PC CONNECTION, INC. AND RESULTS OF OPERATIONS
Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry's rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "could," "expect," "believe," "estimate," "anticipate," "continue," "seek," "plan," "intend," or similar terms, variations of such terms, or the negative of those terms.
We cannot assure investors that our assumptions and expectations will prove to
have been correct. Because forward-looking statements relate to the future, they
are subject to inherent uncertainties, risks, and changes in circumstances that
are difficult to predict. These statements involve known and unknown risks,
uncertainties and other factors, including the effects of the coronavirus
pandemic ("COVID-19") and successful integration of our new Enterprise Resource
Planning ("ERP") system on our business, financial condition, and results of
operations, that may cause our actual results, performance, or achievements to
be materially different from any future results, performance, or achievements
expressed or implied by the forward-looking statements. We therefore caution you
against undue reliance on any of these forward-looking statements. Important
factors that could cause our actual results to differ materially from those
indicated or implied by forward-looking statements include those discussed in
Item 2. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in this Quarterly Report on Form 10-Q and in Item 1A. "Risk
Factors" in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 . Any forward-looking statement made by us in this Quarterly
Report on Form 10-Q speaks only as of the date on which this Quarterly Report on
Form 10-Q was first filed. We undertake no intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise, except as may be required by law.
OVERVIEW
We are a leading solutions provider of a wide range of information technology,
or IT, solutions. We help our customers design, enable, manage, and service
their IT environments. We provide IT products, including computer systems,
software and peripheral equipment, networking communications, and other products
and accessories that we purchase from manufacturers, distributors, and other
suppliers. We also offer services involving design, configuration, and
implementation of IT solutions. These services are performed by our personnel
and by third-party service providers. We operate through three sales segments:
(a) the Business Solutions segment, which serves small- to medium-sized
businesses, through our PC Connection Sales subsidiary, (b) the Enterprise
Solutions segment, which serves large enterprise customers, through our
MoreDirect subsidiary, and (c) the Public Sector segment, which serves federal,
state, and local governmental and educational institutions, through our
GovConnection subsidiary.
We generate sales through (i) outbound telemarketing and field sales contacts by
sales representatives focused on the business, educational, healthcare, and
government markets, (ii) our websites, and (iii) direct responses from customers
responding to our advertising media. We seek to recruit, retain, and increase
the productivity of our sales personnel through training, mentoring, financial
incentives based on performance, and updating and streamlining our information
systems to make our operations more efficient.
As a value-added reseller in the IT supply chain, we do not manufacture IT
hardware or software. We are dependent on our suppliers-manufacturers and
distributors that historically have sold only to resellers rather than directly
to end users. However, certain manufacturers have, on multiple occasions,
attempted to sell directly to our customers, and in some cases, have restricted
our ability to sell their products directly to certain customers, thereby
attempting to eliminate our role. We believe that the success of these direct
sales efforts by suppliers will depend on their ability to meet our
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customers' ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of ourTechnical Solutions Group , we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment. The primary challenges we continue to face in effectively managing our business, especially in the current economic environment, are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels. To support future growth, we have expanded, and expect to continue to expand, our IT solutions business, which requires the addition of highly-skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted. Market and economic conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands. Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality. In the second quarter of 2020, we deployed a new ERP system, which was the result of a multi-year planning and implementation process. The implementation was substantially completed during the second quarter and we continue to work toward complete integration with our business processes and ultimately expect the new ERP system to improve business performance by automating certain manual processes and standardizing business practices. EFFECTS OF COVID-19
InDecember 2019 , a novel coronavirus disease was reported, and inJanuary 2020 , theWorld Health Organization ("WHO") declared it a Public Health Emergency of International Concern. OnFebruary 28, 2020 , theWHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries. OnMarch 11, 2020 , theWHO characterized COVID-19 as a global pandemic. National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home. Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country. We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We have also evaluated the potential impact of the pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.
The COVID-19 pandemic has resulted in adverse economic conditions that are
impacting, and may continue to impact, our business and the businesses of our
suppliers and customers. Although the extent and duration of the impact of the
COVID-19 pandemic on our business and operations and the business and operations
of our suppliers and
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customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions have and may continue to materially adversely impact our business, financial condition, results of operations and cash flows.
The COVID-19 pandemic has caused material disruptions to our business and operations and could cause further material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected. In addition, the COVID-19 pandemic has caused, and may continue to cause, material disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations. In our opinion, customerswho operate within the hospitality, airline, and retail industries are likely to be most adversely affected. We have experienced, and may continue to experience, decreases in orders as a result of the pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future. We also experienced, and may continue to experience, delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether. As a result, we have increased our customer allowance for doubtful accounts by$3.3 million in the nine months endedSeptember 30, 2020 . As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future. However, we continue to monitor the effects on our customers, suppliers, and the economy as a whole and will adjust our business practices, as necessary, to respond to the changing demand for, and supply
of, our products. See the important information in Item 1A. Risk Factors below, under the caption "The spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows." RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2020 2019 2020 2019
Net sales $ 652.8 $ 729.4 $ 1,914.6 $ 2,103.4
Gross profit $ 107.8 $ 118.9 $ 309.9 $ 335.2
Gross margin 16.5 % 16.3 % 16.2 % 15.9 %Selling, general and administrative expenses 13.3 % 11.8 %
13.4 % 12.0 % Income from operations 3.2 % 4.5 % 2.7 % 3.9 % Net sales of$652.8 million for the third quarter of 2020 reflected a decrease of$76.6 million compared to the third quarter of 2019, which was driven by lower net sales across all of our business segments, primarily as a result of the decline in macroeconomic conditions due to the COVID-19 pandemic compared with the prior year. While we continue to supply our customers with necessary technologies to implement work-from-home strategies, remote learning capabilities, and assist on the front lines of the COVID-19 pandemic fight, the impact of the shrinking economy over the course of the year has been felt by customers across our business and caused a significant reduction in demand for our products. Included in net sales for the three months endedSeptember 30, 2020 was$0.9 million of revenue related to the correction of errors in the second quarter operating results. Gross profit decreased year-over-year by$11.0 million , primarily due to the decline in net sales, partially offset by a$3.2 million reduction to cost of sales related to the correction of errors in the second quarter operating results. SG&A expenses increased by$0.5 million ,
driven primarily
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by increased professional service fees of $3.2 million resulting from the
deployment of our new ERP system and increased depreciation expense of $0.7
million . These increases were partially offset by lower product marketing and
advertising expenses of $2.2 million and a decrease in personnel costs of $1.1
million associated with reduced headcount and lower variable compensation.
Operating income in the third quarter of 2020 decreased year-over-year both in
dollars and as a percentage of net sales by $11.6 million and 125 basis points,
respectively, primarily as a result of the decrease in net sales.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and
product mix:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Sales Segment
Enterprise Solutions 40 % 38 % 43 % 41 %
Business Solutions 35 38 37 38
Public Sector Solutions 25 24 20 21
Total 100 % 100 % 100 % 100 %
Product Mix
Notebooks/Mobility 31 % 30 % 31 % 29 %
Desktops 10 13 10 12
Software 12 11 11 12
Servers/Storage 9 8 9 9
Net/Com Products 10 7 8 7
Displays and Sound 8 10 8 9
Accessories 13 12 14 13
Other Hardware/Services 7 9 9 9
Total 100 % 100 % 100 % 100 %
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Sales Segment
Enterprise Solutions 14.8 % 15.1 % 14.5 % 14.8 %
Business Solutions 20.2 19.0 19.4 18.8
Public Sector Solutions 14.1 13.9 13.8 12.9
Total 16.5 % 16.3 % 16.2 % 15.9 %
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Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2020 2019 (1) 2020 2019 (1)
Personnel costs $ 64.8 $ 65.9 $ 191.2 $ 191.4
Advertising 2.4 4.6 9.8 14.2
Facilities operations 2.0 2.1 6.4 6.5Service contracts/subscriptions 4.0 3.1 10.9
9.2
Professional fees 5.9 2.7 12.5 8.1
Credit card fees 1.7 1.6 4.5 4.7
Depreciation and amortization 3.8 3.1 10.3 10.2
Other 2.2 3.1 11.0 7.8
Total SG&A expense $ 86.8 $ 86.2 $ 256.6 $ 252.1
Percentage of net sales 13.3 % 11.8 % 13.4 % 12.0 %
Operating expenses were separated into additional categories in 2020. Certain (1) prior-year balances have been classified to conform with the new
presentation.
Restructuring and other charges
In the second quarter of 2020, we undertook a number of actions across our business to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred restructuring and other costs of$1.0 million in the second quarter of 2020, which were related to an involuntary reduction in workforce across our business segments and included cash severance and other related termination benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses and other liabilities atSeptember 30, 2020 . There were no restructuring and other charges recorded in the third quarter of 2020 or 2019. Year-Over-Year Comparisons
Three Months Ended
Changes in net sales and gross profit by segment are shown in the following
table:
Three Months Ended September 30,
2020 2019
% of % of %
($ in millions) Amount Net Sales Amount Net Sales Change
Net Sales :
Enterprise Solutions $ 259.8 39.8 % $ 278.3 38.2 % (6.6) %
Business Solutions 231.0 35.4 273.8 37.5 (15.6)
Public Sector Solutions 162.0 24.8 177.3 24.3 (8.6)
Total $ 652.8 100.0 % $ 729.4 100.0 % (10.5) %
Gross Profit:
Enterprise Solutions $ 38.4 14.8 % $ 42.1 15.1 % (8.8) %
Business Solutions 46.6 20.2 52.1 19.0 (10.6)
Public Sector Solutions 22.8 14.1 24.7 13.9 (7.7)
Total $ 107.8 16.5 % $ 118.9 16.3 % (9.3) %
Net sales decreased in the third quarter of 2020 compared to the third quarter of 2019, as explained below:
Net sales of
? decrease of
net sales across the majority of our product offerings primarily as
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a result of the deterioration in macroeconomic conditions in the third quarter
of 2020.
impact of which was felt by our customers and business partners and was
reflected in our financial results. We experienced decreases in net sales of
notebooks/mobility products, displays and sound products, accessory products,
and desktop products of
million, respectively. Net sales of net/com products increased by
year-over-year, primarily due to the timing of large project rollouts. Net sales of$231.0 million for the Business Solutions segment reflect a
decrease of
Segment, which primarily serves the small- and medium-sized business sector,
has been heavily impacted by the deterioration in macroeconomic conditions and
drove the significant decrease in net sales year-over-year. We experienced a
? decrease in net sales of desktop products of
products of
products of
million. Also included in net sales for the three months ended
2020 was
2020 operating results.
Net sales of
decrease of
The decrease in net sales was primarily driven by a deterioration in
macroeconomic conditions and strong comparative results in the same quarter a
year ago. Though we experienced decreases across the majority of our product
? lines, including desktop products of
software and notebooks/mobility products grew by
respectively. Also included in net sales for the three months ended September
30, 2020 was a decrease of
the second quarter 2020 operating results.
Gross profit for the third quarter of 2020 decreased year-over-year in dollars, but increased as a percentage of net sales (gross margin), as explained below:
Gross profit for the Enterprise Solutions segment decreased primarily as a
result of the 6.6% decrease in net sales year-over-year and fluctuations in
customer and hardware product mix. Partially offsetting the decrease in gross
profit period-over-period was
? three months ended
reduction to cost of sales, related to the correction of errors in the second
quarter 2020 operating results. The decrease in net sales year-over-year and
the change in customer and hardware product mix also explains the decrease in
gross margin of 30 basis points in the current quarter.
Gross profit for the Business Solutions segment decreased year-over-year due
primarily to a 15.6% decrease in net sales. Partially offsetting the decrease
in gross profit period-over-period was
in the three months ended
? million reduction to cost of sales, related to the correction of errors in the
second quarter 2020 operating results. Gross margin increased by approximately
120 basis points, driven, in part, by a higher percentage of our software sales
in the quarter being reported on a net basis and by the out of period
adjustments of
recorded in the current period.
Gross profit for the Public Sector Solutions segment decreased as a result of a
8.6% decrease in net sales. Partially offsetting the decrease in gross profit
period-over-period was
months ended
? to cost of sales, related to the correction of errors in the second quarter
2020 operating results. Gross margin improved slightly by 20 basis points
year-over-year and benefitted from a higher percentage of our software sales in
the current period being reported on a net basis, along with the out of period
adjustments of
recorded in the current period.
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Selling, general and administrative expenses increased in dollars and as a
percentage of net sales in the third quarter of 2020 compared to the prior year
quarter. SG&A expenses attributable to our three segments and the remaining
unallocated Headquarters/Other group expenses are summarized in the table below:
Three Months Ended September 30,
2020 2019
% of % of
Segment Net Segment Net %
($ in millions) Amount Sales Amount Sales Change
Enterprise Solutions $ 23.6 9.1 % $ 25.8 9.3 % (8.5) %
Business Solutions 37.8 16.4 38.6 14.1 (2.1)
Public Sector Solutions 19.6 12.1 17.5 9.9 12.0
Headquarters/Other, unallocated 5.8 4.3 34.9
Total $ 86.8 13.3 % $ 86.2 11.8 % 0.7 %
SG&A expenses for the Enterprise Solutions segment decreased in dollars and as
a percentage of net sales. The year-over-year change in SG&A dollars was
attributable to decreased personnel costs of
a reduction in headcount and lower variable compensation expense associated
? with lower gross profit, along with lower product marketing and advertising
expenses of
for the Enterprise Solutions segment in the third quarter of 2020, which reflects a decrease of 20 basis points and is a result of cost savings associated with lower net sales that outpaced the decrease in net sales.
SG&A expenses for the Business Solutions segment decreased in dollars and
increased as a percentage of net sales. The year-over-year change in SG&A
dollars was driven primarily by lower product marketing and advertising
expenses of
period-over-period as a result of a reduction in headcount and lower variable
compensation expense associated with lower gross profit. Also contributing to
? the decrease in the current quarter were lower credit card fees of
million. These decreases were partially offset by increases in the use of
Headquarter services of
and consulting fees primarily associated with the deployment of our new ERP
system. SG&A expenses as a percentage of net sales was 16.4% for the Business
Solutions segment in the third quarter of 2020, which reflects an increase of
230 basis points and is a result of lower net sales in the quarter compared
with the same period a year ago.
SG&A expenses for the Public Sector Solutions segment increased in dollars and
as a percentage of net sales. Personnel costs increased by
year-over-year, mainly driven by increases in variable compensation, and an
increase in the use of Headquarter services of
increased contractor and consulting fees primarily associated with the
? deployment of our new ERP system. Credit card fees also increased by
million year-over-year. SG&A expenses as a percentage of net sales was 12.1%
for the Public Sector Solutions segment in the third quarter of 2020, which
reflects an increase of 220 basis points. This increase year-over-year is
primarily attributable to lower net sales in the quarter compared with the same
period a year ago.
SG&A expenses for the Headquarters/Other group increased primarily as a result
of a
associated with the deployment of our new ERP system and an increase of
million in service contracts. Depreciation expense also increased by
million year-over-year. These increases were partially offset by a reduction in
? the allocation of Headquarter services of
The Headquarters/Other group provides services to the three segments in areas
such as finance, human resources, IT, marketing, and product management. Most
of the operating costs associated with such corporate Headquarters services are
charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs. Income from operations for the third quarter of 2020 decreased to$21.1 million , compared to$32.7 million for the third quarter of 2019, primarily due to the decreases in net sales and gross profit, along with increased SG&A expenses. Income from operations as a percentage of net sales was 3.2% for the third quarter of 2020, compared to 4.5% of net sales for the prior year quarter, primarily as a result of the decrease in net sales and increase in SG&A expenses. 20 Table of Contents
Our provision for income taxes in the three months endedSeptember 30, 2020 was$4.1 million , which included$1.7 million of discrete items mainly related
to R&D tax credits. Net income for the third quarter of 2020 decreased to$16.9 million , compared to$23.8 million for the third quarter of 2019, primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the third quarter of 2020, as compared to the third quarter of 2019.
Nine Months Ended
Changes in net sales and gross profit by segment are shown in the following
table (dollars in millions):
Nine Months Ended September 30,
2020 2019
% of % of %
($ in millions) Amount Net Sales Amount Net Sales Change
Net Sales :
Enterprise Solutions $ 839.9 43.9 % $ 872.0 41.5 % (3.7) %
Business Solutions 700.9 36.6 797.7 37.9 (12.1)
Public Sector Solutions 373.8 19.5 433.7 20.6 (13.8)
Total $ 1,914.6 100.0 % $ 2,103.4 100.0 % (9.0) %
Gross Profit:
Enterprise Solutions $ 122.0 14.5 % $ 129.1 14.8 % (5.5) %
Business Solutions 136.3 19.4 150.1 18.8 (9.2)
Public Sector Solutions 51.6 13.8 56.0 12.9 (7.9)
Total $ 309.9 16.2 % $ 335.2 15.9 % (7.5) %
Net sales decreased for the nine months ended
Net sales of$839.9 million for the Enterprise Solutions segment reflect a
decrease of
partners face the challenges of the decline in macroeconomic conditions
resulting from COVID-19. Net sales of displays and sound, notebook/mobility,
? desktop, and software products decreased year-over-year by
million,
partially offset by increases in net/com and server/storage products of
million and
large project rollouts. Net sales of$700.9 million for the Business Solutions segment reflect a decrease of$96.8 million , or 12.1% year-over-year. The majority of the
customers served by our Business Solutions segment are small- to medium-sized
? business, which have been heavily impacted by the decline in macroeconomic
conditions in 2020 resulting from the COVID-19 pandemic. We experienced
declines in net sales across virtually all of our product lines, including
decreases in desktop, software, net/com, and other hardware/services of
million,$17.1 million ,$15.9 million , and$13.2 million , respectively.
Net sales of
by
experienced decreases year-over-year in other hardware and services of
million, primarily as a result of the decline in the current macroeconomic
environment, along with some larger projects with the Federal government in the
? first half of 2019 that did not repeat in the current year. Net sales of
desktop, servers/storage, and software products also decreased by
million,
prior year. These decreases in net sales were partially offset by an increase
in sales of notebooks/mobility products of
orders from educational institutions preparing for and implementing remote
learning capabilities.
Gross profit for the nine months ended
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Gross profit for the Enterprise Solutions segment decreased year-over-year,
? primarily due to the 3.7% decrease in net sales. The decrease in gross margin
of 30 basis points compared with the prior year was driven by fluctuations in
customer and hardware product mix.
Gross profit for the Business Solutions segment decreased as a result of an
? 12.1% decrease in net sales. However, gross margin increased year-over-year by
60 basis points, resulting from higher invoice selling margins and a greater
percentage of our software sales in the current period reported on a net basis.
Gross profit for the Public Sector Solutions segment decreased by
year-over-year, primarily as a result of lower net sales in the current period.
? Gross margin improved by 90 basis points based on changes in customer mix,
improved hardware margins, and a higher percentage of our software sales in the
current period reported on a net basis.
Selling, general and administrative expenses increased in dollars and as a percentage of net sales in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions): Nine Months Ended September 30, 2020 2019 % of % of Segment Net Segment Net % ($ in millions) Amount Sales Amount Sales Change Enterprise Solutions$ 76.6 9.1 %$ 78.2 9.0 % (2.0) % Business Solutions 114.6 16.4 111.6 14.0 2.7 Public Sector Solutions 53.6 14.3 51.3 11.8 4.5 Headquarters/Other, unallocated 11.8 11.0 7.3 Total$ 256.6 13.4 %$ 252.1 12.0 % 1.8 %
SG&A expenses for the Enterprise Solutions segment decreased in dollars, but
increased as a percentage of net sales. The year-over-year change in SG&A
dollars was primarily attributable to a
costs, driven mostly by lower variable compensation expense associated with
lower gross profit, along with a
advertising expense. These changes were partially offset by an increase in the
use of Headquarter services of
? contractor and consulting fees primarily associated with the deployment of our
new ERP system. Bad debt expense also increased period-over-period by
million due to anticipated collection challenges from customers
significantly impacted by the COVID-19 pandemic. SG&A expenses as a percentage
of net sales was 9.1% for the Enterprise Solutions segment in the nine months
ended
are no individually significant drivers of this change period-over-period, but
is primarily attributable to lower net sales compared with the same period a
year ago.
SG&A expenses for the Business Solutions segment increased in both dollars and
as a percentage of net sales. The year-over-year increase in SG&A dollars was
primarily due to a
driven, in part, by an increase in contractor and consulting fees primarily
associated with the deployment of our new ERP system. Bad debt expense also
increased by
? losses from customers
pandemic. These increases were partially offset by decreases in product
marketing and advertising expense, credit card fees, and personnel costs of
percentage of net sales was 16.4% for the Business Solutions segment in the
nine months ended
reflects an increase of 240 basis points year-over-year, resulting from lower
net sales and increased spending compared with the same period a year ago.
SG&A expenses for the Public Sector Solutions segment increased in both dollars
and as a percentage of net sales. The increase in SG&A dollars year-over-year
? was driven by an increase in the usage of Headquarter services of
which included an increase in contractor and consulting fees primarily associated with the deployment of our new ERP system, and an increase in personnel costs of$0.4 million . SG&A expenses as 22 Table of Contents
a percentage of net sales was 14.3% for the Public Sector Solutions segment in
the nine months ended
basis points. This increase year-over-year is primarily attributable to lower
net sales and increased spending compared with the same period a year ago.
SG&A expenses for the Headquarters/Other group increased primarily as a result
of a
associated with the deployment of our new ERP system and an increase of
million in service contracts. Personnel costs also increased by
year-over-year. These increases were partially offset by a reduction in the
? allocation of Headquarter services of
Headquarters/Other group provides services to the three segments in areas such
as finance, human resources, IT, marketing, and product management. Most of the
operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs. Restructuring and other charges in the current year of$1.0 million were incurred in the second quarter of 2020 and related to an involuntary reduction in workforce across our business segments, and included cash severance payments and other related termination benefits. Restructuring and other charges were$0.7 million in the nine months endedSeptember 30, 2019 and related to a reduction in workforce in our Headquarters/Other group, and included cash severance payments and other related benefits. Also included were costs incurred related to the closing of one of our office facilities. Income from operations for the nine months endedSeptember 30, 2020 decreased to$52.3 million , compared to$82.4 million for the nine months endedSeptember 30, 2019 , primarily due to the decreases in net sales and gross profit, along with an increase in SG&A expense year-over-year. Income from operations as a percentage of net sales decreased to 2.7% for the nine months endedSeptember 30, 2020 , compared to 3.9% of net sales for the same period in the prior year, primarily due to the decrease in net sales and increase in SG&A expenses year-over-year. Our provision for income taxes in the nine months endedSeptember 30, 2020 was$12.9 million , which included$1.7 million of discrete items mainly related to R&D tax credits recognized in the third quarter. Net income for the nine months endedSeptember 30, 2020 decreased to$39.5 million , compared to$60.1 million for the nine months endedSeptember 30, 2019 , primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the first three quarters of 2020, as compared to the
first three quarters of 2019.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of businesses. Market conditions impact and help determine our strategic use of funds. We believe that funds generated from operations, together with available credit under our bank line of credit, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.
We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our bank line of credit, as follows:
? Cash on Hand. At
equivalents.
Cash Generated from Operations. We expect to generate cash flows from
? operations in excess of operating cash needs by generating earnings and
managing net changes in inventories and receivables with changes in payables to
generate a positive cash flow.
? Credit Facilities. As of
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The COVID-19 global pandemic has created some uncertainty in financial
liquidity. A number of customers across affected industries have requested
various payment term concessions from us. We have worked closely with our
partners to mitigate the impact these concessions might have on us, but we
expect that these situations may continue to arise as we navigate through this
crisis. In certain cases, our partners have previously provided us with extended
payment terms, which generally returned to their original terms beginning in the
third quarter of 2020.
Our ability to continue funding our planned growth, both internally and
externally, is dependent upon our ability to generate sufficient cash flow from
operations or to obtain additional funds through equity or debt financing, or
from other sources of financing, as may be required. While we do not anticipate
needing any additional sources of financing to fund our operations at this time,
if demand for IT products declines, or our customers continue to be materially
adversely affected by the COVID-19 pandemic, our cash flows from operations may
be substantially affected. See also related risks listed below under "Item1A. "Risk Factors".
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods
indicated:
Nine Months Ended
($ in millions) 2020 2019
Net cash provided by operating activities
(9.6) (20.6)
Net cash used in financing activities (18.8) (12.6)
Increase in cash and cash equivalents
Cash provided by operating activities was$46.4 million in the nine months endedSeptember 30, 2020 . Cash flow provided by operations in the nine months endedSeptember 30, 2020 resulted primarily from net income before depreciation and amortization and an increase in accounts payable, which increased by$48.7 million in the current year and was driven primarily by the timing of payments and, to a lesser extent, extended payment terms from certain vendors. These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in accounts receivable of$42.6 million in the current year, primarily due to the timing of collections and, in some cases, delayed collections from customerswho have received extended payment terms. Our days sales outstanding increased to 73 days atSeptember 30, 2020 , compared to 52 days atSeptember 30, 2019 . Inventory increased from the prior year-end balance due to higher levels of inventory on-hand related to future backlog and an increase in shipments in transit but not received by our customers as ofSeptember 30, 2020 . Inventory turns, which measures the number of times inventory was sold and replaced during the period, decreased to 15 for the third quarter of 2020 compared to 16 turns for the prior year quarter. Operating cash flow in the nine months endedSeptember 30, 2019 resulted primarily from net income before depreciation and amortization, an increase in accrued expenses, and a decrease in prepaid expenses, and partially offset by increases in accounts receivable and inventory. Cash used in investing activities in the nine months endedSeptember 30, 2020 represented$9.6 million of purchases of property and equipment. These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure, particularly related to our new ERP system implementation. In the prior year, we made similar investments with$20.6 million in purchases of property and equipment. Our new ERP system was deployed in the second quarter of 2020, which resulted in fewer capital expenditures in the current year as the project was winding down. Cash used in financing activities in the nine months endedSeptember 30, 2020 consisted primarily of$10.2 million for the repurchase treasury shares and an$8.4 million payment of a special$0.32 per share dividend. In the nine months endedSeptember 30, 2020 , we have purchased 0.2 million shares at an average price of$41.34 , and we are authorized to purchase an additional$12.7 million in shares under our Board-approved repurchase program. In the prior year period, financing activities primarily represented an$8.5 million payment of a special$0.32 per share dividend and$4.4 million for the purchase of treasury shares.
Debt Instruments, Contractual Agreements, and Related Covenants
Below is a summary of certain provisions of our credit facilities and other contractual obligations. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see "Factors
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Affecting Sources of Liquidity" below. For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report.
Bank Line of Credit. Our bank line of credit extends untilFebruary 2022 and is collateralized by our accounts receivable. Our borrowing capacity is up to$50.0 million . Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% atSeptember 30, 2020 ). The one-month LIBOR rate atSeptember 30, 2020 was 0.15%. In addition, we have the option to increase the facility by an additional$30.0 million to meet additional borrowing requirements. Our credit facility is subject to certain covenant requirements which are described below under "Factors Affecting Sources of Liquidity." AtSeptember 30, 2020 ,$50.0 million was available for borrowing under the facility.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations. The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 have not materially changed since the report was filed.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels. These factors may also be adversely impacted by the COVID-19 pandemic. Credit Facility. Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, and other distributions, investments, and liens) with which we and all of our subsidiaries must comply. Our credit facility does not include restrictions on future dividend payments. Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing funds under this line of credit. This credit facility contains two financial covenants:
Our funded debt ratio (defined as the average outstanding advances under the
line for the quarter, divided by our consolidated trailing twelve months
Adjusted EBITDA-earnings before interest expense, taxes, depreciation,
amortization, and special charges-for the trailing four quarters) must not be
? more than 2.0 to 1.0. Our outstanding borrowings under the credit facility
during the nine months ended
funded debt ratio did not limit potential borrowings as of
Future decreases in our consolidated trailing twelve months Adjusted EBITDA,
could limit our potential borrowings under the credit facility.
Our minimum consolidated net worth (defined as our consolidated total assets
less our consolidated total liabilities) must be at least
? 50% of consolidated net income for each quarter, beginning with the quarter
ended
as
equity at that date was$628.3 million . Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not materially changed from those
discussed in our Annual Report on Form 10-K for the year ended
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, "Summary
of Significant Accounting Policies," in the Notes to the Unaudited Condensed
Consolidated Financial Statements included in Item 1 of this Quarterly Report on
Form 10-Q.
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PC CONNECTION, INC. AND SUBSIDIARIES
PART I-FINANCIAL INFORMATION© Edgar Online, source
