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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                  to                 

Commission file number 0-23827

 

 

PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE		02-0513618
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
730 MILFORD ROAD,
MERRIMACK, NEW HAMPSHIRE		03054
(Address of principal executive offices)		(Zip Code)

(603) 683-2000

(Registrant’s telephone number, including area code)

 

 

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares outstanding of the issuer’s common stock as of October 30, 2014 was 26,302,885.

 

 

 

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PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION
				Page
ITEM 1.		Unaudited Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets—September 30, 2014 and December 31, 2013			1
		Condensed Consolidated Statements of Income—Three and nine months ended September 30, 2014 and 2013			2
		Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2014 and 2013			3
		Notes to Unaudited Condensed Consolidated Financial Statements			4
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			8
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			19
ITEM 4.		Controls and Procedures			20
PART II OTHER INFORMATION
ITEM 1A.		Risk Factors			21
ITEM 5.		Other Information			21
ITEM 6.		Exhibits			21
SIGNATURES					23

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands)

 

		September 30, 2014				December 31, 2013
ASSETS
Current Assets:
Cash and cash equivalents		$	66,434			$	42,547
Accounts receivable, net			273,938				283,051
Inventories			82,541				79,141
Deferred income taxes			6,382				6,382
Prepaid expenses and other current assets			4,868				5,117
Income taxes receivable			4,607				2,256
Total current assets			438,770				418,494
Property and equipment, net			27,745				27,600
Goodwill			51,276				51,276
Other intangibles, net			2,178				2,854
Other assets			751				720
Total Assets		$	520,720			$	500,944
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	109,346			$	124,821
Accrued expenses and other liabilities			22,524				22,362
Accrued payroll			18,316				14,935
Total current liabilities			150,186				162,118
Deferred income taxes			16,274				16,224
Other liabilities			2,476				2,773
Total Liabilities			168,936				181,115
Stockholders’ Equity:
Common stock			282				281
Additional paid-in capital			106,149				104,932
Retained earnings			261,215				230,478
Treasury stock, at cost			(15,862	)			(15,862	)
Total Stockholders’ Equity			351,784				319,829
Total Liabilities and Stockholders’ Equity		$	520,720			$	500,944

See notes to unaudited condensed consolidated financial statements.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in thousands, except per share data)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Net sales		$	639,570			$	580,356			$	1,832,574			$	1,643,066
Cost of sales			555,918				503,803				1,592,309				1,425,759
Gross profit			83,652				76,553				240,265				217,307
Selling, general and administrative expenses			63,235				59,043				188,900				174,289
Income from operations			20,417				17,510				51,365				43,018
Interest/other expense, net			(36	)			(39	)			(72	)			(135	)
Income before taxes			20,381				17,471				51,293				42,883
Income tax provision			(8,204	)			(6,882	)			(20,556	)			(17,042	)
Net income		$	12,177			$	10,589			$	30,737			$	25,841
Earnings per common share:
Basic		$	0.46			$	0.40			$	1.17			$	0.99
Diluted		$	0.46			$	0.40			$	1.16			$	0.98
Shares used in computation of earnings per common share:
Basic			26,266				26,169				26,225				26,099
Diluted			26,524				26,399				26,498				26,351

See notes to unaudited condensed consolidated financial statements.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

 

		Nine Months Ended September 30,
		2014				2013
Cash Flows from Operating Activities:
Net income		$	30,737			$	25,841
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,998				5,011
Stock-based compensation expense			702				753
Provision for doubtful accounts			826				727
Deferred income taxes			50				(126	)
Excess tax benefit from exercise of equity awards			(503	)			(228	)
Loss on disposal of fixed assets			—				7
Income tax benefit from stock-based compensation			—				505
Changes in assets and liabilities:
Accounts receivable			8,287				15,592
Inventories			(3,400	)			(6,736	)
Prepaid expenses and other current assets			(2,102	)			(157	)
Other non-current assets			(31	)			(17	)
Accounts payable			(15,430	)			(963	)
Accrued expenses and other liabilities			3,749				1,198
Net cash provided by operating activities			28,883				41,407
Cash Flows from Investing Activities:
Purchases of property and equipment			(5,522	)			(4,943	)
Proceeds from sale of equipment			10				—
Net cash used for investing activities			(5,512	)			(4,943	)
Cash Flows from Financing Activities:
Excess tax benefit from exercise of equity awards			503				228
Exercise of stock options			186				1,654
Issuance of stock under Employee Stock Purchase Plan			360				307
Payment of payroll taxes on stock-based compensation through shares withheld			(533	)			(577	)
Repayment of capital lease obligation to affiliate			—				(802	)
Net cash provided by financing activities			516				810
Increase in cash and cash equivalents			23,887				37,274
Cash and cash equivalents, beginning of period			42,547				39,907
Cash and cash equivalents, end of period		$	66,434			$	77,181
Non-cash Investing Activities:
Accrued capital expenditures		$	290			$	320
Issuance of nonvested stock from treasury			—				403
Supplemental Cash Flow Information:
Income taxes paid		$	22,092			$	17,075

See notes to unaudited condensed consolidated financial statements.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1—Basis of Presentation

The accompanying condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements contained in our Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three and nine months ended September 30, 2014 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2014.

Use of Estimates in the Preparation of Financial Statements

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

Comprehensive Income

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

Recently Issued Financial Accounting Standard

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract, and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for the Company on January 1, 2017. We are currently assessing the potential impact of the adoption of ASU 2014-09 on our financial statements.

 

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Note 2—Earnings Per Share

Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to nonvested stock units and stock options outstanding, if dilutive.

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

 

		Three Months Ended								Nine Months Ended
September 30,		2014				2013				2014				2013
Numerator:
Net income		$	12,177			$	10,589			$	30,737			$	25,841
Denominator:
Denominator for basic earnings per share			26,266				26,169				26,225				26,099
Dilutive effect of employee stock awards			258				230				273				252
Denominator for diluted earnings per share			26,524				26,399				26,498				26,351
Earnings per share:
Basic		$	0.46			$	0.40			$	1.17			$	0.99
Diluted		$	0.46			$	0.40			$	1.16			$	0.98

For the three and nine months ended September 30, 2014 and 2013, we had no outstanding nonvested stock units or stock options that were excluded from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

Note 3—Segment and Related Disclosures

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

Our operations are organized under three reporting segments—the SMB segment, which serves primarily small- and medium-sized businesses; the Large Account segment, which serves primarily medium-to-large corporations; and the Public Sector segment, which serves primarily federal, state, and local governmental and educational institutions. In addition, the Headquarters/Other group provides services in areas such as finance, human resources, information technology, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. 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 our reportable operating segments for the three and nine months ended September 30, 2014 and 2013 is shown below:

 

		Three Months Ended								Nine Months Ended
September 30,		2014				2013				2014				2013
Net sales:
SMB		$	254,432			$	235,285			$	775,959			$	713,157
Large Account			201,979				193,124				625,187				575,671
Public Sector			183,159				151,947				431,428				354,238
Total net sales		$	639,570			$	580,356			$	1,832,574			$	1,643,066
Operating income (loss):
SMB		$	7,133			$	8,201			$	24,510			$	24,236
Large Account			10,879				8,595				28,981				21,870
Public Sector			4,743				2,806				4,552				2,404
Headquarters/Other			(2,338	)			(2,092	)			(6,678	)			(5,492	)
Total operating income		$	20,417			$	17,510			$	51,365			$	43,018
Interest/other expense, net			(36	)			(39	)			(72	)			(135	)
Income before taxes		$	20,381			$	17,471			$	51,293			$	42,883
Selected Operating Expense:
Depreciation and amortization:
SMB		$	1			$	2			$	3			$	4
Large Account			348				528				1,023				1,566
Public Sector			23				45				91				122
Headquarters/Other			1,761				1,100				4,881				3,319
Total depreciation and amortization		$	2,133			$	1,675			$	5,998			$	5,011
Assets at September 30, 2014:
SMB										$	177,969
Large Account											241,554
Public Sector											65,461
Headquarters/Other											35,736
Total assets										$	520,720

The assets of our three operating segments presented above consist primarily of accounts receivable, intercompany receivable, goodwill, and other intangibles. Assets reported under the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, and property and equipment. Total assets for the Headquarters/Other group are presented net of intercompany balances eliminations of $27,309 as of September 30, 2014. Our capital expenditures consist largely of IT hardware and software purchased to maintain or upgrade our management information systems. These systems serve all of our subsidiaries, to varying degrees, and as a result, our CODM does not evaluate capital expenditures on a segment basis.

Note 4—Commitments and Contingencies

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

We are subject to audits by states on sales and income taxes, unclaimed property, employment matters, and other assessments. A comprehensive multi-state unclaimed property audit continues to be in progress. While

 

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management believes that known and estimated unclaimed property liabilities have been adequately provided for, it is too early to determine the ultimate outcome of such audits, as not all formal assessments have been finalized. Additional liabilities for this and other audits could be assessed, and such outcomes could have a material, negative impact on our financial position, results of operations, and cash flows.

Note 5—Bank Borrowing and Trade Credit Arrangements

We have a $50,000 credit facility collateralized by our receivables that expires February 24, 2017. This facility can be increased, at our option, to $80,000 for approved acquisitions or other uses authorized by the lender on substantially the same terms. Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at September 30, 2014). The one-month LIBOR rate at September 30, 2014 was 0.15%. 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. Funded debt ratio is the ratio of average outstanding advances under the credit facility to Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated Adjusted EBITDA could limit our potential borrowings under the credit facility. We had no outstanding bank borrowings at September 30, 2014, and accordingly, the entire $50,000 facility was available for borrowings under the credit facility.

At September 30, 2014, we had security agreements with two financial institutions to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreements allow a collateralized first position in certain branded products in our inventory financed by the financial institutions up to an aggregated amount of $57,000. The cost of such financing under these agreements is borne by the suppliers by discounting their invoices to the financial institutions. We do not pay any interest or discount fees on such inventory. At September 30, 2014 and December 31, 2013, accounts payable included $21,682 and $15,543, respectively, owed to these financial institutions.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 on file with the SEC.

OVERVIEW

We are a direct marketer 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 providers. We operate through three sales segments, which serve primarily: (a) small- to medium-sized businesses, or SMBs, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Large Account segment, through our MoreDirect subsidiary, and (c) federal, state, and local governmental and educational institutions, in our Public Sector segment, through our GovConnection subsidiary.

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

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have on multiple occasions attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our 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 our ProConnection services group we are able to provide customers with 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 are (1) increasing both revenue and gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel.

 

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To support future growth, we are expanding our IT solution 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 significantly as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.

Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest more heavily in our own IT development to meet these new demands. This investment includes significant planned expenditures to update our websites, as buying trends change and electronic commerce continues to grow.

Our investments in IT infrastructure are designed to enable us to operate more efficiently. In the third quarter of 2013, we completed the first phase of a Customer Master Data Management, or MDM, software project, and placed into service $12.0 million of related software and integration costs. Accordingly, depreciation expense will include approximately $2.0 million (or approximately $0.5 million per quarter) related to this project. The Customer MDM software provides us with a more comprehensive view of our customers and serves as a foundation for future IT investments. While we have not yet finalized our decisions regarding to what extent additional software will be acquired, we expect to increase our capital investments in our IT infrastructure, which if fully implemented, would likely exceed $20 million over the next three to five years.

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,		2014				2013				2014				2013
Net sales (in millions)		$	639.6			$	580.4			$	1,832.6			$	1,643.1
Gross margin			13.1	%			13.2	%			13.1	%			13.2	%
Selling, general and administrative expenses			9.9				10.2				10.3				10.6
Income from operations			3.2	%			3.0	%			2.8	%			2.6	%

Net sales in the third quarter of 2014 increased year over year by $59.2 million, or 10.2%, compared to the third quarter of 2013, due to increased sales in all three of our sales segments. Sales increased due to the release of pent-up corporate refresh demand for IT project rollouts that were delayed from 2013. Gross margin (gross profit expressed as a percentage of net sales) was largely unchanged compared to the prior year quarter. SG&A expenses decreased as a percentage of net sales, but increased in dollars due to incremental variable compensation associated with higher gross profits and investments in solution sales and support personnel. Operating income in the third quarter of 2014 increased year over year in both dollars and as a percentage of net sales due to the increase in net sales.

 

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Net Sales Distribution

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

 

		Three Months Ended								Nine Months Ended
September 30,		2014				2013				2014				2013
Business Segment
SMB			40	%			41	%			42	%			43	%
Large Account			31				33				34				35
Public Sector			29				26				24				22
Total			100	%			100	%			100	%			100	%
Product Mix
Notebook/Tablet			22	%			20	%			22	%			19	%
Software			16				15				16				16
Desktop/Server			16				16				16				15
Net/Com Product			9				10				9				10
Video, Imaging & Sound			9				9				9				9
Printer & Printer Supplies			6				7				6				7
Storage			6				6				6				6
Memory & System Enhancement			3				3				3				3
Accessory/Services/Other			13				14				13				15
Total			100	%			100	%			100	%			100	%

Gross 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,		2014				2013				2014				2013
Business Segment
SMB			14.9	%			15.6	%			15.0	%			15.5	%
Large Account			13.1				12.1				12.5				11.6
Public Sector			10.4				10.8				10.6				11.3
Total			13.1	%			13.2	%			13.1	%			13.2	%

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. Direct operating expenses relating to our purchasing function and receiving, inspection, warehousing, packing and shipping, and other expenses of our distribution center are included in our SG&A expenses. Accordingly, our gross margin may not be comparable to those of other entities who include all of the costs related to their distribution network in cost of goods sold. Such distribution costs included in our SG&A expenses were $3.1 million and $3.4 million in the three months ended September 30, 2014 and 2013, respectively, and $10.5 million and $10.1 million for the nine months ended September 30, 2014 and 2013, respectively. Distribution costs as a percentage of net sales for the periods reported are as follows:

 

		Three Months Ended								Nine Months Ended
September 30,		2014				2013				2014				2013
Purchasing/Distribution Center			0.49	%			0.58	%			0.57	%			0.61	%

 

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Operating Expenses

The following table breaks out our more significant SG&A expenses for the periods indicated (dollars in millions):

 

		Three Months Ended								Nine Months Ended
September 30,		2014				2013				2014				2013
Personnel costs		$	48.1			$	44.7			$	142.4			$	129.9
Advertising			3.4				3.7				11.6				13.4
Facilities operations			2.9				2.6				9.0				7.7
Professional fees			1.5				1.8				5.4				5.7
Credit card fees			2.0				2.0				5.8				5.7
Depreciation and amortization			2.1				1.7				6.0				5.0
Other, net			3.2				2.5				8.7				6.9
Total		$	63.2			$	59.0			$	188.9			$	174.3
Percentage of net sales			9.9	%			10.2	%			10.3	%			10.6	%

Year-Over-Year Comparisons

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

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

 

		Three Months Ended September 30,
		2014								2013
		Amount				% of Net Sales				Amount				% of Net Sales				% Change
Sales:
SMB		$	254.4				39.8	%		$	235.3				40.5	%			8.1	%
Large Account			202.0				31.6				193.1				33.3				4.6
Public Sector			183.2				28.6				152.0				26.2				20.5
Total		$	639.6				100.0	%		$	580.4				100.0	%			10.2	%
Gross Profit:
SMB		$	38.1				14.9	%		$	36.7				15.6	%			3.8	%
Large Account			26.5				13.1				23.4				12.1				13.2
Public Sector			19.1				10.4				16.5				10.8				15.9
Total		$	83.7				13.1	%		$	76.6				13.2	%			9.3	%

Net sales increased in all three segments in the third quarter of 2014 compared to the third quarter of 2013, as explained below:

 

•

Net sales for the SMB segment increased due to our focus on growing technical solution sales, which led to increased sales of notebook and desktop/server products.

 

•

Net sales for the Large Account segment increased due to our focus on growing technical solution sales, and the release of pent-up corporate refresh demand for IT project rollouts that were delayed from 2013. Software and desktop/server product sales increased by 31% and 11%, respectively.

 

•

Net sales to the Public Sector segment increased due to a 30% increase in sales to state and local government and educational institutions offset by a 3% decrease in sales to the federal government. Sales of notebooks and tablets increased to K-12 educational customers due to higher demand associated with the implementation of standardized digital testing requirements.

 

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Gross profit for the third quarter of 2014 increased year over year in dollars, but decreased as a percentage of net sales (gross margin), as explained below:

 

•

Gross profit for the SMB segment increased due to higher net sales. Gross margin decreased due to lower invoice selling margins (84 basis points) associated with increased demand for lower-margin desktops and notebook products, which were partially offset by increases in cash discounts offered by our vendors (18 basis points).

 

•

Gross profit for the Large Account segment increased due to higher net sales and gross margin, which increased due to improved invoice selling margins (54 basis points) and higher agency revenues (40 basis points).

 

•

Gross profit for the Public Sector segment increased due to higher net sales. Invoice selling margins decreased by 43 basis points due to increased demand for lower margin products, such as notebooks and desktops.

Selling, general and administrative expenses increased in dollars, but decreased as a percentage of net sales in the third quarter of 2014 compared to the prior year quarter. SG&A expenses attributable to our three operating segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions):

 

		Three Months Ended September 30,
		2014								2013
		Amount				% of Segment Net Sales				Amount				% of Segment Net Sales				% Change
SMB		$	30.9				12.1	%		$	28.4				12.1	%			8.8	%
Large Account			15.6				7.8				14.8				7.7				5.4
Public Sector			14.4				7.8				13.7				9.0				5.1
Headquarters/Other			2.3								2.1								9.5
Total		$	63.2				9.9	%		$	59.0				10.2	%			7.1	%

 

•

SG&A expenses for the SMB segment increased in dollars, but was unchanged as a percentage of net sales. The dollar increase was attributable to investments in solution sales and services and incremental variable compensation associated with higher gross profits, but was partially offset by reduced advertising expense. SG&A as a percentage of net sales was unchanged due to the leveraging of fixed costs over larger net sales.

 

•

SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales. The dollar increase was attributable to investments in solution sales and services and incremental variable compensation associated with higher gross profits. The increase in SG&A as a percentage of net sales was due to increase in depreciation expense.

 

•

SG&A expenses for the Public Sector segment decreased as a percentage of net sales, but increased in dollars due to incremental variable compensation related to higher gross profits. The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.

 

•

SG&A expenses for the Headquarters/Other group increased due to an increase in unallocated personnel and related costs. 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 operating segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

Income from operations for the third quarter of 2014 increased to $20.4 million, compared to $17.5 million for the third quarter of 2013. Income from operations as a percentage of net sales was 3.2% for the third quarter of 2014, compared to 3.0% of net sales for the prior year quarter.

 

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Our effective tax rate was 40.3% for the third quarter of 2014, compared to 39.4% for the third quarter of 2013. Our tax rate will vary based on variations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions. We do not expect these variations to be significant in 2014.

Net income for the third quarter of 2014 increased to $12.2 million, compared to $10.6 million for the third quarter of 2013, due to the increase in operating income.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

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

 

		Nine Months Ended September 30,
		2014								2013
		Amount				% of Net Sales				Amount				% of Net Sales				% Change
Sales:
SMB		$	776.0				42.3	%		$	713.2				43.4	%			8.8	%
Large Account			625.2				34.1				575.7				35.0				8.6
Public Sector			431.4				23.6				354.2				21.6				21.8
Total		$	1,832.6				100.0	%		$	1,643.1				100.0	%			11.5	%
Gross Profit:
SMB		$	116.7				15.0	%		$	110.3				15.5	%			5.8	%
Large Account			78.0				12.5				66.9				11.6				16.6
Public Sector			45.6				10.6				40.1				11.3				13.7
Total		$	240.3				13.1	%		$	217.3				13.2	%			10.6	%

Net sales increased for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, as explained below:

 

•

Net sales for the SMB segment increased due to our focus on growing technical solution sales and the expiration in April 2014 of support for the Windows XP operating system, which generated increased demand for desktops, notebooks, and software products.

 

•

Net sales for the Large Account segment increased due to our focus on growing technical solution sales, our acquisition of new customers, and the expiration in April 2014 of support for the Windows XP operating system. In addition, sales increased due to the release of pent-up corporate refresh demand for IT product rollouts that were delayed from 2013.

 

•

Net sales to the Public Sector segment increased due to a 26% increase in sales to state and local governments and educational institutions and a 11% increase in sales to the federal government. Sales of notebooks and tablets increased to K-12 educational customers due to higher demand associated with the implementation of standardized digital testing requirements. Federal government sales increased due to the expiration in April 2014 of support for the Windows XP operating system, as well as increased sales made under our federal government contracts.

Gross profit for the nine months ended September 30, 2014 increased year over year in dollars, but decreased slightly as a percentage of net sales (gross margin), compared to the prior year period as explained below:

 

•

Gross profit for the SMB segment increased due to an increase in net sales. Gross margin decreased year over year due to lower invoice selling margins (68 basis points) on desktops and notebooks but was partially offset by increases in cash discounts (10 basis points) and agency revenues (7 basis points).

 

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•

Gross profit for the Large Account segment increased due to higher net sales and gross margin, which increased due to improved invoice selling margins (61 basis points) and higher agency revenues (22 basis points).

 

•

Gross profit for the Public Sector segment increased due to an increase in net sales. Invoice selling margins decreased by 81 basis points due to increased demand for lower margin products such as notebooks and desktops.

Selling, general and administrative expenses increased in dollars, but decreased as a percentage of net sales in the nine months ended September 30, 2014 compared to the prior year period. SG&A expenses attributable to our three operating segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions):

 

		Nine Months Ended September 30,
		2014								2013
		Amount				% of Segment Net Sales				Amount				% of Segment Net Sales				% Change
SMB		$	92.2				11.9	%		$	86.1				12.1	%			7.1	%
Large Account			49.0				7.8				45.0				7.8				8.9
Public Sector			41.0				9.5				37.7				10.6				8.8
Headquarters/Other			6.7								5.5								21.8
Total		$	188.9				10.3	%		$	174.3				10.6	%			8.4	%

 

•

SG&A expenses for the SMB segment increased in dollars, but decreased as a percentage of net sales. The dollar increase was attributable to investments in solution sales and services and incremental variable compensation associated with higher gross profits, but was partially offset by reduced advertising expense. The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.

 

•

SG&A expenses for the Large Account segment increased in dollars, but was unchanged as a percentage of net sales due to the leveraging of fixed costs over larger net sales. The dollar increase was attributable to investments in solution sales and services and incremental variable compensation associated with higher gross profits.

 

•

SG&A expenses for the Public Sector segment increased in dollars, but decreased as a percentage of net sales. The dollar increase was due to higher credit card fees and incremental variable compensation associated with higher gross profits. The decrease in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.

 

•

SG&A expenses for the Headquarters/Other group increased slightly due to an increase in unallocated personnel and related costs. 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 operating segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

Income from operations for the nine months ended September 30, 2014 increased to $51.4 million or 2.8% of net sales, compared to $43.0 million, or 2.6% of net sales for the comparable prior year period. Our increase in operating income and operating margin in the nine months ended September 30, 2014 resulted primarily from the increase in net sales, compared to the prior year period.

Our effective tax rate was 40.1% for the nine months ended September 30, 2014, compared to the effective tax rate of 39.7% for the prior period of 2013. Our tax rate will vary based on variations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions. We do not expect these variations to be significant in 2014.

 

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Net income for the nine months ended September 30, 2014 increased to $30.7 million, compared to $25.8 million for the nine months ended September 30, 2013, principally due to the increase in operating income.

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, repurchases of common stock for treasury, and as opportunities arise, acquisitions of new businesses.

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 expenditure, and other requirements for at least the next twelve calendar months. We expect our capital needs for the next twelve months to consist primarily of capital expenditures of $10.0 to $12.0 million and payments on leases and other contractual obligations of approximately $4.1 million. We have undertaken a comprehensive review and assessment of our entire business software needs, including commercially available software that meets, or can be configured to meet, those needs better than our existing software. While we have not finalized our decisions, regarding to what extent new software will be acquired, the incremental capital costs of such a project, if fully implemented, would likely exceed $20.0 million over the next three to five years.

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 on our bank line of credit, as follows:

 

•

Cash on Hand. At September 30, 2014, we had approximately $66.4 million in cash.

 

•

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 September 30, 2014, no borrowings were outstanding against our $50.0 million bank line of credit, which is available until February 24, 2017. Accordingly, our entire line of credit was available for borrowing at September 30, 2014. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

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, our cash flows from operations may be substantially affected. See also related risks listed below under “Item 1A. Risk Factors.”

Summary of Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods indicated (in millions):

 

		Nine Months Ended
September 30,		2014				2013
Net cash provided by operating activities		$	28.9			$	41.4
Net cash used for investing activities			(5.5	)			(4.9	)
Net cash provided by financing activities			0.5				0.8
Increase in cash and cash equivalents		$	23.9			$	37.3

 

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Cash provided by operating activities was $28.9 million in the nine months ended September 30, 2014. Operating cash flow in the nine months ended September 30, 2014 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, partially offset by a decrease in accounts payable and an increase in inventory. Accounts receivable decreased by $8.3 million from the prior year-end balance due to improved collection efforts as evidenced by our lower days sales outstanding, which decreased to 36 days at September 30, 2014, compared to 37 days at September 30, 2013. Inventory increased from the prior year-end balance by $3.4 million. Inventory turns decreased to 24 turns for the third quarter of 2014 compared to 27 turns for the prior year quarter.

At September 30, 2014, we had $109.3 million in outstanding accounts payable. Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be paid by cash flows from operations or short-term borrowings under the line of credit. This amount includes $21.7 million payable to two financial institutions under inventory trade credit agreements we use to finance our purchase of certain inventory, secured by the inventory which is financed. We believe we will be able to meet our obligations under our accounts payable with cash flows from operations and our existing line of credit.

Cash used for investing activities increased by $0.6 million in the nine months ended September 30, 2014 compared to the prior year period due to increased purchases of property and equipment. These expenditures were primarily for computer equipment and capitalized internally-developed software.

Cash provided by financing activities decreased by $0.3 million due to lower proceeds from the exercise of equity awards.

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 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 until February 2017 and is collateralized by our receivables. Our borrowing capacity is up to $50.0 million 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% at September 30, 2014). The one-month LIBOR rate at September 30, 2014 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.” We did not have any borrowings under the credit facility during the quarter ended September 30, 2014.

Cash receipts are automatically applied against any outstanding borrowings. Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments. Borrowings under the line of credit are classified as current. At September 30, 2014, the entire $50.0 million facility was available for borrowing.

Inventory Trade Credit Agreements. We have additional security agreements with two financial institutions to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These agreements allow a collateralized first position in certain branded products in our inventory that were financed by these two institutions. Although the agreements provide for up to 100% financing on the purchase price of these products, up to an aggregate of $57.0 million, any outstanding financing must be fully secured by available inventory. We do not pay any interest or discount fees on such inventory. The related costs are borne by the suppliers as an incentive for us to purchase their products. Amounts outstanding under such facilities, which equaled $21.7 million in the aggregate as of September 30, 2014, are recorded in accounts payable. The inventory financed is classified as inventory on the consolidated balance sheet.

 

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Operating Leases. We lease our corporate headquarters from an affiliated company related through common ownership. The initial term of the fifteen-year lease ended November 30, 2013, and we amended the lease on May 8, 2014 to extend the term for an additional five years. The amendment requires a monthly payment of $0.1 million. In addition to the rent payable under the facility lease, we are required to pay real estate taxes, insurance, and common area maintenance charges.

We entered into a ten-year lease for a new distribution center on August 27, 2014. The facility is located in the same office park as our current distribution center in Wilmington, Ohio. Lease payments commence on September 1, 2015 and require the following series of annual payments:

 

2015		$	0.2 million
2016		$	0.7 million
2017		$	0.7 million
2018		$	0.7 million
2019		$	0.7 million
Thereafter		$	4.3 million

In addition to the rent payable under the facility lease, we are required to pay real estate taxes, insurance, operating expenses, and common area maintenance charges.

We also lease additional facilities from our principal stockholders and facilities and equipment from third parties under non-cancelable operating leases which have been reported in the “Contractual Obligations” section of our Annual Report on Form 10-K for the year ended December 31, 2013.

Sports Marketing Commitments. We have entered into a multi-year sponsorship agreement with the New England Patriots that extends through 2016. This agreement, which grants us various marketing rights and seating access, requires annual payments aggregating to $0.3 million per year.

Off-Balance Sheet Arrangements. We do not have any other 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, 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 ended December 31, 2013 have not materially changed since the report was filed, other than with respect to the lease for our new distribution center and the renewal of our lease for our corporate headquarters as described above.

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.

Bank Line of Credit. Our bank line of credit extends until February 2017 and is collateralized by our receivables. As of September 30, 2014, the entire $50.0 million facility was available for borrowing. 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. Any failure to comply with these covenants would constitute a default and could prevent us from borrowing additional funds under this line of credit. This credit facility contains two financial tests:

 

•

The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated Adjusted EBITDA for the trailing four quarters) must not be more than 2.0

 

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to 1.0. We did not have any outstanding borrowings under the credit facility during the third quarter of 2014, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 2014. Future decreases in our consolidated Adjusted EBITDA, however, could limit our potential borrowings under the credit facility.

 

•

Minimum Consolidated Net Worth must be at least $250.0 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended March 31, 2012 (loss quarters not counted). Such amount was calculated as $299.7 million at September 30, 2014, whereas our actual consolidated stockholders’ equity at this date was in compliance at $351.8 million.

Trade Credit Agreements. These agreements contain similar financial ratios and operational covenants and restrictions as those contained in our bank line of credit described above. These trade credit agreements also contain cross-default provisions whereby a default under the bank agreement would also constitute a default under these agreements. Financing under these agreements is limited to the purchase of specific branded products from authorized suppliers, and amounts outstanding must be fully collateralized by inventories of those products on hand.

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.

SUMMARY 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 December 31, 2013. These policies include revenue recognition, accounts receivable, vendor allowances, inventory, and the value of goodwill and long-lived assets, including intangibles.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract, and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification. ASU 2014-09 also requires significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for us on January 1, 2017. We are currently assessing the potential impact of the adoption of ASU 2014-09 on our financial statements.

INFLATION

We have historically offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate. We do not expect inflation to have a significant impact on our business in the foreseeable future.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of our market risks, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. No material changes have occurred in our market risks since December 31, 2013.

 

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PC CONNECTION, INC. AND SUBSIDIARIES

PART I—FINANCIAL INFORMATION

Item 4—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 September 30, 2014. 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.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1A—Risk Factors

In addition to other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial position, and results of operations. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the SEC, and those incorporated by reference in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 5—Other Information

On August 27, 2014, we entered into a ten-year lease agreement (the “Wilmington Lease”) with Wilmington Investors, LLC for a distribution center located in Wilmington, Ohio. The term of the lease and lease payments commence on September 1, 2015 and require the following series of annual payments:

 

2015		$	0.2 million
2016		$	0.7 million
2017		$	0.7 million
2018		$	0.7 million
2019		$	0.7 million
Thereafter		$	4.3 million

We have the option to renew the lease for two additional five-year periods. Rent at the beginning of each renewal period will be equal to the greater of (i) the amount of rent for the last year of the previous term plus 3% or (ii) the prevailing fair market value of comparable space in the area. Rent for each lease year during the renewal periods are subject to a 3% increase per year. Additionally, we have a one-time option for early termination upon the expiration of the seventh year of the lease.

The foregoing description of the Wilmington Lease is qualified in its entirety by reference to the Wilmington Lease filed as Exhibit 10.1 to this quarterly report and incorporated by reference herein.

Item 6—Exhibits

 

Exhibit Number		Description
10.1*		Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for property located at 3188 Progress Way, Building 11, Wilmington, Ohio.
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, Treasurer and Chief Financial Officer 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, Treasurer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document.

 

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Exhibit Number		Description
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Label Linkbase Document.
101.PRE**		XBRL Taxonomy Presentation Linkbase Document.

 

*	Filed herewith.

**	Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and September 30, 2013, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements 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: October 31, 2014		By:		/S/ TIMOTHY MCGRATH
				Timothy McGrath
				President and Chief Executive Officer
Date: October 31, 2014		By:		/S/ JOSEPH DRISCOLL
				Joseph Driscoll
				Senior Vice President, Treasurer and Chief Financial Officer

 

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