PC nection(US:CNXN)2024-03-06 16:00PART I Business PC Connection, Inc., operating as Connection®, is a Fortune 1000 Global Solutions Provider, simplifying IT for enterprise, SMB, and public sector clients with integrated solutions from over 2,500 vendors - The company operates through three segments: Enterprise Solutions (serving large enterprises), Business Solutions (serving SMBs), and Public Sector Solutions (serving government and education)936978 Net Sales Distribution by Operating Segment (2021-2023) | Operating Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Enterprise Solutions | 42% | 42% | 43% | | Business Solutions | 38% | 40% | 38% | | Public Sector Solutions | 20% | 18% | 19% | | Total | 100% | 100% | 100% | Net Sales by Product Category (2021-2023) | Product Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Notebooks/Mobility | 33% | 37% | 38% | | Desktops | 9% | 10% | 9% | | Software | 12% | 9% | 10% | | Servers/Storage | 7% | 7% | 7% | | Net/Com Products | 10% | 7% | 7% | | Displays and Sound | 9% | 10% | 10% | | Accessories | 11% | 13% | 12% | | Other Hardware/Services | 9% | 7% | 7% | | Total | 100% | 100% | 100% | - Key growth strategies include delivering AI and automation solutions, migrating customers to cloud-based solutions, expanding IT solution services, increasing sales representative productivity, and pursuing strategic acquisitions103104129 - The company has significant vendor concentration; in 2023, purchases from Ingram Micro, TD Synnex, and Microsoft accounted for 21%, 19%, and 11% of total product purchases, respectively, while products from manufacturers Microsoft, HP Inc., and Dell Inc. represented 15%, 13%, and 11% of total product purchases16321 - As of December 31, 2023, the company employed 2,703 full-time equivalent persons, with 1,152 in sales-related activities33 Risk Factors The company faces various risks including intense competition, vendor dependency, economic conditions, rapid technological change, cybersecurity threats, regulatory compliance, and the significant influence of a controlling stockholder - Business, Operations, and Industry Risks: - Competition: Faces significant price competition from other national solutions providers, direct-selling vendors, and e-tailers, which could reduce profit margins53040635 - Vendor Dependency: A majority of products are acquired from a limited number of vendors; in 2023, Ingram Micro, TD Synnex, and Microsoft accounted for 21%, 19%, and 11% of purchases, respectively, and disruption of supply would likely have a material adverse effect555537 - Economic Conditions: Unfavorable economic conditions, inflation, and rising interest rates may lead clients to delay or forgo IT investments, as observed in 2023380553531 - Technology, Data, and IP Risks: - Technological Change: Business depends on continued innovation (e.g., AI, cloud) from vendor partners, and failure to adapt to changes like the shift to SaaS could disrupt traditional distribution models542556525 - Cybersecurity: Faces risks from cyberattacks which could disrupt operations, expose sensitive data, and result in liability and reputational harm; the company has experienced intrusion attempts, malware, and phishing411570600 - Regulatory and Legal Risks: - Government Contracts: The Public Sector segment is highly regulated, and noncompliance could result in fines, contract termination, or debarment, with government agencies also able to cancel orders with little notice580608 - Common Stock Risks: - Controlling Stockholder: Patricia Gallup, a co-founder, beneficially owned or controlled approximately 55% of the common stock as of December 31, 2023, allowing her to control board elections and other stockholder matters637612 Cybersecurity The company manages cybersecurity risks through an Information Security Steering Committee, overseen by the Board of Directors, and has not experienced any material incidents to date - Cybersecurity risk is managed by an Information Security Steering Committee composed of senior management, including the CIO and CFO, and overseen by the Board of Directors640614 - The company has not experienced any cybersecurity incidents that have materially affected its business, strategy, or financial condition as of the report date639 - The company utilizes external parties, including consultants and security firms, and a third-party risk management program to enhance cybersecurity oversight613 Properties The company's corporate headquarters in Merrimack, NH, and a distribution facility in Wilmington, OH, are leased, and are deemed sufficient for current and future needs - The corporate headquarters in Merrimack, NH, is leased from G&H Post, an affiliated company related through common ownership618 - A key distribution and technology integration center is located in a leased facility in Wilmington, Ohio61938 Legal Proceedings The company is involved in various ordinary course legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - The company is involved in various legal proceedings from the ordinary course of business, but management does not expect them to have a material impact620436 PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'CNXN', with quarterly cash dividends paid, including an increased $0.10 per share declared in February 2024 - The company's common stock trades on the Nasdaq Global Select Market under the symbol CNXN674 2023 Quarterly Dividends Paid | Declaration Date | Record Date | Payment Date | Dividend per Share | Total Dividend (millions) | | :--- | :--- | :--- | :--- | :--- | | Feb 9, 2023 | Feb 21, 2023 | Mar 10, 2023 | $0.08 | $2.1 | | May 4, 2023 | May 16, 2023 | Jun 2, 2023 | $0.08 | $2.1 | | Aug 2, 2023 | Aug 15, 2023 | Sep 1, 2023 | $0.08 | $2.1 | | Oct 31, 2023 | Nov 14, 2023 | Dec 1, 2023 | $0.08 | $2.1 | - On February 14, 2024, the Board of Directors declared an increased quarterly cash dividend of $0.10 per share648 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales decreased by 8.8% to $2.85 billion due to lower demand, while gross margin improved to 18.0% from a favorable product mix, and liquidity remained strong with improved cash conversion Key Financial Performance (2023 vs 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,850.6M | $3,125.0M | -8.8% | | Gross Profit | $511.7M | $526.2M | -2.7% | | Gross Margin | 18.0% | 16.8% | +120 bps | | Income from Operations | $103.2M | $120.6M | -14.4% | | Net Income | $83.3M | $89.2M | -6.6% | - The decrease in 2023 net sales was primarily driven by lower demand for end-point devices, with notebook/mobility sales down $205.2 million year-over-year661 - Gross margin increased due to a favorable product mix, with a higher proportion of sales from higher-margin products like software (recognized on a net basis) and net/com products661 - In 2023, the company incurred $2.7 million in restructuring charges related to an involuntary reduction in its headquarters workforce665213 - The company's liquidity is strong, with primary sources being cash from operations, $145.0 million in cash, $152.2 million in short-term investments, and an undrawn $50.0 million credit facility as of Dec 31, 2023697698223 Cash Conversion Cycle (in days) | Component | Q4 2023 | Q4 2022 | | :--- | :--- | :--- | | Days of sales outstanding (DSO) | 73 | 70 | | Days of supply in inventory (DIO) | 20 | 31 | | Days of purchases outstanding (DPO) | (42) | (35) | | Cash conversion cycle | 51 | 66 | Year-Over-Year Comparisons (2023 vs 2022) In 2023, Enterprise and Business Solutions net sales declined due to lower demand, while Public Sector sales grew, and gross margins improved across all segments from a favorable product mix Net Sales by Segment (2023 vs 2022, in millions) | Operating Segment | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Enterprise Solutions | $1,201.1 | $1,324.4 | $(123.3) | (9.3)% | | Business Solutions | $1,075.6 | $1,245.3 | $(169.7) | (13.6)% | | Public Sector Solutions | $573.9 | $555.3 | $18.6 | 3.3% | | Total | $2,850.6 | $3,125.0 | $(274.4) | (8.8)% | Gross Profit by Segment (2023 vs 2022, in millions) | Operating Segment | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Enterprise Solutions | $178.9 | $195.1 | $(16.2) | (8.3)% | | Business Solutions | $247.1 | $250.9 | $(3.8) | (1.5)% | | Public Sector Solutions | $85.7 | $80.2 | $5.5 | 7.0% | | Total | $511.7 | $526.2 | $(14.5) | (2.7)% | - Other income, net increased to $10.0 million in 2023 from $1.1 million in 2022, primarily due to an $8.9 million increase in interest income from higher cash balances and interest rates672 Application of Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition (principal vs. agent), accounts receivable, inventory valuation, and goodwill impairment, with no impairment identified for goodwill in 2023 or 2022 - Revenue Recognition: A critical judgment is the principal vs. agent determination; the company generally acts as a principal for IT hardware and on-premise software (gross revenue) and as an agent for cloud products, third-party services, and certain software maintenance (net revenue)710261741 - Accounts Receivable: The allowance for credit losses is estimated based on past due status and specific customer financial difficulty; bad debt expense decreased to $1.8 million in 2023 from $3.3 million in 2022715242 - Inventory: The provision for inventory obsolescence was $2.4 million in 2023, down from $4.3 million in 2022, based on management's forecast of customer demand244269 - Goodwill: The company holds $73.6 million in goodwill ($66.2M in Enterprise Solutions, $7.4M in Business Solutions); annual qualitative impairment tests in 2023 and 2022 concluded that goodwill was not impaired271382 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and notes, with Deloitte & Touche LLP providing an unqualified opinion on both financial statements and internal controls, highlighting revenue recognition as a critical audit matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023283305331 - The auditor identified revenue recognition, specifically the judgment in determining whether the company is a principal or an agent in transactions, as a Critical Audit Matter361333334 Consolidated Financial Statements The consolidated financial statements show total assets of $1.19 billion and stockholders' equity of $840.8 million as of December 31, 2023, with net income of $83.3 million on $2.85 billion in net sales Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $144,954 | $122,930 | | Short-term investments | $152,232 | $0 | | Accounts receivable, net | $606,834 | $610,280 | | Inventories, net | $124,179 | $208,682 | | Total Current Assets | $1,048,639 | $953,792 | | Total Assets | $1,188,381 | $1,099,826 | | Accounts payable | $263,682 | $232,638 | | Total Current Liabilities | $327,965 | $310,517 | | Total Liabilities | $347,614 | $333,651 | | Total Stockholders' Equity | $840,767 | $766,175 | Consolidated Income Statement Data (in thousands, except per share) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $2,850,644 | $3,124,996 | $2,892,595 | | Gross profit | $511,736 | $526,177 | $464,579 | | Income from operations | $103,153 | $120,552 | $96,517 | | Net income | $83,271 | $89,219 | $69,906 | | Diluted EPS | $3.15 | $3.37 | $2.65 | Consolidated Cash Flow Data (in thousands) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from Operating | $197,954 | $34,889 | $57,754 | | Net cash from Investing | $(160,202) | $(9,077) | $(8,733) | | Net cash from Financing | $(15,728) | $(11,192) | $(36,366) | | Increase in Cash | $22,024 | $14,620 | $12,655 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue disaggregation, an undrawn $50 million credit facility, a $32.3 million share repurchase authorization, income tax provisions, and segment performance data - Note 2 (Revenue): Revenue is disaggregated by product category and segment; for 2023, Notebooks/Mobility was the largest product category at $951.7 million, and the Enterprise Solutions segment had the highest net sales at $1.20 billion419391 - Note 4 (Goodwill): Goodwill totaled $73.6 million as of Dec 31, 2023, with $66.2 million allocated to Enterprise Solutions and $7.4 million to Business Solutions; no impairment was recorded424449 - Note 9 (Bank Borrowings): The company has a $50 million credit facility expiring in March 2025; there were no outstanding borrowings as of December 31, 2023481459 - Note 10 (Stockholders' Equity): The Board has authorized a share repurchase program, with approximately $32.3 million remaining authorization for future purchases as of Dec 31, 2023; in 2023, 129,000 shares were repurchased for $5.4 million483463 - Note 11 (Income Taxes): The effective tax rate for 2023 was 26.4%, compared to 26.7% in 2022; the income tax provision was $29.8 million475723 Segment Operating Income (in thousands) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Enterprise Solutions | $39,216 | $53,477 | $74,653 | | Business Solutions | $76,150 | $79,475 | $43,783 | | Public Sector Solutions | $2,177 | $1,105 | $(4,928) | | Headquarters/Other | $(14,390) | $(13,505) | $(16,991) | | Total Operating Income | $103,153 | $120,552 | $96,517 | Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - Based on their evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023249 - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was effective as of December 31, 2023251280 - The independent registered public accounting firm issued an unqualified audit report on the company's internal control over financial reporting as of December 31, 2023252305 - There were no material changes to internal control over financial reporting during the fourth quarter of 2023252281 Other Information No directors or officers adopted or terminated Rule 10b5-1 trading agreements during the fourth quarter of 2023 - No directors or officers adopted or terminated a Rule 10b5-1 trading plan during the fourth quarter of 2023310 PART III Directors, Executive Officers, and Corporate Governance This section identifies executive officers and confirms the adoption of a Code of Business Conduct and Ethics, with other governance information incorporated by reference from the 2024 Proxy Statement - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders28958 - The company has adopted a Code of Business Conduct and Ethics, which is posted on its website292 Executive Compensation Information on executive and director compensation is incorporated by reference from the company's 2024 Proxy Statement - Information regarding executive and director compensation is incorporated by reference from the 2024 Proxy Statement293 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on security ownership by beneficial owners and management, and equity compensation plans, are incorporated by reference from the 2024 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement294 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the 2024 Proxy Statement295 Principal Accounting Fees and Services Details on principal accounting fees and services, including pre-approval policies, are incorporated by reference from the 2024 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement296 PART IV Exhibits and Financial Statement Schedules This section lists all documents filed with the Form 10-K, including consolidated financial statements, schedules, an exhibit index, and financial data in interactive XBRL format - This section lists the consolidated financial statements and Schedule II—Valuation and Qualifying Accounts as being filed with the report318319 - An exhibit index is provided, listing all material contracts, governance documents, and required certifications filed with the SEC298347 - Financial statements and notes are submitted in XBRL format for interactive data analysis325