PC nection(CNXN) - 2024 Q4 - Annual Report

PART I Item 1. Business PC Connection, Inc. is a Fortune 1000 IT solutions provider operating through three segments, offering a wide range of products and services, with a focus on AI and cloud solutions - The company operates through three segments: Connection Enterprise Solutions, Connection Business Solutions, and Connection Public Sector Solutions[20] Net Sales Distribution by Operating Segment (2022-2024) | Operating Segment | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Enterprise Solutions | 42% | 42% | 42% | | Business Solutions | 38% | 38% | 40% | | Public Sector Solutions | 20% | 20% | 18% | | Total | 100% | 100% | 100% | Net Sales by Major Product Category (2022-2024) | Product Category | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Notebooks/Mobility | 35% | 33% | 37% | | Desktops | 11% | 9% | 10% | | Software | 10% | 12% | 9% | | Servers/Storage | 7% | 7% | 7% | | Net/Com Products | 8% | 10% | 7% | | Displays and Sound | 10% | 9% | 10% | | Accessories | 12% | 11% | 13% | | Other Hardware/Services | 7% | 9% | 7% | | Total | 100% | 100% | 100% | - In 2024, major product purchases were from distributors Ingram Micro, Inc. (25%) and TD Synnex Corporation (23%), and manufacturer Dell Inc. (11%)[55] - Products manufactured by Microsoft (15%), HP Inc. (12%), and Dell Inc. (12%) represented approximately of total product purchases in 2024, respectively, with a disruption from these manufacturers posing a material adverse effect[56] - The company's growth strategy includes a focus on delivering artificial intelligence (AI) and automation solutions, driven through its CNXN Helix effort launched in 2023[31] - As of December 31, 2024, the company employed 2,580 full-time equivalent persons, with 711 being sales representatives[22][88] Item 1A. Risk Factors The company faces significant risks from intense competition, heavy reliance on key vendors, technological disruption from cloud computing and AI, cybersecurity threats, and control by a principal stockholder - The business is exposed to substantial competition from other national solutions providers, direct-selling manufacturers, and e-tailers, which could reduce market share and profit margins[104][106] - A majority of products are acquired from a limited number of vendors, including Ingram Micro, TD Synnex, and Dell, and a disruption in supply from these key partners would likely have a material adverse effect on operations and cash flows[118][119] - The growing demand for cloud-based services (SaaS, IaaS, PaaS) and virtualization may disrupt traditional hardware and software distribution models, potentially reducing demand for products sold by the company[122] - The business is heavily dependent on IT systems and faces risks from cyberattacks, which could lead to operational disruption, data loss, liability, and reputational harm[140][141][142] - The company is controlled by its principal stockholder, Patricia Gallup, who beneficially owned approximately 52% of the outstanding common stock as of December 31, 2024, allowing her to control board elections and all matters requiring stockholder approval[161] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[162] Item 1C. Cybersecurity The company manages cybersecurity risks through an Information Security Steering Committee and external experts, with no material threats identified as of the report date - Cybersecurity risk is managed by an Information Security Steering Committee, which includes the CIO and CFO, and is overseen by the Board of Directors[165][168] - The company utilizes external consultants, security firms, and risk management experts to enhance its cybersecurity oversight[163] - As of the filing date, the company is not aware of any cybersecurity threats that have had or are reasonably likely to have a material effect on the business[164] Item 2. Properties The company leases its corporate headquarters from an affiliate and operates a large distribution center in Ohio, with current properties deemed sufficient for future needs - The corporate headquarters at 730 Milford Road, Merrimack, NH, is leased from G&H Post, an affiliated company related through common ownership[169] - The company leases a facility in Wilmington, Ohio, for its distribution, order fulfillment, and technology integration operations, serving all three operating segments[61][171] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to have a material adverse effect on its financial condition - The company is subject to various legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition or results[172] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[173] PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, paid quarterly dividends in 2024, increased its share repurchase authorization to $120.0 million, and underperformed market indices over five years - The company's common stock trades on the Nasdaq Global Select Market under the symbol "CNXN"[176] 2024 Quarterly Dividends Paid | Declaration Date | Payment Date | Dividend per Share | Total Dividend (millions) | | :--- | :--- | :--- | :--- | | Feb 12, 2024 | Mar 15, 2024 | $0.10 | $2.6 | | Apr 30, 2024 | May 29, 2024 | $0.10 | $2.6 | | Jul 30, 2024 | Aug 13, 2024 | $0.10 | $2.6 | | Oct 29, 2024 | Nov 12, 2024 | $0.10 | $2.6 | - On February 5, 2025, the Board declared a quarterly dividend of $0.15 per share, payable in March 2025[177] Share Repurchases in Q4 2024 | Period | Total Shares Purchased | Average Price Paid Per Share | Value of Shares Remaining for Repurchase (thousands) | | :--- | :--- | :--- | :--- | | Oct 2024 | 3,419 | $68.31 | $64,334 | | Nov 2024 | 31,097 | $70.19 | $62,152 | | Dec 2024 | 34,850 | $70.78 | $59,685 | | Total Q4 | 69,366 | $70.39 | $59,685 | - The Board increased the share repurchase program authorization by $40.0 million in May 2024, bringing the aggregate authorized amount to $120.0 million[178][180] Item 6. [Reserved] This item is reserved - [Reserved][183] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2024, net sales decreased by 1.7% to $2.80 billion, while gross margin improved to 18.6%, leading to a net income of $87.1 million, supported by strong liquidity and an improved cash conversion cycle Results of Operations In 2024, net sales decreased by 1.7% to $2.80 billion, while gross profit increased by 1.6% to $519.8 million, and operating income declined to $97.1 million due to higher SG&A expenses Consolidated Financial Performance (2022-2024) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Sales (in millions) | $2,802.1 | $2,850.6 | $3,125.0 | | Gross Margin | 18.6% | 18.0% | 16.8% | | SG&A as % of Net Sales | 15.1% | 14.2% | 13.0% | | Income from Operations as % of Net Sales | 3.5% | 3.6% | 3.9% | Year-Over-Year Change in Net Sales and Gross Profit by Segment (2024 vs 2023) | Segment | Net Sales Change ($M) | Net Sales Change (%) | Gross Profit Change ($M) | Gross Profit Change (%) | | :--- | :--- | :--- | :--- | :--- | | Enterprise Solutions | $(19.9) | (1.7)% | $1.1 | 0.6% | | Business Solutions | $(26.5) | (2.5)% | $5.3 | 2.2% | | Public Sector Solutions | $(2.1) | (0.4)% | $1.7 | 1.9% | | Total | $(48.5) | (1.7)% | $8.1 | 1.6% | - The decrease in 2024 net sales was primarily driven by lower sales of advanced technology categories, including net/com products (down $85.7 million) and software (down $44.1 million), partially offset by increases in notebooks/mobility (up $42.3 million) and desktops (up $31.3 million)[197] - SG&A expenses increased by $16.4 million (4.0%) in 2024, primarily due to investments in resources to strengthen sales, technical sales, and services capabilities[197][207] Liquidity and Capital Resources The company maintains strong liquidity with $178.3 million in cash and $264.3 million in short-term investments, an undrawn $50 million credit facility, and an improved cash conversion cycle of 40 days Key Liquidity and Cash Flow Metrics (in millions) | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $178.3 | $145.0 | | Short-term investments | $264.3 | $152.2 | | Credit facility availability | $50.0 | $50.0 | | Net cash from operating activities (FY) | $173.9 | $197.9 | Cash Conversion Cycle (in days) | Component | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Days of Sales Outstanding (DSO) | 72 | 73 | | Days of Supply in Inventory (DIO) | 15 | 20 | | Days of Purchases Outstanding (DPO) | (47) | (42) | | Cash Conversion Cycle | 40 | 51 | - The company had no borrowings outstanding under its $50.0 million credit facility as of December 31, 2024, and was in compliance with all covenants[216][227] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition (principal vs. agent), allowances for credit losses, inventory obsolescence, and annual goodwill impairment testing, with no impairment found in 2024 - A critical judgment in revenue recognition is determining if the company is the principal (gross revenue) or agent (net revenue), with the company generally being the principal for hardware and on-premise software, and an agent for cloud products, third-party services, and software maintenance[236][238][241][242] - For the year ended December 31, 2024, the company recognized $147.5 million in net sales on an agency (net) basis[244] - The company performs ongoing credit evaluations for its accounts receivable and maintains an allowance for credit losses, which was $3.3 million at year-end 2024[255][417] - Goodwill, totaling $73.6 million, is tested for impairment annually, and a qualitative assessment in 2024 indicated that goodwill was not impaired[263][265] Item 7A. Quantitative and Qualitative Disclosure About Market Risk The company faces market risk from interest rate fluctuations and inflation, but management believes a 10% interest rate change or current inflation would not materially affect its financial statements - The company is exposed to interest rate risk on its cash equivalents, short-term investments, and variable-rate credit facility, but management believes a hypothetical 10% change in rates would not be material[268] - Inflation is noted as a risk that could increase costs, but it is not considered to have had a material effect on the financial statements for the reported period[268] Item 8. Financial Statements and Supplementary Data This section indicates that the company's consolidated financial statements and supplementary data are included in the report, beginning on page F-1 - The consolidated financial statements and supplementary data required by this item are included in the report starting at page F-1[269] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[270] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with an unqualified audit opinion from the independent registered public accounting firm - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[271][273] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2024, based on the criteria set forth by COSO[276][277] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[281] Item 9B. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading agreements during the fourth quarter of 2024 - No directors or officers adopted or terminated a Rule 10b5-1 trading plan during the fourth quarter of 2024[288] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[289] PART III Item 10. Directors, Executive Officers, and Corporate Governance This section identifies key executive officers and incorporates most governance information by reference from the 2025 Proxy Statement, noting the company's Code of Business Conduct and Ethics - The company's executive officers are Patricia Gallup (Chair), Timothy McGrath (CEO), and Thomas Baker (CFO)[293] - Most information for this item is incorporated by reference from the definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[292] Item 11. Executive Compensation The information required by this item concerning executive and director compensation is incorporated by reference from the company's 2025 definitive Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement[297] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item, including security ownership of beneficial owners and management, as well as equity compensation plan details, is incorporated by reference from the company's 2025 definitive Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the Proxy Statement[298] Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item concerning related party transactions and director independence is incorporated by reference from the company's 2025 definitive Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the Proxy Statement[300] Item 14. Principal Accounting Fees and Services The information required by this item concerning principal accounting fees and services, as well as pre-approval policies, is incorporated by reference from the company's 2025 definitive Proxy Statement - Information regarding accounting fees and services is incorporated by reference from the Proxy Statement[301] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Annual Report, including consolidated financial statements, financial schedules, and a comprehensive list of exhibits - This item lists the consolidated financial statements, financial statement schedules, and all exhibits filed with the Form 10-K[304][307] Item 16. Form 10-K Summary The company reports that there is no Form 10-K summary - None[320]