
Pre-tax expense for nonvested units
$
5,675
$
4,231
$
2,668
Tax benefit
( 1,512 )
( 1,167 )
( 635 )
Net effect on net income
$
4,163
$
3,064
$
2,033
In 2022, 2021, and 2020, the Company issued nonvested stock units that settle in stock and vest over periods of up to four years . Recipients of nonvested stock units do not possess stockholder rights. The fair value of nonvested stock
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units is based on the end of day market value of the Company’s common stock on the grant date. The following table summarizes the Company’s nonvested stock unit activity in 2022 (shares in thousands):
Nonvested Stock Units
Weighted-Average
Grant Date
Shares
Fair Value
Nonvested at January 1, 2022
509
$
36.98
Granted
184
53.50
Vested
( 142 )
37.28
Canceled
( 16 )
41.99
Nonvested at December 31, 2022
535
42.44
The weighted-average grant-date fair value of nonvested stock units granted in 2022, 2021 and 2020 was $ 53.50 , $ 46.02 and $ 44.31 , respectively. The total fair value of nonvested stock units that vested in 2022, 2021, and 2020 was $ 7,202 , $ 5,529 , and $ 4,044 , respectively. Unearned compensation cost related to the nonvested portion of outstanding nonvested stock units was $ 20,914 as of December 31, 2022, and is expected to be recognized over a weighted-average period of approximately 3.3 years. The aggregate intrinsic value of the nonvested stock units at December 31, 2022, which is calculated based on the positive difference between the fair value of the Company’s stock on December 31, 2022 and the grant price of the underlying awards, was $ 25,093 .
Stock Equivalent Units
The Company has also previously issued stock equivalent units, or 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.
2022
2021
2020
Units issued
—
—
—
Compensation expense
$
—
$
425
$
840
11. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
Years Ended December 31,
2022
2021
2020
Current:
Federal
$
25,483
$
18,450
$
13,350
State
8,200
7,413
5,726
Total current
33,683
25,863
19,076
Deferred:
Federal
( 743 )
655
( 1,108 )
State
( 524 )
98
( 537 )
Total deferred
( 1,267 )
753
( 1,645 )
Provision for income taxes
$
32,416
$
26,616
$
17,431
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The components of the deferred taxes as of December 31, 2022 and 2021 are as follows (in thousands):
2022
2021
Deferred tax assets:
Allowance for credit losses
$
1,349
$
1,266
Inventory costs capitalized for tax purposes
227
254
Inventory valuation reserves
57
402
Sales return reserves
140
164
Deductible expenses, primarily employee-benefit related
79
18
Accrued compensation
2,249
2,792
Operating lease liability
2,084
2,668
Other
632
1,399
Qualified research expenses
598
—
Compensation under non-statutory stock option agreements
1,281
866
State tax loss carryforwards
1,151
1,411
Total gross deferred tax assets
9,847
11,240
Less: Valuation allowance
( 1,064 )
( 1,174 )
Net deferred tax assets
8,783
10,066
Deferred tax liabilities:
Goodwill and other intangibles
( 13,990 )
( 14,243 )
Property and equipment
( 10,572 )
( 12,552 )
Right-of-use assets
( 1,930 )
( 2,503 )
Prepaid expenses
( 261 )
( 46 )
Total gross deferred tax liabilities
( 26,753 )
( 29,344 )
Net deferred tax liability
$
( 17,970 )
$
( 19,278 )
Current deferred tax assets
$
—
$
—
Noncurrent deferred tax liability
( 17,970 )
( 19,278 )
Net deferred tax liability
$
( 17,970 )
$
( 19,278 )
The Company has deferred tax assets from state net operating loss carryforwards aggregating $ 1,457 as of December 31, 2022 representing state tax benefits, net of federal taxes, of approximately $ 1,151 . These loss carryforwards are subject to five , fifteen , or twenty-year carryforward periods, with $ 2 expiring in 2023, $ 4 expiring in 2024, $ 4 expiring in 2025, $ 33 expiring in 2026, $ 7 expiring in 2027, $ 1,210 expiring beyond 2027, and $ 197 with no expiration. The Company has provided valuation allowances of $ 1,064 and $ 1,174 as of December 31, 2022 and 2021, respectively, against the state tax loss carryforwards, representing the portion of carryforward losses that the Company believes are not likely to be realized. The net change in the total valuation allowance reflects a $ 110 decrease and a $ 232 increase in 2022 and 2021, respectively.
A reconciliation of the Company’s 2022, 2021, and 2020 income tax provision to total income taxes at the statutory federal tax rate is as follows (in thousands):
2022
2021
2020
Federal income taxes, at statutory tax rate
$
25,543
$
20,270
$
15,378
State income taxes, net of federal benefit
5,954
5,954
3,987
Nondeductible expenses
928
645
365
Tax credits
—
—
( 2,093 )
Other, net
( 9 )
( 253 )
( 206 )
Income tax provision
$
32,416
$
26,616
$
17,431
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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 2018 -2021 remain open to examination by the major state taxing jurisdictions in which the Company files. The tax years 2019-2021 remain open to examination by the Internal Revenue Service.
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 the Company’s liability for unrecognized income tax benefits. The Company did no t recognize any interest and penalties for the years ended December 31, 2022, 2021 or 2020.
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 2022, 2021, and 2020. The Company made matching contributions to the employee savings element of such plan of $ 6,517 , $ 5,951 , and $ 5,656 in 2022, 2021, and 2020, respectively.
13. COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is subject to various legal proceedings and claims, which have arisen during the ordinary course of business. In the opinion of the Company’s management, the outcome of such matters is not expected to have a material effect on the Company’s 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 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 the Company’s 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, or CODM, to assess performance and allocate resources determines the basis for the Company’s operating segments. The Company’s CODM is its Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
The Company’s operations are organized under three reporting segments—the Business Solutions segment, which serves primarily SMBs; 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, IT, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. The Company reports these charges to the operating segments as “Allocations.” Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.
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Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the years ended December 31, 2022, 2021, and 2020 is shown below (in thousands):
Years Ended December 31,
2022
2021
2020
Net sales:
Business Solutions
$
1,245,311
$
1,098,496
$
966,032
Enterprise Solutions
1,324,361
1,249,459
1,115,569
Public Sector Solutions
555,324
544,640
508,689
Total net sales
$
3,124,996
$
2,892,595
$
2,590,290
Operating income (loss):
Business Solutions
$
79,475
$
43,783
$
32,351
Enterprise Solutions
53,477
74,653
59,382
Public Sector Solutions
1,105
( 4,928 )
( 2,763 )
Headquarters/Other
( 13,505 )
( 16,991 )
( 16,896 )
Total operating income
120,552
96,517
72,074
Other income, net
1,083
5
1,122
Income before taxes
$
121,635
$
96,522
$
73,196
Selected operating expense:
Depreciation and amortization:
Business Solutions
$
661
$
655
$
636
Enterprise Solutions
1,992
2,408
2,771
Public Sector Solutions
78
62
60
Headquarters/Other
9,247
9,077
10,136
Total depreciation and amortization
$
11,978
$
12,202
$
13,603
Total assets:
Business Solutions
$
445,698
$
401,624
Enterprise Solutions
660,374
645,938
Public Sector Solutions
84,939
84,787
Headquarters/Other
( 91,185 )
( 48,966 )
Total assets
$
1,099,826
$
1,083,383
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, 2022. 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 $ 43,679 and $ 39,390 for the years ended December 31, 2022 and 2021, 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 2022, 2021, and 2020 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 2022, 2021, and 2020. All of the Company’s assets as of December 31, 2022 and 2021 were located in the United States. The Company’s primary target customers are SMBs, medium-to-large businesses, and federal, state, and local government agencies and educational institutions.
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PC CONNECTION, INC. AND SUBSIDIARIES
SCHEDULE II—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, 2020
$
3,466
29,435
( 28,887 )
$
4,014
Year Ended December 31, 2021
$
4,014
32,635
( 32,431 )
$
4,218
Year Ended December 31, 2022
$
4,218
35,161
( 35,573 )
$
3,806
Allowance for Credit Losses
Year Ended December 31, 2020
$
2,202
3,316
( 110 )
$
5,408
Year Ended December 31, 2021
$
5,408
3,307
( 3,890 )
$
4,825
Year Ended December 31, 2022
$
4,825
3,252
( 2,810 )
$
5,267
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