TABLE OF CONTENTS
PART I
Page
ITEM 1.
Business ……………………………………………………………………………………………………………………………………………………………………………… 1
ITEM 1A. Risk Factors ……………………………………………………………………………………………………………………………………………………………………… 10
ITEM 1B. Unresolved Staff Comments ………………………………………………………………………………………………………………………………………… 16
ITEM 2.
Properties …………………………………………………………………………………………………………………………………………………………………………… 16
ITEM 3.
Legal Proceedings …………………………………………………………………………………………………………………………………………………………… 17
ITEM 4. Mine Safety Disclosures ………………………………………………………………………………………………………………………………………………… 17
PART II
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities …………………………………………………………………………………………………………………………………………………………………… 18
ITEM 6.
Selected Financial Data ………………………………………………………………………………………………………………………………………………… 20
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ……………………… 21
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk ……………………………………………………………………………… 34
ITEM 8.
Consolidated Financial Statements and Supplementary Data …………………………………………………………………………… 34
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ……………………… 34
ITEM 9A. Controls and Procedures ……………………………………………………………………………………………………………………………………………… 34
ITEM 9B. Other Information …………………………………………………………………………………………………………………………………………………………… 37
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance …………………………………………………………………………………… 38
ITEM 11.
Executive Compensation ……………………………………………………………………………………………………………………………………………… 38
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ……………………………………………………………………………………………………………………………………………………… 38
ITEM 13. Certain Relationships and Related Transactions and Director Independence ………………………………………………… 38
ITEM 14. Principal Accounting Fees and Services ……………………………………………………………………………………………………………………… 38
ITEM 15. Exhibits and Financial Statement Schedule ……………………………………………………………………………………………………………… 39
SIGNATURES ………………………………………………………………………………………………………………………………………………………………………………………… 44
PART IV
I N A D I G I T A L W O R L D
2 0 1 6 A N N U A L R E P O R T
TRANSFORMING Dear Shareholders,
The information technology world continues to be transformed by
diverse and powerful influences. In 2016, mergers and acquisitions
in the information technology (IT) industry made headlines,
the expansion of vertical markets led to increased demand for
specialized IT solutions, and industry innovators continued to
find exciting and meaningful ways to integrate technology into
our everyday lives. Looking back on PC Connection’s growth, the
creation of our new “Connection®” brand, and our integration
of two strategic acquisitions, it is clear that 2016 was a time of
change—a year of transformation into a stronger business. These
changes, combined with Connection’s passion for exceeding
customer expectations, kept us busy throughout the year.
Connection generated annual sales of $2.7 billion in 2016, an
increase of 4.6% year over year. Gross profit increased by 8.8%
due to higher net sales, an increase in gross margin, and strong
performance across mobility, security, software, and our vertical
markets. We continued to grow our earnings per share, with EPS
increasing steadily over the past five years from $1.24 in 2012 to
$1.80 in 2016. This performance allowed Connection to declare
a special dividend for the sixth consecutive year, returning
$9 million to shareholders in the form of a $0.34 per share special
cash dividend paid in January 2017. The Company generated
positive operating cash flow of approximately $33 million in
2016. We invested $43 million of our reserves in the strategic
acquisitions of Softmart and GlobalServe, paid a dividend to
our shareholders, and ended the year with no debt and a healthy
cash balance of $49 million.
Our acquisition of Softmart, Inc., an IT provider headquartered
in the Philadelphia metropolitan area, was finalized in Q2 2016.
By integrating this strategic addition into our organization, we
enhanced our software licensing capabilities, expanded our cloud
services, and strengthened our position with Microsoft as a Tier 1
Cloud Solution Provider. We also grew our solutions and services
offerings with the acquisition of GlobalServe in Q4 2016. Operating
as a standalone global IT procurement and service management
company, GlobalServe represents a significant step forward in
our ability to service customers on a global scale. The company’s
patented procurement engine, OneSource, offers a centralized
purchasing portal, one-click reporting, and visibility into IT assets
worldwide. By leveraging OneSource and GlobalServe’s network
of more than 500 suppliers and 25,000 certified IT professionals
in 174 different countries, Connection is able to offer multinational
customers greater consistency, scalability, and efficiency in their
global procurement.
rebranded as Connection in Q3 2016. Emphasizing elements of
our trademark symbol, the “blue arc,” this new brand represents
our organization’s strength, and the unity of our workforce.
PC Connection Sales Corporation, GovConnection, and MoreDirect
have been rebranded as Connection Business Solutions,
Connection Public Sector Solutions, and Connection Enterprise
Solutions, respectively. We are now united under a single banner,
sharing a clear, concise, and powerful brand while retaining the
unique ability to serve each of our specific customer segments
with targeted expertise.
Connection Business Solutions, our SMB-focused subsidiary,
achieved net sales of $1.09 billion in 2016, growing average order
size and improving gross profit year over year, while sales figures
were up 5%. Connection Enterprise Solutions reported revenues
of $1.01 billion, up 5% year over year. Connection Public Sector
Solutions generated net sales of $589 million, up 3% from 2015.
Our strong performance in 2016 was recognized with numerous
awards from our industry partners. Connection was named
Symantec Growth Partner of the Year and received the Americas
VMware Partner Innovation Award, Kaspersky Lab Large Account
Reseller (LAR) of the Year Award, Microsoft Operations Excellence
Award, and Premier Inc. Continuum of Care Award. In addition,
Connection Enterprise Solutions was named Dell EMC 2016
Healthcare Partner of the Year. We were also named to the
Fortune 1000, CRN Solution Provider 500, Internet Retailer
Top 500, and CRN Tech Elite 250.
From now and into the future, Connection will exemplify the spirit
of our rebranding by working as one team, focused on one mission.
We will continue to integrate our recent acquisitions, deepening
our software expertise and leveraging the powerful OneSource
platform to extend our reach and realize new synergies internally.
We are taking steps to better align our sales and specialist support
teams with training and shared, metrics-driven goals. Our pursuit
of vertical markets remains a key priority, and to mirror the success
of our healthcare business, we have created additional teams to
focus on retail, finance, and manufacturing verticals.
As we guide customers on their journey of digital transformation,
we believe our expertise in delivering advanced technology
solutions—and our dedication to teamwork and exceptional
customer service—will position Connection as a premier National
Solutions Provider. Connection will continue to pursue strategies
aimed at accelerating our competitive advantage and increasing
long-term shareholder value.
In order to consolidate our growing brand and more accurately
reflect our Company’s mission—to connect people with solutions
and technology that enhances growth, elevates productivity, and
empowers innovation—all PC Connection, Inc. sales companies
We are grateful for the support of our customers, industry
partners, co-workers, and you—our shareholders. Together, we
are transforming technology into solutions that build a more
connected world.
Patricia Gallup
Chair and
Chief Administrative Officer
Timothy McGrath
President and
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2016
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
Commission File Number 000-23827
PC CONNECTION, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
730 Milford Road
Merrimack, New Hampshire
(Address of principal executive offices)
02-0513618
(I.R.S. Employer Identification No.)
03054
(Zip Code)
Registrant’s telephone number, including area code
(603) 683-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO
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 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 NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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. (Check one):
Large accelerated filer ___ Accelerated filer Non-accelerated filer ___ Smaller reporting company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(Do not check if a smaller reporting company)
YES NO
The aggregate market value of the registrant’s voting shares of common stock held by non-affiliates of the registrant on June 30, 2016, based on $23.80 per share,
the last reported sale price on the Nasdaq Global Select Market on that date, was $265,826,436.
The number of shares outstanding of each of the registrant’s classes of common stock, as of February 27, 2017:
Class
Common Stock, $.01 par value
Number of Shares
26,719,185
The following documents are incorporated by reference into the Annual Report on Form 10-K: Portions of the registrant’s definitive Proxy Statement for its 2016
Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4.
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
ITEM 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 6.
ITEM 7.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
Consolidated Financial Statements and Supplementary Data
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9.
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11.
ITEM 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
ITEM 13.
ITEM 14.
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
PART IV
ITEM 15.
SIGNATURES
Exhibits and Financial Statement Schedules
Page
1
10
16
16
17
17
18
20
21
34
34
34
34
37
38
38
38
38
38
39
44
FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this Annual Report on Form 10-K that are not based on
historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-
looking statements regarding future events and our future results are based on current expectations, estimates, forecasts,
and projections and the beliefs and assumptions of management including, without limitation, our expectations with
regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations
of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic
activity and the level of business investment in information technology products. Forward-looking statements may be
identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,”
“anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those
terms.
We cannot assure investors that our assumptions and expectations will prove to have been correct. Because
forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in
circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be materially different from any future results,
performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you
against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results
to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 1A.,
“Risk Factors” of this Annual Report on Form 10-K. Any forward-looking statement made by us in this Annual Report
on Form 10-K speaks only as of the date on which this Annual Report on Form 10-K was first filed. We undertake no
intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future
events, or otherwise, except as may be required by law.
Item 1. Business
GENERAL
PART I
We are a national solutions provider of a wide range of information technology, or IT, solutions. We help our
customers design, enable, manage, and service their IT environments. We provide IT products, including computer
systems, software and peripheral equipment, networking communications, and other products and accessories that we
purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration,
and implementation of IT solutions. These services are performed by our personnel and by third-party providers. We
have three operating segments, which serve primarily: (a) small- to medium-sized businesses, or SMBs, in our SMB
segment, 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 government and educational institutions, in our
Public Sector segment, through our GovConnection subsidiary. We generate sales through (i) outbound telemarketing
and field sales contacts by sales representatives focused on the business, educational, healthcare, and government
markets, (ii) our websites, and (iii) inbound calls from customers responding to our catalogs and other advertising media.
We offer a broad selection of over 300,000 products at competitive prices, including products from Apple, Cisco
Systems, Dell, EMC, Hewlett-Packard, IBM, Lenovo, Microsoft, Symantec, and VMWare, and we partner with more
than 1,600 suppliers. Our most frequently ordered products are carried in inventory and are typically shipped to
customers the same day the order is received.
Since our founding in 1982, we have consistently served our customers’ needs by providing innovative, reliable, and
timely service and technical support, and by offering an extensive assortment of branded products through
knowledgeable, well-trained sales and support teams. Our strategy’s effectiveness is reflected in the recognition we have
received, including being named to the Fortune 1000 and the CRN Solution Provider 500 for sixteen straight years. Over
the past few years, we have received numerous awards, including the Microsoft Operational Excellence Award for
delivering market-leading operational excellence, as well as being recently named to the CRN Tech Elite 250. We
believe that our ability to understand our customers’ needs and provide comprehensive and effective IT solutions has
resulted in strong brand name recognition and a broad and loyal customer base. We also believe that through our strong
vendor relationships we can provide an efficient supply chain and be an effective IT solution provider for our multiple
customer segments.
We strive to identify the unique needs of our corporate, government, healthcare, educational, and small business
customers, and have designed our business processes to enable our customers to effectively manage their IT systems.
We provide value by offering our customers efficient design, deployment, and support of their IT environments. As of
December 31, 2016, we employed 900 sales representatives, whose average tenure exceeded six years. Sales
representatives are responsible for managing enterprise, commercial, and public sector accounts, as specialization and a
deep understanding of unique customer environments are more important than ever. These sales representatives focus on
current and prospective customers and are supported by an increasing number of engineering, technical, and
administrative staff. We believe that increasing our salesforce productivity is important to our future success, and we
have increased our headcount and investments in this area accordingly.
In September 2016, we launched “Connection®,” uniting all of our subsidiaries into one cohesive brand, reflecting
the promise of our trademark blue arc and our mission to connect people with technology that enhances growth, elevates
productivity, and empowers innovation. MoreDirect, our enterprise team, became Connection® Enterprise Solutions;
PC Connection Sales Corp, our SMB-focused team, became Connection® Business Solutions; and GovConnection, our
public sector team, became Connection® Public Sector Solutions.
We market our products and services through our websites: www.connection.com, www.connection.com/enterprise,
www.connection.com/publicsector, and www.macconnection.com. Our websites provide extensive product information,
customized pricing, rich content, and a digital platform for online orders.
1
Additional financial information regarding our business segments and geographic data about our customers and
assets is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7
of Part II, and in Note 13 to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on
Form 10-K.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and accordingly, we file reports, proxy and information statements, and other information with the
Securities and Exchange Commission, or the SEC. Such reports and information can be read and copied at the public
reference facilities maintained by the SEC at the Public Reference Room, 100 F Street, NE, Washington, D.C. 20549.
Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-
0330. The SEC maintains a website (http://www.sec.gov) that contains such reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC. We maintain a corporate website with the
address www.connection.com. We are not including the information contained in our website as part of, or incorporating
by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual
Reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practical after we
electronically file these materials with, or otherwise furnish them to, the SEC.
MARKET AND COMPETITION
In the fiscal year ended December 31, 2016, we generated approximately 40% of our sales from the SMB segment,
38% from medium-to-large corporate accounts (Fortune 1000), and 22% from government and educational institutions.
The overall IT market that we serve is estimated to be approximately $200 billion.
The largest segment of this market is served by local and regional “value added resellers,” or VARs, many of whom
we believe are transitioning from the hardware and software products business to higher-margin IT services. We have
transitioned from an end-user or desktop-centric computing supplier to a network or enterprise-wide IT solutions
supplier. We have also partnered with third-party technology and telecommunications service providers. We now offer
our customers access to the same services and technical expertise as local and regional VARs, but with a more extensive
product selection at generally lower prices.
Intense competition for customers has led manufacturers of our IT products to use all available channels, including
direct marketers, to distribute their products. Certain of these manufacturers who have traditionally used resellers to
distribute their products have, from time to time, established their own direct marketing operations, including sales
through the Internet. Nonetheless, we believe that these manufacturers will continue to provide us and other third-party
direct marketers favorable product allocations and marketing support.
We believe new entrants to the direct marketing channel must overcome a number of obstacles, including:
•
•
•
•
•
the substantial time and resources required to build a customer base of meaningful size and profitability for
cost-effective operation;
the high costs of developing the information systems and operating infrastructure required to successfully
compete as a direct marketer;
the advantages enjoyed by larger and more established competitors in terms of purchasing and operating
efficiencies;
the difficulty of building relationships with vendors to achieve favorable product allocations and attractive
pricing terms; and
the difficulty of identifying and recruiting management personnel with significant direct marketing experience
in the industry.
2
BUSINESS STRATEGIES
We believe we become our customers’ IT provider of choice by providing innovative IT solutions which meet their
needs of increased productivity, mobility, virtualization, and security in a continually evolving IT environment. We
provide enhanced value by assisting them in cost-effectively maximizing business opportunities provided by new
technologies and advanced service solutions. The key elements of our business strategies include:
• Providing consistent customer service before, during, and after the sale. We believe that we have earned a
reputation for providing superior customer service by consistently focusing on our customers’ needs. We have
dedicated our resources to developing strong, long-term relationships with our customers by accurately
assessing their IT needs, and providing scalable, high-quality solutions and services through our knowledgeable,
well-trained personnel. Through operational excellence, we have efficient delivery programs that provide a
quality buying experience for our customers with reasonable return policies.
• Offering a broad product selection at competitive prices. We offer a broad range of IT products and solutions,
including personal computers and related peripheral products, servers, storage, and networking infrastructure, at
costs that allow our customers to be more productive while maximizing their IT budgets. Our advanced
solution offerings include network, server, storage, and mission-critical onsite installation and support using
proprietary cloud-based service management software. We offer products and enhanced service capabilities
with aggressive price and performance standards, all with the convenience of one-stop shopping for technology
solutions.
• Simplifying technology product procurement for corporate customers. We offer Internet-based procurement
options to eliminate complexity and enhance customer value, as well as lower the cost of procurement for our
customers. Our Large Account segment specializes in Internet-based solutions and provides electronic
integration between its customers and suppliers.
• Offering targeted IT solutions. Our customers seek solutions to increasingly complex IT infrastructure
demands. To better address their business needs, we have focused our solution service capabilities on seven
practice areas—Converged Data Center, Networking, Mobility, Security, Cloud Solutions, Lifecycle, and
Software. These IT practice groups are responsible for understanding the infrastructure needs of our customers,
and for designing cost-effective technology solutions to address them. We have also partnered with third-party
providers to make available a range of IT support services, including asset assessment, implementation,
maintenance, and disposal services. We believe we can leverage these seven practice groups to transform our
company into a recognized IT solution provider, which will enable us to capture a greater share of the IT
expenditures of our customers.
• Maintaining a strong brand name and customer awareness. Since our founding in 1982, we have built a
strong brand name and customer awareness. We have been named to the Fortune 1000 and the CRN Solution
Provider 500 for each of the last sixteen years. We actively work with our existing customers to become their
IT provider of choice for products and enhanced solution services, while seeking to ensure our reputation of
high-quality customer service, tailored marketing programs, and competitive pricing lead the way to expanding
our share of the overall IT market.
• Maintaining long-standing vendor relationships. We have a history of strong relationships with vendors, and
were among the first national solutions providers qualified by manufacturers to market computer systems to end
users. By working closely with our vendors to provide an efficient channel for the advertising and distribution
of their products, we expect to expand market share and generate opportunities for optimizing partner incentive
programs.
3
GROWTH STRATEGIES
Our growth strategies are designed to increase revenues by maximizing operational efficiencies while offering
innovative products and value added service offerings, increasing penetration of our existing customers, and expanding
our customer base. Our six key elements of growth are:
• Expanding hardware and software offerings. We offer our customers an extensive range of IT hardware and
software products, and in response to customer demand, we continually evaluate and add new products as they
become available. We work closely with vendors to identify and source first-to-market product offerings at
aggressive prices.
• Expanding IT solution services offerings. We strive to accelerate solution and service growth by providing
creative solutions to the increasingly complex hardware and software needs of our customers. Our Converged
Data Center, Networking, Mobility, Security, Cloud Solutions, Lifecycle, and Software services practice groups
consist of industry-certified and product-certified engineers, as well as highly specialized third-party providers.
Our investment in these seven practice areas is expected to increase our share of our customers’ annual IT
expenditures by broadening the range of products and services they purchase from us.
• Targeting customer segments. Through increased targeted marketing, we seek to expand the number of our
active customers and generate additional sales to existing customers by providing more value-added services
and solutions. We have developed specialty catalogs featuring product offerings designed to address the needs
of specific customer populations, including new product inserts targeted to purchasers of graphics, server, and
networking products. We also utilize Internet marketing campaigns that focus on select markets, such as
healthcare.
•
Increasing productivity of our sales representatives. We believe that higher sales productivity is the key to
leveraging our expense structure and driving future profitability improvements. We invest significant resources
in training new sales representatives and providing ongoing training to experienced personnel. Our training and
evaluation programs are focused towards assisting our sales personnel in understanding and anticipating clients’
IT needs, with the goal of fostering loyal customer relationships. We also provide our sales representatives with
technical support on more complex sales opportunities through our expanding group of technical solution
specialists.
• Migrating to cloud-based solutions for our customers. Cloud computing will be a key driver of new IT
spending as our customers seek scalable, cost-effective solutions. We plan to expand our cloud-based solution
sales and assist our customers in navigating the complex and growing field of cloud-solution offerings.
• Pursuing strategic acquisitions and alliances. We seek acquisitions and alliances that add new customers,
strengthen our product offerings, add management talent, and produce operating results which are accretive to
our core business earnings.
SERVICE AND SUPPORT
Since our founding in 1982, our primary objective has been to provide products and services that meet the demands
and needs of customers and to supplement those products with up-to-date product information and excellent customer
service and support. We believe that offering our customers superior value, through a combination of product
knowledge, consistent and reliable service and support, and leading products at competitive prices, differentiates us from
other direct marketers and provides the foundation for developing a broad and loyal customer base.
We invest in training programs for our service and support personnel, with an emphasis on putting customer needs
and service first. Product support technicians assist callers with questions concerning compatibility, installation, and
more difficult questions relating to product use. The product support technicians authorize customers to return defective
or incompatible products to either the manufacturer or to us for warranty service. In-house technicians perform both
warranty and non-warranty repair on most major systems and hardware products.
4
Using our customized information system, we transmit our customer orders either to our distribution center or to our
drop-ship suppliers, depending on product availability, for processing immediately after a customer receives credit
approval. At our distribution center, we also perform custom configuration of computer systems and handheld devices
as requested by our customers, which typically consists of the installation of memory, accessories, and/or software
purchased. Our customers may select the method of delivery that best meets their needs and is most cost effective,
ranging from expedited overnight delivery for urgently needed items to ground freight, generally used for heavier, more
bulky items. Through our Everything Overnight™ service, orders accepted up to 7:00 p.m. Eastern Time can be shipped
for overnight delivery from our distribution center.
Our inventory stocking levels are based on three primary criteria. First, we stock and maintain a large quantity of
products that sell through quickly (such as notebook and desktop systems, printers, and monitors). Second, we stock
products obtained through opportunistic purchases (including first-to-market and end-of-life special promotions, and
popular products with limited availability). Third, we stock products in common demand, such as components we use to
configure systems prior to shipping, for which we want to avoid shortages. Inventory stocking decisions are made
generally independent of the level of shipping service, as expedited shipping, including overnight delivery, is available
through the majority of our drop-ship suppliers as well as through our warehouse.
MARKETING AND SALES
We sell our products through our direct marketing channels to (i) SMBs including small office/home office
customers, (ii) government and educational institutions, and (iii) medium-to-large corporate accounts. We strive to be
the primary supplier of IT products and solutions to our existing and prospective customers by providing exemplary
customer service. We use multiple marketing approaches to reach existing and prospective customers, including:
•
•
outbound telemarketing and field sales;
digital, web, and print media advertising; and
• marketing programs targeted to specific customer populations.
All of our marketing approaches emphasize our broad product offerings, fast delivery, customer support,
competitive pricing, and our wide range of service solutions.
Sales Channels. We believe that our ability to establish and maintain long-term customer relationships and to
encourage repeat purchases is largely dependent on the strength of our sales personnel and programs. Because our
customers’ primary contact with us is through our sales representatives, we are committed to maintaining a qualified,
knowledgeable, and motivated sales staff with its principal focus on customer service.
Outbound Telemarketing and Field Sales. We seek to build loyal relationships with potential high-volume
customers by assigning them to individual account managers. We believe that customers respond favorably to one-on-
one relationships with personalized, well-trained account managers. Once established, these one-on-one relationships
are maintained and enhanced through frequent telecommunications and targeted catalogs and e-mails, as well as other
marketing materials designed to meet each customer’s specific IT needs. We pay most of our account managers a base
annual salary plus incentive compensation. Incentive compensation is tied generally to gross profit dollars produced by
the individual account manager. Account managers historically have significantly increased productivity after
approximately twelve months of training and experience.
E-commerce Sales. (www.connection.com, www.connection.com/enterprise, www.connection.com/publicsector,
and www.macconnection.com) We provide product descriptions and prices for generally all products online. Our
Connection website also provides updated information for more than 300,000 items. We offer, and continuously update,
selected product offerings and other special buys. We believe our websites are important sales sources and
communication tools for improving customer service.
5
Our MoreDirect subsidiary’s business process and operations are primarily Web-based. Most of its corporate
customers utilize a customized Web page to quickly search, source, and track IT products. MoreDirect’s website
(www.connection.com/enterprise) aggregates the current available inventories of its largest IT suppliers into a single
online source for its corporate customers. Its custom designed Internet-based system, TRAXX®, provides corporate
buyers with comparative pricing from several suppliers as well as special pricing arranged through the manufacturer.
The Internet supports three key business initiatives for us:
• Customer choice — We have built our business on the premise that our customers should be able to choose how
they interact with us--be it by telephone, or by means of their desktop or mobile device via email or the Internet.
• Lowering transactions costs — Our website tools include robust product search features and Internet Business
Accounts (customized Web pages), which allow customers to quickly and easily find information about
products of interest to them. If customers still have questions, they may call our telesales representatives or
account managers. Such phone calls are typically shorter and have higher close rates than calls from customers
who have not first visited our websites.
• Leveraging the time of experienced sales representatives — Our investments in technology-based sales and
service programs allow our sales representatives more time to build and maintain relationships with our
customers and help them to solve their business problems.
Business Segments. We conduct our business operations through three business segments: SMB, Large Account,
and Public Sector.
SMB Segment. Our principal target markets in this segment are small-to-medium-sized business customers. We
use a combination of outbound telemarketing, including some on-site sales solicitation by business development
managers, and Internet sales through customized Internet Business Accounts, to reach these customers.
Large Account Segment. Through our MoreDirect subsidiary’s custom designed Web-based system, we are able to
offer our larger corporate customers an efficient and effective method of sourcing, evaluating, purchasing, and tracking a
wide variety of IT products and services. MoreDirect’s strategy is to be the primary single source procurement portal for
its large corporate customers. MoreDirect’s sales representatives typically have ten to twenty years of experience and
are located strategically across the United States. This allows them to work directly with customers, often on site.
MoreDirect generally places its product orders with manufacturers and/or distribution companies for drop shipment
directly to its customers.
Public Sector Segment. We use a combination of outbound telemarketing, including some on-site sales solicitation
by business development managers, and Internet sales through customized Internet Business Accounts, to reach these
customers. Through our GovConnection subsidiary, we target each of the four distinct market sectors within this
segment—federal government, higher educational institutions, school grades K-12, and state and local governments.
The following table sets forth the relative distribution of net sales by business segment:
Years Ended December 31,
2016 2015 2014
Sales Segment
SMB
Large Account
Public Sector
Total
42 %
40 %
41 %
37
38
22
22
100 % 100 % 100 %
35
23
Our brand, and each of Connection’s business segments, is supported by targeted marketing campaigns across a
variety of media:
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Digital. We utilize a series of digital programs, in conjunction with advanced data analytics, to identify prospective
customers and generate new leads within our existing customer base. These programs include website, email, blog,
social media, electronic catalogs, webinars, and video/multimedia promotions.
Print. Connection produces a variety of print media, including direct mail pieces and Connected, a quarterly
publication that provides informative articles on the latest technologies and industry trends. We distribute specialty
catalogs to education, healthcare, and government customers and prospective customers on a periodic basis. The
Company’s MacConnection® brand publishes an eponymous catalog for the Apple market. These publications showcase
the depth of our in-house expertise in the marketplace and extend Connection’s brand to a wide audience of IT decision
makers.
Specialty Marketing. In addition to our digital and print marketing efforts, Connection maintains a strong presence
at industry tradeshows and conventions across the country, including a number of healthcare and education IT
conferences. Connection also hosts a series of Technology Summits each year, with a focus on building stronger
relationships with our customers and reinforcing our reputation as a trusted source of expertise.
Customers. We maintain an extensive database of customers and prospects. However, no single customer
accounted for more than 2% of our consolidated revenue in 2016. While no single agency of the federal government
comprised more than 2% of total sales, aggregate sales to the federal government were 7.5%, 6.7%, and 6.5% in 2016,
2015, and 2014, respectively. The loss of any single customer would not have a material adverse effect on any of our
business segments. In addition, we do not have individual orders in our backlog that are material to our business, as we
typically ship products within hours of receipt of orders.
PRODUCTS AND MERCHANDISING
We continuously focus on expanding the breadth of our product offerings. We currently offer our customers over
300,000 information technology products designed for business applications from more than 1,600 vendors, including
hardware and peripherals, accessories, networking products, and software. We select the products we sell based upon
their technology and effectiveness, market demand, product features, quality, price, margins, and warranties. The
following table sets forth our percentage of net sales (in dollars) for major product categories:
PERCENTAGE OF
NET SALES
Years Ended December 31,
2015
2014
2016
Notebooks/Mobility
Software
Servers/Storage
Net/Com Product
Other Hardware/Services
Total
23 %
20
10
8
39
100 %
23 %
17
13
9
38
100 %
21 %
16
13
9
41
100 %
We offer a 30-day right of return generally limited to defective merchandise. Returns of non-defective products are
subject to restocking fees. Substantially all of the products marketed by us are warranted by the manufacturer. We
generally accept returns directly from the customer and then either credit the customer’s account or ship the customer a
replacement or similar product from our inventory.
PURCHASING AND VENDOR RELATIONS
Product purchases from Ingram Micro, Inc., or Ingram, our largest supplier, accounted for approximately 21% of our
total product purchases in 2016 and 2015, respectively, and 25% in 2014. Purchases from Synnex Corporation, or
Synnex, comprised 13%, 15%, and 13% of our total product purchases in 2016, 2015, and 2014, respectively. No other
vendor supplied more than 10% of our total product purchases in 2016, 2015, or 2014. We believe that, while we may
experience some short-term disruption if products from Ingram and/or Synnex become unavailable to us, alternative
sources for products obtained directly from Ingram and Synnex are available to us.
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Products manufactured by HP represented 20% of our net sales in 2016 and 22% in both 2015 and 2014. We
believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such
disruption would likely have a material adverse effect on our results of operations and cash flows.
Many product suppliers reimburse us for advertisements or other cooperative marketing programs in our catalogs
and other marketing vehicles. Reimbursements may be in the form of discounts, advertising allowances, and/or rebates.
We also receive allowances from certain vendors based upon the volume of our purchases or sales of the vendors’
products by us. Some of our vendors offer limited price protection in the form of rebates or credits against future
purchases. We may also participate in end-of-life product and other special purchases which may not be eligible for
price protection.
We believe that we have excellent relationships with our vendors. We generally pay vendors within stated terms, or
earlier when favorable cash discounts are offered. We believe our high volume of purchases enables us to obtain product
pricing and terms that are competitive with those available to other national IT solutions providers. Although brand
names and individual product offerings are important to our business, we believe that competitive products are available
in substantially all of the merchandise categories offered by us.
DISTRIBUTION
We fulfill orders from customers both from products we hold in inventory and through drop shipping arrangements
with manufacturers and distributors. At our 283,000 square foot distribution and fulfillment complex in Wilmington,
Ohio, we receive and ship inventory, configure computer systems, and process returned products. Orders are transmitted
electronically from our various sales facilities to our Wilmington distribution center after credit approval, where
packaging documentation is printed automatically and order fulfillment takes place. Our customers are given several
shipping options, ranging from expedited overnight delivery through our Everything Overnight™ service to normal
ground freight service. Through our Everything Overnight™ service, orders accepted up until 7:00 p.m. Eastern Time,
can be shipped from our distribution center for overnight delivery via United Parcel Service, or UPS, or FedEx
Corporation. Upon request, orders may also be shipped by other common carriers.
We also place product orders directly with manufacturers and/or distribution companies for drop shipment directly
to our customers. Our MoreDirect subsidiary generally utilizes drop shipping for substantially all product orders. Order
status with distributors is tracked online, and in all circumstances, a confirmation of shipment from manufacturers and/or
distribution companies is received prior to initial recording of the transaction. At the end of each financial reporting
period, revenue is adjusted to reflect the anticipated receipt of products by the customers in the period. Products drop
shipped by suppliers were 75%, 74%, and 73% of net sales in 2016, 2015, and 2014, respectively. In future years, we
expect that products drop shipped from suppliers may increase, both in dollars and as a percentage of net sales, as we
seek to lower our overall inventory and distribution costs while maintaining excellent customer service.
Certain of our larger customers occasionally request special staged delivery arrangements under which either we or
our distribution partners set aside and temporarily hold inventory on our customer’s behalf. Such orders are firm
delivery orders, and customers generally pay under normal credit terms, regardless of delivery. Revenue on such
transactions is not recorded until shipment to their final destination as requested by the customer. Inventory held for
such staged delivery requests aggregated $23.2 million and $27.7 million at December 31, 2016 and 2015, respectively.
We maintain inventories of fast moving products that account for a high percentage of our ongoing product sales
transactions and sales dollars. We may also, from time to time, make large inventory purchases of certain first-to-market
products or end-of-life products to obtain favorable purchasing discounts. We also maintain sufficient inventory levels
of high volume components and accessories used for configuration services.
MANAGEMENT INFORMATION SYSTEMS
Our subsidiaries utilize management information systems which have been significantly customized for our use.
These systems permit centralized management of key functions, including order taking and processing, inventory and
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accounts receivable management, purchasing, sales, and distribution, and the preparation of daily operating control
reports on key aspects of the business. We also operate advanced telecommunications equipment to support our sales
and customer service operations. Key elements of the telecommunications systems are integrated with our computer
systems to provide timely customer information to sales and service representatives, and to facilitate the preparation of
operating and performance data.
MoreDirect has developed a custom designed Internet-based system, TRAXX®. This system is an integrated
application of sales order processing, integrated supply chain visibility, and has full Electronic Data Interchange (EDI)
links with major manufacturers’ distribution partners for product information, availability, pricing, ordering, delivery,
and tracking, including related accounting functions.
Our success is dependent in large part on the accuracy and proper use of our information systems, including our
telephone systems, to manage our inventory and accounts receivable collections, to purchase, sell, and ship our products
efficiently and on a timely basis, and to maintain cost-efficient operations. We expect to continue upgrading our
information systems in the future to more effectively manage our operations and customer database.
Our investments in IT infrastructure are designed to enable us to operate more efficiently. While we have not yet
finalized our decisions regarding the areas of future investment in our IT infrastructure, we expect to increase our capital
investments in our IT infrastructure, which if fully implemented, would likely exceed $20 million over the next one to
three years. For further discussion see “Liquidity and Capital Resources” of Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
COMPETITION
The direct marketing and sale of IT related products is highly competitive. We compete with other national
solutions providers of IT products, including CDW Corporation and Insight Enterprises, Inc., who are much larger than
we are. We also compete with:
•
•
•
•
•
•
certain product manufacturers that sell directly to customers as well as some of our own suppliers, such as
Apple, Dell, HP, and Lenovo;
software publishers, such as IBM, Microsoft, and Symantec;
distributors that sell directly to certain customers;
local and regional VARs;
various franchisers, office supply superstores, and national computer retailers; and
e-tailers, such as Amazon Web Services, with more extensive commercial online networks.
Additional competition may arise if other new methods of distribution emerge in the future. We compete not only
for customers, but also for favorable product allocations and cooperative advertising support from product
manufacturers. Several of our competitors are larger than we are and have substantially greater financial resources.
These and other factors related to our competitive position are discussed more fully in the “Overview” of Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on
Form 10-K.
We believe that price, product selection and availability, and service and support are the most important competitive
factors in our industry.
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INTELLECTUAL PROPERTY RIGHTS
Our trademarks include among others Connection®, PC Connection®, GovConnection®, MacConnection®, The
Connection™, HealthConnectionTM, Mobile Connection®, Cloud Connection®, Service Connection®,
ProConnection™, Education Connection®, MoreDirect®, TRAXX®, WebSPOC®, Softmart®, GlobalServeTM,
Raccoon CharacterTM, and their related logos and all iterations. We intend to use and protect these and our other marks,
as we deem necessary. We believe our trademarks have significant value and are an important factor in the marketing of
our products. We do not maintain a traditional research and development group, but we work closely with computer
product manufacturers and other technology developers to stay abreast of the latest developments in computer
technology, with respect to the products we both sell and use.
WORK FORCE
As of December 31, 2016, we employed 2,501 persons (full-time equivalent), of whom 1,268 (including 368
management and support personnel) were engaged in sales-related activities, 475 were engaged in providing IT services
and customer service and support, 464 were engaged in purchasing, marketing, and distribution-related activities, 102
were engaged in the operation and development of management information systems, and 192 were engaged in
administrative and finance functions. We consider our employee relations to be good. Our employees are not
represented by a labor union, and we have never experienced a labor related work stoppage.
Item 1A. Risk Factors
We cannot assure investors that our assumptions and expectations will prove to have been correct. Important
factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements.
Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no
intention or obligation to update or revise any forward-looking statements, whether as a result of new information,
future events, or otherwise. If any of the following risks actually occur, our business, financial condition, or results of
operations would likely suffer.
Instability in economic conditions in the financial markets may adversely affect our business and reduce our
operating results.
Our business has been affected by changes in economic conditions that are outside of our control, including
reductions in business investment, loss of consumer confidence, and fiscal uncertainty at both federal and state
government levels. Reductions in federal government spending may result in significant reductions in program funding.
Considerable uncertainty also exists regarding expected economic conditions both globally and in the United States, and
future delays or reductions in IT spending could have a material adverse effect on demand for our products and
consequently on our financial results.
Despite the recent increase in general economic optimism, there is always a risk that heightened economic
expectations may not be realized. Economic instability may arise, and it is difficult to predict to what extent our business
may be adversely affected. However, if IT spending should again decline, we are likely to experience an adverse impact,
which may be material on our business and our results of operations.
We have experienced variability in sales and may not be able to maintain profitable operations.
Several factors have caused our results of operations to fluctuate and we expect some of these fluctuations to
continue. Causes of these fluctuations include:
•
•
shifts in customer demand that affect our distribution models, including demand for total solutions;
loss of customers to competitors;
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•
•
•
•
•
•
industry shipments of new products or upgrades;
changes in overall demand and timing of product shipments related to economic markets and to government
spending;
changes in vendor distribution of products;
changes in our product offerings and in merchandise returns;
changes in distribution models as a result of cloud and software-as-a-service, or SaaS; and
adverse weather conditions that affect response, distribution, or shipping.
Our results also may vary based on our ability to manage personnel levels in response to fluctuations in revenue.
We base personnel levels and other operating expenditures on sales forecasts. If our revenues do not meet anticipated
levels in the future, we may not be able to reduce our staffing levels and operating expenses in a timely manner to avoid
significant losses from operations.
Substantial competition could reduce our market share and may negatively affect our business.
The direct marketing industry and the computer products retail business, in particular, are highly competitive. We
compete with other national solutions providers of hardware and software and computer related products, including
CDW Corporation and Insight Enterprises, Inc., each of which is much larger than we are. Certain hardware and
software vendors, such as Apple, Dell, Lenovo, and HP, who provide products to us, also sell their products directly to
end users through their own catalogs, stores, and via the Internet. We also compete with computer retail stores and
websites, who are increasingly selling to business customers and may become a significant competitor. We compete not
only for customers, but also for advertising support from IT product manufacturers. Some of our competitors have larger
customer bases and greater financial, marketing, and other resources than we do. In addition, some of our competitors
offer a wider range of products and services than we do and may be able to respond more quickly to new or changing
opportunities, technologies, and customer requirements. Many current and potential competitors also have greater name
recognition, engage in more extensive promotional activities, and adopt pricing policies that are more aggressive than
ours. We expect competition to increase as retailers and direct marketers who have not traditionally sold computers and
related products enter the industry.
In addition, product resellers and national solutions providers are combining operations or acquiring or merging with
other resellers and national solutions providers to increase efficiency. Moreover, current and potential competitors have
established or may establish cooperative relationships among themselves or with third parties to enhance their products
and services. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire
significant market share. We may not be able to continue to compete effectively against our current or future
competitors. If we encounter new competition or fail to compete effectively against our competitors, our business may
be harmed.
We face and will continue to face significant price competition.
Generally, pricing is very aggressive in our industry, and we expect pricing pressures to escalate should economic
conditions deteriorate. An increase in price competition could result in a reduction of our profit margins. We may not
be able to offset the effects of price reductions with an increase in the number of customers, higher sales, cost reductions,
or otherwise. Also, our sales of IT hardware products generally result in lower profit margins than those associated with
software products. Such pricing pressures could result in an erosion of our market share, reduced sales, and reduced
operating margins, any of which could have a material adverse effect on our business.
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Virtualization of IT resources and applications, including networks, servers, applications, and data storage may
disrupt or alter our traditional distribution models.
Our customers can access, through a cloud-based platform, business-critical solutions without the significant initial
capital investment required for dedicated infrastructure. Growing demand for the development of cloud-based solutions
may reduce demand for some of our existing hardware products. If the transition to an environment characterized by
cloud-based computing and software being delivered as a service progresses, we will likely increase investments in this
area before knowing whether our sales forecasts will accurately reflect customer demand for these products, services,
and solutions. We may not be able to effectively compete using these virtual distribution models. Our inability to
compete effectively with current or future virtual distribution model competitors, or adapt to a cloud-based environment,
could have a material adverse effect on our business.
We may experience a reduction in the incentive programs offered to us by our vendors.
Some product manufacturers and distributors provide us with incentives such as supplier reimbursements, payment
discounts, price protection, rebates, and other similar arrangements. The increasingly competitive computer hardware
market has already resulted in the following:
•
reduction or elimination of some of these incentive programs;
• more restrictive price protection and other terms; and
•
reduced advertising allowances and incentives.
Many product suppliers provide us with advertising allowances, and in exchange, we feature their products on our
website, and in our catalogs and other marketing vehicles. These vendor allowances, to the extent that they represent
specific reimbursements of incremental and identifiable costs, are offset against SG&A expenses. Advertising
allowances that cannot be associated with a specific program funded by an individual vendor or that exceed the fair value
of advertising expense associated with that program are classified as offsets to cost of sales or inventory. In the past, we
have experienced a decrease in the level of vendor consideration available to us from certain manufacturers. The level of
such consideration we receive from some manufacturers may decline in the future. Such a decline could decrease our
gross profit and have a material adverse effect on our earnings and cash flows.
Our business could be materially adversely affected by system failures, interruption, integration issues, or
security lapses of our information technology systems or those of our third-party providers.
Our ability to effectively manage our business depends significantly on our information systems and infrastructure
as well as, in certain instances those of our third-party providers. The failure of our current systems to operate effectively
or to integrate with other systems, including integration of upgrades to better meet the changing needs of our customers,
could result in transaction errors, processing inefficiencies, and the loss of sales and customers. In addition,
cybersecurity threats are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized
access to company or customer data, denial of service attacks, the processing of fraudulent transactions, and other
electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or
otherwise protected information, and corruption of data. Although we have in place various processes, procedures, and
controls to monitor and mitigate these threats, these measures may not be sufficient to prevent a material security threat
or mitigate these risks for our customers. If any of these events were to materialize, they could lead to disruption of our
operations or loss of sensitive information as well as subject us to regulatory actions, litigation, or damage to our
reputation, and could have a material adverse effect on our financial position, results of operations, and cash flows.
12
We could experience Internet and other system failures which would interfere with our ability to process orders.
We depend on the accuracy and proper use of our management information systems, including our telephone
system. Many of our key functions depend on the quality and effective utilization of the information generated by our
management information systems, including:
•
•
•
our ability to purchase, sell, and ship products efficiently and on a timely basis;
our ability to manage inventory and accounts receivable collection; and
our ability to maintain operations.
Our management information systems require continual upgrades to most effectively manage our operations and
customer database. Although we maintain some redundant systems, with full data backup, our primary computer and
telecommunications hardware is located in a single facility in New Hampshire, and a substantial interruption in our
management information systems or in our telephone communication systems, including those resulting from extreme
weather and natural disasters, as well as power loss, telecommunications failure, or similar events, would substantially
hinder our ability to process customer orders and thus could have a material adverse effect on our business.
Should our financial performance not meet expectations, we may be required to record a significant charge to
earnings for impairment of goodwill and other intangibles.
We test goodwill for impairment each year and more frequently if potential impairment indicators arise. Although
the fair value of our SMB and Large Account reporting units substantially exceeded their carrying value at our annual
impairment test, should the financial performance of a reporting unit not meet expectations due to the economy or
otherwise, we would likely adjust downward expected future operating results and cash flows. Such adjustment may
result in a determination that the carrying value of goodwill and other intangibles for a reporting unit exceeds its fair
value. This determination may in turn require that we record a significant non-cash charge to earnings to reduce the
$73.6 million aggregate carrying amount of goodwill held by our SMB and Large Account reporting units, resulting in a
negative effect on our results of operations.
The failure to comply with our public sector contracts could result in, among other things, fines or liabilities.
Revenues from the Public Sector segment are derived from sales to federal, state, and local government departments
and agencies, as well as to educational institutions, through various contracts and open market sales. Government
contracting is a highly regulated area. Noncompliance with government procurement regulations or contract provisions
could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination
of government contracts, and suspension, debarment, or ineligibility from doing business with the government. Our
current arrangements with these government agencies allow them to cancel orders with little or no notice and do not
require them to purchase products from us in the future. The effect of any of these possible actions by any government
department or agency could adversely affect our financial position, results of operations, and cash flows.
We acquire a majority of our products for resale from a limited number of vendors. The loss of any one of these
vendors could have a material adverse effect on our business.
We acquire products for resale both directly from manufacturers and increasingly indirectly through distributors and
other sources. The five vendors supplying the greatest amount of goods to us constituted 59% of our total product
purchases in the years ended December 31, 2016 and 61% in both 2015, and 2014. Among these five suppliers, product
purchases from Ingram, our largest supplier, accounted for approximately 21% of our total product purchases in 2016
and 2015, respectively, and 25% in 2014. Purchases from Synnex comprised 13%, 15%, and 13% of our total product
purchases in 2016, 2015, and 2014, respectively. No other vendor supplied more than 10% of our total product
purchases in 2016, 2015, or 2014. If we were unable to acquire products from Ingram or Synnex, we could experience a
short-term disruption in the availability of products, and such disruption could have a material adverse effect on our
results of operations and cash flows.
13
Products manufactured by HP represented 20% of our net sales in 2016 and 22% in both 2015 and 2014. We
believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such
disruption would likely have a material adverse effect on our results of operations and cash flows.
Substantially all of our contracts and arrangements with our vendors that supply significant quantities of products
are terminable by such vendors or us without notice or upon short notice. Most of our product vendors provide us with
trade credit, of which the net amount outstanding at December 31, 2016 was $177.9 million. Termination, interruption,
or contraction of relationships with our vendors, including a reduction in the level of trade credit provided to us, could
have a material adverse effect on our financial position.
Some product manufacturers either do not permit us to sell the full line of their products or limit the number of
product units available to national solutions providers such as us. An element of our business strategy is to continue
increasing our participation in first-to-market purchase opportunities. The availability of certain desired products,
especially in the direct marketing channel, has been constrained in the past. We could experience a material adverse
effect to our business if we are unable to source first-to-market purchases or similar opportunities, or if significant
availability constraints reoccur.
We are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry.
The market for IT products is characterized by rapid technological change and the frequent introduction of new
products and product enhancements. Our success depends in large part on our ability to identify and market products
that meet the needs of customers in that marketplace. In order to satisfy customer demand and to obtain favorable
purchasing discounts, we have and may continue to carry increased inventory levels of certain products. By so doing, we
are subject to the increased risk of inventory obsolescence. Also, in order to implement our business strategy, we intend
to continue, among other things, placing larger than typical inventory stocking orders of selected products and increasing
our participation in first-to-market purchase opportunities. We may also, from time to time, make large inventory
purchases of certain end-of-life products, which would increase the risk of inventory obsolescence. In addition, we
sometimes acquire special purchase products without return privileges. For these and other reasons, we may not be able
to avoid losses related to obsolete inventory. Manufacturers have limited return rights and have taken steps to reduce
their inventory exposure by supporting “configure-to-order” programs authorizing distributors and resellers to assemble
computer hardware under the manufacturers’ brands. These actions reduce the costs to manufacturers and shift the
burden of inventory risk to resellers like us, which could negatively impact our business.
We are dependent on key personnel.
Our future performance will depend to a significant extent upon the efforts and abilities of our senior executives and
other key management personnel. The competition for qualified management personnel in the computer products
industry is very intense, and the loss of service of one or more of these persons could have an adverse effect on our
business. Our success and plans for future growth will also depend on our ability to hire, train, and retain skilled
personnel in all areas of our business, especially sales representatives and technical support personnel. We may not be
able to attract, train, and retain sufficient qualified personnel to achieve our business objectives.
The methods of distributing IT products are changing, and such changes may negatively impact us and our
business.
The manner in which IT hardware and software is distributed and sold is changing, and new methods of distribution
and sale have emerged, including distribution through cloud-based and SaaS solutions. In addition, hardware and
software manufacturers have sold, and may intensify their efforts to sell, their products directly to end users. From time
to time, certain manufacturers have instituted programs for the direct sales of large order quantities of hardware and
software to certain major corporate accounts. These types of programs may continue to be developed and used by
various manufacturers. Some of our vendors, including Apple, Dell, HP, and Lenovo, currently sell some of their
products directly to end users and have stated their intentions to increase the level of such direct sales. In addition,
manufacturers may attempt to increase the volume of software products distributed electronically to end users. An
14
increase in the volume of products sold through or used by consumers of any of these competitive programs, or our
inability to effectively adapt our business to increased electronic distribution of products and services to end users could
have a material adverse effect on our results of operations.
We depend heavily on third-party shippers to deliver our products to customers.
Many of our customers elect to have their purchases shipped by an interstate common carrier, such as UPS or FedEx
Corporation. A strike or other interruption in service by these shippers could adversely affect our ability to market or
deliver products to customers on a timely basis.
Natural disasters, terrorism, and other circumstances could materially adversely affect our business.
Natural disasters, terrorism, and other business interruptions have caused and could cause damage or disruption to
international commerce and the global economy, and thus could have a negative effect on the Company, its suppliers,
logistics providers, manufacturing vendors, and customers. Our business operations are subject to interruption by natural
disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, and other events
beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to deliver
services or products to our customers, or to receive products from our suppliers, and create delays and inefficiencies in
our supply chain. In the event of a natural disaster or other business interruption, significant recovery time and
substantial expenditures could be required to resume operations and our financial condition, results of operations, and
cash flows could be materially adversely affected.
We may experience increases in shipping and postage costs, which may adversely affect our business if we are not
able to pass such increases on to our customers.
Shipping costs are a significant expense in the operation of our business. Increases in postal or shipping rates could
significantly impact the cost of shipping customer orders and mailing our catalogs. Postage prices and shipping rates
increase periodically, and we have no control over future increases. We have a long-term contract with UPS, and believe
that we have negotiated favorable shipping rates with our carriers. While we generally invoice customers for shipping
and handling charges, we may not be able to pass on to our customers the full cost, including any future increases in the
cost, of commercial delivery services, which would adversely affect our business.
We rely on the continued development of electronic commerce and Internet infrastructure development.
We continue to have increasing levels of sales made through our e-commerce sites. The on-line experience for our
clients continues to improve, but the competitive nature of the e-commerce channel also continues to increase. Growth
of our overall sales is dependent on customers continuing to expand their on-line purchases in addition to traditional
channels to purchase products and services. We cannot accurately predict the rate at which on-line purchases will
expand.
Our success in growing our Internet business will depend in large part upon our development of an increasingly
sophisticated e-commerce experience and infrastructure. Increasing customer sophistication requires that we provide
additional website features and functionality in order to be competitive in the marketplace and maintain market share.
We will continue to iterate our website features, but we cannot predict future trends and required functionality or our
adoption rate for customer preferences. As the number of on-line users continues to grow, such growth may impact the
performance of our existing Internet infrastructure.
We face uncertainties relating to unclaimed property and the collection of state sales and use tax.
We collect and remit sales and use taxes in states in which we have either voluntarily registered or have a physical
presence. Various states have sought to impose on direct marketers the burden of collecting state sales and use taxes on
the sales of products shipped to their residents. Many states have adopted rules that require companies and their
affiliates to register in those states as a condition of doing business with those state agencies. Our three sales companies
15
are registered in substantially all states, however, if a state were to determine that our earlier contacts with that state
exceeded the constitutionally permitted contacts, the state could assess a tax liability relating to our prior year sales. A
multi-state unclaimed property audit continues to be in process, and total accruals for unclaimed property aggregated
$0.8 million at December 31, 2016.
Privacy concerns with respect to list development and maintenance may materially adversely affect our business.
We mail catalogs and other promotional materials to names in our customer database and to potential customers
whose names we obtain from rented or exchanged mailing lists. Public concern regarding the protection of personal
information has subjected the rental and use of customer mailing lists and other customer information to increased
scrutiny. Legislation enacted limiting or prohibiting the use of rented or exchanged mailing lists could negatively affect
our business.
We are controlled by two principal stockholders.
Patricia Gallup and David Hall, our two principal stockholders, beneficially own or control, in the aggregate,
approximately 56% of the outstanding shares of our common stock as of December 31, 2016. Because of their beneficial
stock ownership, these stockholders can continue to elect the members of the Board of Directors and decide all matters
requiring stockholder approval at a meeting or by a written consent in lieu of a meeting. Similarly, such stockholders
can control decisions to adopt, amend, or repeal our charter and our bylaws, or take other actions requiring the vote or
consent of our stockholders and prevent a takeover of us by one or more third parties, or sell or otherwise transfer their
stock to a third party, which could deprive our stockholders of a control premium that might otherwise be realized by
them in connection with an acquisition of our Company. Such control may result in decisions that are not in the best
interest of our public stockholders. In connection with our initial public offering, the principal stockholders placed
substantially all shares of common stock beneficially owned by them into a voting trust, pursuant to which they are
required to agree as to the manner of voting such shares in order for the shares to be voted. Such provisions could
discourage bids for our common stock at a premium as well as have a negative impact on the market price of our
common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters located at 730 Milford Road, Merrimack, New Hampshire 03054-4631, from
an affiliated company, G&H Post, which is related to us through common ownership. The initial term of the fifteen-year
lease ended in November 2013, and we amended the lease in May 2014 to extend the term for an additional five years.
In addition to the rent payable under the facility lease, we are required to pay real estate taxes, insurance, and common
area maintenance charges. The amended lease has been recorded as an operating lease in the financial statements.
In August 2008, we entered into a lease agreement with G&H Post, which is related to us through common
ownership, for an office facility adjacent to our corporate headquarters. The lease has a term of ten years and provides
us with an option to renew the lease for two additional two-year terms, at the then comparable market rate. The lease
requires us to pay our proportionate share of real estate taxes and common area maintenance charges as either additional
rent or directly to third parties and also to pay insurance premiums for the leased property. The lease has been recorded
as an operating lease in the financial statements.
In August 2014, we entered into a ten-year lease for a facility in Wilmington, Ohio, which houses our distribution
and order fulfillment operations. We also operate sales and support offices throughout the United States and lease
facilities at these locations. Leasehold improvements associated with these properties are amortized over the terms of the
leases or their useful lives, whichever is shorter. We believe that our physical properties will be sufficient to support our
anticipated needs through the next twelve months and beyond.
16
Item 3. Legal Proceedings
We are subject to audits by states on sales and income taxes, unclaimed property, employment matters, and other
assessments. While management believes that known and estimated liabilities have been adequately provided for, it is
too early to determine the ultimate outcome of such audits, as formal assessments have not 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.
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 business, financial position, results of operations, or cash flows.
Executive Officers of PC Connection
Our executive officers and their ages as of March 3, 2017 are as follows:
Name
Patricia Gallup
Timothy McGrath
William Schulze
Age
62
58
56
Position
Chair and Chief Administrative Officer
President and Chief Executive Officer
Vice President, Interim Treasurer and Chief Financial Officer
Patricia Gallup is a co-founder of PC Connection and has served as Chair of the Board since September 1994, and
as Chief Administrative Officer since August 2011. Ms. Gallup has served as a member of our executive management
team since 1982.
Timothy McGrath has served as Chief Executive Officer since August 2011, and as President since May 2010. Mr.
McGrath has served as a member of our executive management team since he joined the Company in 2005.
William Schulze has served as Interim Treasurer and Chief Financial Officer since October 2016, and as Vice
President and Corporate Controller since October 2011. From December 1998 to October 2011, Mr. Schulze served in
various finance management roles at the Company.
Item 4. Mine Safety Disclosures
Not applicable.
17
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
PART II
Equity Securities
Market Information
Our common stock commenced trading on March 3, 1998, on the Nasdaq Global Select Market and trades today
under the symbol “CNXN.” As of February 27, 2017, there were 26,719,185 shares of our common stock outstanding,
held by approximately 61 stockholders of record. This figure does not include an estimate of the number of beneficial
holders whose shares are held of record by brokerage firms.
The following table sets forth for the fiscal periods indicated the range of high and low sales prices for our common
stock on the Nasdaq Global Select Market.
2016
High
Low
Quarter Ended:
December 31
September 30
June 30
March 31
Quarter Ended:
December 31
September 30
June 30
March 31
$ 29.40
26.89
25.48
25.81
$ 22.81
23.46
22.55
20.02
2015
High
Low
$ 23.24 $ 19.95
19.50
24.04
22.27
24.82
26.88
26.74
In 2016, we declared a special cash dividend of $0.34 per share. The total cash payment of $9.0 million was made
on January 12, 2017 to stockholders of record at the close of business on December 30, 2016. In 2015, we declared a
special cash dividend of $0.40 per share. The total cash payment of $10.6 million was made on January 12, 2016 to
stockholders of record at the close of business on December 29, 2015. We have no current plans to pay additional cash
dividends on our common stock in the foreseeable future, and declaration of any future cash dividends will depend upon
our financial position, strategic plans, and general business conditions.
Share Repurchase Authorization
On March 28, 2001, our Board of Directors authorized the spending of up to $15.0 million to repurchase our
common stock. We consider block repurchases directly from larger stockholders, as well as open market purchases, in
carrying out our ongoing stock repurchase program.
We did not repurchase any shares in 2015 or 2016. As of December 31, 2016, we have repurchased an aggregate of
1,682,119 shares for $12.2 million under our Board approved 2001 repurchase program. The maximum approximate
dollar value of shares that may yet be purchased under this Board authorized program is $2.8 million.
On February 11, 2014, our Board approved a new share repurchase program authorizing up to $15.0 million in share
repurchases. There is no fixed termination date for this repurchase program. Purchases may be made in open-market
transactions, block transactions on or off an exchange, or in privately negotiated transactions. We intend to complete the
2001 repurchase program before repurchasing shares under the new program. The timing and amount of any share
repurchases will be based on market conditions and other factors.
18
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed”
with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of
1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into
such filing.
The following stock performance graph compares cumulative total stockholder return on our common stock for the
period from January 1, 2011 through December 31, 2016 with the cumulative total return for (i) the Nasdaq Stock
Market Composite and (ii) the Nasdaq Retail Trade Stocks (Peer Group) for the period starting January 1, 2011 and
ending December 31, 2016. This graph assumes the investment of $100 on January 1, 2011 in our common stock and in
each of the two Nasdaq indices, and that dividends are reinvested.
Company Name / Index
PC Connection, Inc.
Nasdaq Stock Market-Composite
Nasdaq Retail Trade (Peer Index)
Base
Period
11-Dec 12-Dec
100.00
100.00
100.00
Years Ended
13-Dec 14-Dec 15-Dec 16-Dec
107.39 236.13 237.37 222.85 279.87
117.45 164.57 188.84 201.98 219.89
118.24 153.55 170.82 178.67 181.43
19
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and
the Notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
other financial information included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations
Data:
Net sales
Cost of sales
Gross profit
Selling, general and administrative
expenses
Special charges (1)
Income from operations
Interest expense
Other, net
Income before taxes
Income tax provision
Net income
Basic earnings per share
Diluted earnings per share
Consolidated Balance Sheet Data:
Working capital
Total assets
Short-term debt:
2016
Years Ended December 31,
2015
2013
2014
(dollars in thousands, except per share)
2012
$ 2,692,592 $ 2,573,973 $ 2,463,339
2,139,950
2,232,954
323,389
341,019
2,321,435
371,157
$ 2,221,638 $ 2,158,873
1,876,784
1,928,638
282,089
293,000
$
$
$
290,637
—
80,520
(67)
—
80,453
(32,342)
48,111 $
262,465
—
78,554
(87)
—
78,467
(31,640)
46,827 $
251,935
—
71,454
(86)
─
71,368
(28,687)
42,681
233,604
—
59,396
(149)
─
59,247
(23,565)
35,682 $
226,322
1,135
54,632
(166)
41
54,507
(21,436)
33,071
$
1.81 $
1.80 $
1.77 $
1.76 $
1.63
1.61
$
$
1.37 $
1.35 $
1.25
1.24
2016
2015
As of December 31,
2014
(dollars in thousands)
2013
2012
$ 328,917
686,134
$ 330,848 $ 293,449 $ 256,376
500,944
539,960
639,074
$ 222,987
468,323
Current maturities of capital lease obligation to
affiliate
Total stockholders’ equity
Cash dividends declared per share
─
433,442
0.34
$
─
392,451
$
─
354,008
─
319,829
0.40
989
291,303
0.38
$
0.40 $
0.40 $
(1) Special charges in 2012 consisted of $1,135 related to an equity-based award granted upon the retirement of a former executive
officer and workforce reductions.
20
Item 7. 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.”
OVERVIEW
We are a national solutions provider of a wide range of information technology, or IT, solutions. We help our
customers design, enable, manage, and service their IT environments. We provide IT products, including computer
systems, software and peripheral equipment, networking communications, and other products and accessories that we
purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration,
and implementation of IT solutions. These services are performed by our personnel and by third-party 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 government 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 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 our revenues
while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the
productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and
administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel,
especially in relation to changing revenue levels.
To support future growth, we are expanding our IT solutions business, which requires the addition of highly-skilled
service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-
year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do
not grow enough to offset the cost of these headcount additions, our operating results may decline.
21
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 and provide our customers
enhanced functionality. While we have not yet finalized our decisions regarding the areas of future investment in our IT
infrastructure, we expect to increase our capital investments in our IT infrastructure in the next one to three years, which
will also likely increase SG&A expenses as assets are placed into service and depreciated.
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:
Net sales (in millions)
Gross margin
Selling, general and administrative expenses
Income from operations
2016
Years Ended December 31,
2015
$ 2,574.0
2014
$ 2,463.3
$ 2,692.6
13.8 %
10.8
3.0
13.2 %
10.2
3.0
13.1 %
10.2
2.9
Net sales increased in 2016 by $118.6 million, or 4.6%, compared to 2015, due to increased sales in all three of our
sales segments. Our investments in advanced solution sales including our acquisition of Softmart in May 2016 led to
increased sales of software. In addition, net sales of notebooks/mobility increased as mobility continued to be a strategic
focus for customers in all three segments. Gross margin (gross profit expressed as a percentage of net sales) increased
significantly due to our focus on increasing sales of higher-margin advanced solution products. SG&A expenses
increased in dollars and as a percentage of net sales due to incremental variable compensation associated with higher
gross profits, investments in solution sales and support personnel, and the acquisitions in 2016 of Softmart and
GlobalServe. Operating income in 2016 increased year over year in dollars, but remained unchanged as a percentage of
net sales.
Sales Distribution
The following table sets forth our percentage of net sales by sales segment and product mix:
Years Ended December 31,
2015
2016
2014
Sales Segment
SMB
Large Account
Public Sector
Total
Product Mix
Notebooks/Mobility
Software
Servers/Storage
Net/Com Product
Other Hardware/Services
Total
40 %
38
22
100 %
41 %
37
22
100 %
42 %
35
23
100 %
23 %
20
10
8
39
100 %
23 %
17
13
9
38
100 %
21 %
16
13
9
41
100 %
22
Gross Profit Margins
The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three
years:
Sales Segment
SMB
Large Account
Public Sector
Total
Cost of Sales
Years Ended December 31,
2015
2014
2016
15.8 %
12.8
11.7
13.8 %
15.5 %
12.0
11.3
13.2 %
15.1 %
12.2
10.9
13.1 %
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.
Operating Expenses
The following table reflects our more significant operating expenses for the last three years (in millions of dollars):
Personnel costs
Advertising
Facilities operations
Professional fees
Credit card fees
Depreciation and amortization
Other, net
Total
Percentage of net sales
Years Ended December 31,
2015
$ 200.5
15.7
12.7
7.5
7.1
9.0
10.0
$ 262.5
2014
$ 189.7
15.7
12.0
7.3
7.7
8.1
11.4
$ 251.9
2016
$ 226.2
16.1
14.2
8.3
6.9
10.5
8.4
$ 290.6
10.8 %
10.2 %
10.2 %
Personnel costs increased in 2016 compared to 2015 due to investments in our sales force and solution sales support,
increased variable compensation associated with higher gross profits, and the inclusion of the personnel costs of Softmart
and GlobalServe since their respective 2016 acquisition dates. Facilities operations increased year over year in 2016 due
to the relocation of our Chicago-area facility, as lease expense for the previous facility overlapped the new lease. We
will not incur any lease expense in 2017 for the previous facility.
23
YEAR-OVER-YEAR COMPARISONS
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Net sales increased by 4.6% to $2,692.6 million in 2016 from $2,574.0 million in 2015. Changes in net sales and
gross profit by operating segment are shown in the following table (dollars in millions):
Sales:
SMB
Large Account
Public Sector
Total
Gross Profit:
SMB
Large Account
Public Sector
Total
Years Ended December 31,
2016
2015
Amount
% of
Net Sales
Amount
% of
Net Sales
%
Change
$ 1,091.2
1,012.0
589.4
$ 2,692.6
40.5 % $ 1,040.6
37.6
21.9
100.0 % $ 2,574.0
961.0
572.4
40.5 %
37.3
22.2
100.0 %
4.9 %
5.3
3.0
4.6 %
$
172.4
129.6
69.2
$
371.2
15.8 % $
12.8
11.7
13.8 % $
161.3
115.0
64.7
341.0
6.9 %
15.5 %
12.0
11.3
13.2 %
12.7
7.0
8.8 %
• Net sales for the SMB segment increased due to higher software and notebooks/mobility sales. Software sales
increased due to our 2016 acquisition of Softmart as well as investments in additional security and software services
technical specialists. Net sales of notebooks/mobility products increased as mobility continues to be a strategic
focus for SMB customers.
• Net sales for the Large Account segment increased due to higher sales of software, accessories, and
notebooks/mobility products. Net sales of software for this segment increased year over year by double-digit
percentages due to strong demand for security and office productivity tools as well as our 2016 acquisition of
Softmart.
• Net sales to the Public Sector segment increased due to increased sales to the federal government. Sales to the
federal government grew by 16.4% due to higher sales of desktops and notebooks made under federal government
contracts, while sales to state and local government and educational institutions decreased by 2.9% due to lower
sales to K-12 customers. Sales of notebooks/mobility, desktops, and software increased in this segment, but were
partly offset by decreased sales of server/storage products.
Gross profit for 2016 increased year over year in dollars and as a percentage of net sales (gross margin), as explained
below:
• Gross profit for the SMB segment increased due to an increase in net sales and gross margin. Gross margin
increased year over year due to higher invoice selling margins (24 basis points) realized on larger sales of higher-
margin advance solution sales, as well as an increase in vendor early-payment discounts (3 basis points).
• Gross profit for the Large Account segment increased due to an increase in net sales and gross margin. Gross
margin increased year over year due to higher invoice selling margins (95 basis points) associated with increased
sales of higher-margin software sales, offset by lower agency revenues (32 basis points).
• Gross profit for the Public Sector segment increased due to an increase in net sales and gross margin. Invoice
selling margins increased by 40 basis points due to increased demand for higher-margin products such as software.
24
Selling, general and administrative expenses in 2016 increased in dollars and as a percentage of net sales compared
to the prior year. SG&A expenses attributable to our three operating segments and the remaining unallocated
Headquarters/Other group expenses are summarized below (dollars in millions):
Years Ended December 31,
2015
2016
SMB
Large Account
Public Sector
Headquarters/Other, unallocated
Total
Amount
$ 130.8
87.1
60.6
12.1
$ 290.6
% of Net
Sales
Amount
12.0 % $ 118.4
8.6
10.3
73.9
57.8
12.4
10.8 % $ 262.5
% of Net %
Sales
Change
11.4 % 10.5 %
7.7
10.1
17.9
4.8
(2.4)
10.2 % 10.7 %
• SG&A expenses for the SMB segment increased in dollars and as a percentage of net sales. Both increased due to
incremental variable compensation associated with higher gross profits, the inclusion of Softmart’s operating
expenses, and greater usage of Headquarter services. The increase in Headquarter services was partly related to our
investments in technical and engineering support provided to the SMB segment.
• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales. The increase
in SG&A dollars and as a percentage of net sales was due to the inclusion of Softmart’s operating expenses,
incremental variable compensation associated with higher gross profits, and higher usage of Headquarter services.
The increase in Headquarter services was partly related to our investments in technical and engineering support
provided to the Large Account segment.
• SG&A expenses for the Public Sector segment increased in dollars and as a percentage of net sales. Both increased
due to incremental variable compensation associated with higher gross profits and greater usage of Headquarter
services. The increase in Headquarter services was partly related to our investments technical and engineering
support provided to the Public Sector segment.
• SG&A expenses for the Headquarters/Other group decreased due to an increase in allocated personnel and related
costs related to our investments in solution services. 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 increased by $2.0 million to $80.5 million in 2016, compared to 2015. Income from
operations as a percentage of net sales remained unchanged at 3.0% for 2016 and 2015. The increase in operating
income resulted primarily from an increase in gross profits.
Income taxes. Our effective tax rate was 40.2% for the year ended December 31, 2016, compared to 40.3% for the
year ended December 31, 2015. Our tax rate will vary based on income apportionment to certain jurisdictions, valuation
reserves, and accounting for uncertain tax positions. However, we do not expect these variations to be significant in
2017.
Net income increased by $1.3 million to $48.1 million in 2016, from $46.8 million in 2015, principally due to the
increase in operating income.
25
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Net sales increased by 4.5% to $2,574.0 million in 2015 from $2,463.3 million in 2014. Changes in net sales and
gross profit by operating segment are shown in the following table (dollars in millions):
Years Ended December 31,
2015
2014
Amount
% of
Net Sales
Amount
% of
Net Sales
%
Change
Sales:
SMB
Large Account
Public Sector
Total
Gross Profit:
SMB
Large Account
Public Sector
Total
$ 1,040.6
961.0
572.4
40.5 % $ 1,037.6
37.3
22.2
850.8
574.9
$ 2,574.0
100.0 % $ 2,463.3
$
161.3
115.0
64.7
$
341.0
15.5 % $
12.0
11.3
13.2 % $
156.6
104.2
62.6
323.4
0.3 %
42.1 %
34.5
23.4
100.0 %
13.0
(0.4)
4.5 %
3.0 %
15.1 %
12.2
10.9
13.1 %
10.5
3.3
5.5 %
• Net sales for the SMB segment increased slightly due to higher notebooks/mobility sales. Sales of desktops in 2014
were high due to the expiration of support for Windows XP software in April 2014. Increased sales of
notebooks/mobility, servers/storage, and net/com products for this segment offset the year-over-year decline in
desktops.
• Net sales for the Large Account segment increased due to our focus on growing advanced solution sales including
software and servers/storage products. Software and servers/storage product sales for this segment increased year
over year by 27% and 14%, respectively, due to our investment in technical solution engineers and the completion of
large software deals. Servers sales increased in part due to the expiration in July 2015 of support for Windows
Server 2003 software.
• Net sales to the Public Sector segment decreased by 0.4% or $2.5 million. Sales to the federal government increased
by 8.7% due to higher sales made under federal government contracts, while state and local government and
educational institutions decreased by 4.0% due to lower sales to K-12 customers. Sales of notebooks/mobility
increased in this segment, offset by decreased sales of net/com products.
Gross profit for 2015 increased year over year in dollars and as a percentage of net sales (gross margin), as explained
below:
• Gross profit for the SMB segment increased due to an increase in net sales and gross margin. Gross margin
increased year over year due to higher invoice selling margins (29 basis points) realized on increased sales of higher-
margin net/com and storage products, as well as an increase in vendor early-payment discounts (9 basis points).
• Gross profit for the Large Account segment increased due to higher net sales. Gross margin decreased due to lower
invoice selling margins (41 basis points) associated with increased sales of lower-margin notebooks/mobility
products, offset by higher agency revenues (16 basis points). We receive agency fees from suppliers for certain
software and hardware sales which are recorded as revenue with no corresponding cost of goods sold, and
accordingly such fees have a positive impact on gross margin.
• Gross profit for the Public Sector segment increased despite lower net sales. Invoice selling margins increased by
45 basis points due to increased demand for higher margin products such as software.
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Selling, general and administrative expenses in 2015 increased in dollars and remained unchanged as a percentage
of net sales compared to the prior year. SG&A expenses attributable to our three operating segments and the remaining
unallocated Headquarters/Other group expenses are summarized below (dollars in millions):
Years Ended December 31,
2014
2015
SMB
Large Account
Public Sector
Headquarters/Other, unallocated
Total
% of Net
Sales
% of Net %
Sales
Amount
$ 118.4
73.9
57.8
12.4
$ 262.5
Amount
11.4 % $ 117.0
7.7
10.1
64.9
59.0
11.0
10.2 % $ 251.9
11.3 %
7.6
10.3
Change
1.2 %
13.7
(2.0)
12.7
10.2 % 4..2 %
• SG&A expenses for the SMB segment increased slightly in dollars and as a percentage of net sales. Both increased
due to incremental variable compensation associated with higher gross profits and greater usage of Headquarter
services, but were partially offset by reduced advertising expense. The increase in Headquarter services was partly
related to additional technical and engineering support provided to the SMB segment.
• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales. The increase
in SG&A dollars and as a percentage of net sales was due to investments in solution sales and services, incremental
variable compensation associated with higher gross profits, and higher usage of Headquarter services. The increase
in Headquarter services was partly related to additional technical and engineering support provided to the Large
Account segment.
• SG&A expenses for the Public Sector segment decreased in dollars and as a percentage of net sales due to a
reduction in advertising expense and credit card fees.
• SG&A expenses for the Headquarters/Other group increased due to an increase in unallocated personnel and other
related costs, including higher executive management oversight costs associated with our improved operating results
in 2015. 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 increased by $7.1 million to $78.6 million in 2015, from $71.5 million in 2014. Income
from operations as a percentage of net sales increased to 3.0% for 2015 from 2.9% in 2014. The increase in operating
income resulted primarily from an increase in net sales.
Income taxes. Our effective tax rate was 40.3% for the year ended December 31, 2015, compared to 40.2% for the
year ended December 31, 2014.
Net income increased by $4.1 million to $46.8 million in 2015 from $42.7 million in 2014, principally due to the
increase in operating income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
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, dividend payments, and as opportunities arise, possible acquisitions of new
businesses.
27
We believe that funds generated from operations, together with available credit under our bank line of credit, will be
sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve
calendar months. 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 $4.5 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 the areas of future investment in our IT infrastructure, the incremental capital
costs of such a project, if fully implemented, would likely exceed $20.0 million over the next one to three years.
We expect to meet our cash requirements for 2017 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 December 31, 2016, we had $49.2 million in cash and cash equivalents.
• Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash
needs by generating earnings and managing net changes in inventories and receivables with changes in payables to
generate a positive cash flow.
• Credit Facilities. As of December 31, 2016, no borrowings were outstanding against our $50.0 million bank line of
credit, which is available until February 10, 2022. Accordingly, our entire line of credit was available for borrowing
at December 31, 2016. 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 under “Item 1A. Risk Factors.”
Summary Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the last three years (in millions of dollars):
Years Ended December 31,
2015
2014
2016
Net cash provided by operating activities
Net cash used for investing activities
Net cash (used for) provided by financing activities
(Decrease)/increase in cash and cash equivalents
$
$
33.6
(54.9)
(9.7)
(31.0)
$
$
30.9
(12.8)
1.2
19.3
$
$
35.4
(7.6)
(9.4)
18.4
Cash provided by operating activities totaled $33.6 million in 2016. Operating cash flow in 2016 resulted primarily
from net income before depreciation and amortization and a decrease in inventory, offset partially by an increase in
accounts receivable. Accounts receivable increased year over year by $33.8 million primarily due to our $51.0 million
increase in sales in the fourth quarter of 2016 compared to the prior year period. Days sales outstanding increased to 48
days at December 31, 2016, from 44 days at December 31, 2015. Inventory decreased year over year by $12.4 million in
2016 due primarily to better inventory management. Inventory days, which is the measure of the average number of days
goods remain in inventory before being sold, decreased from 16 days at December 31, 2015, to 13 days at December 31,
2016. Operating cash in 2015 was primarily generated by net income before depreciation and amortization and an
increase in accounts payable offset by increases in accounts receivable and inventory. Operating cash in 2014 was
primarily generated by net income before depreciation and amortization partially offset by increases in accounts
receivable and inventory.
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At December 31, 2016, we had $177.9 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 financed by cash
flows from operations or short-term borrowings under the line of credit. This amount includes $33.1 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 $42.1 million in 2016, compared to 2015 due to our acquisitions of
Softmart, Inc. and GlobalServe, Inc. Cash used to purchase property and equipment less proceeds from the sale of
equipment amounted to $11.9 million in 2016, compared to $12.3 million in 2015, and $7.6 million in 2014,
respectively. These expenditures were primarily related to capitalized internally-developed software in connection with
the investments in our IT infrastructure, and in 2015, included our investment in a distribution center. The acquisitions of
Softmart and GlobalServe represented a net use of cash of $31.9 million and $11.1 million, respectively, for the year
ended December 31, 2016.
Cash used for financing activities decreased $10.9 million in 2016, compared to 2015. Financing uses of cash
included dividends of $10.6 million declared in December 2015 and paid in January 2016. Cash provided by financing
activities in 2015 related primarily to proceeds of $0.9 million from the issuance of stock under our employee stock
purchase plan. Financing uses of cash included dividends of $10.5 million in 2014. In January 2017, the Company paid
a dividend of $9.0 million which was declared in December 2016.
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 consolidated financial statements and the accompanying notes included in this annual report.
Bank Line of Credit. Our bank line of credit extends until February 2022 and is collateralized by our accounts
receivable. 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 (3.75% at December 31, 2016).
The one-month LIBOR rate at December 31, 2016 was 0.77%. 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 year ended December 31, 2016.
In February of 2017, we renewed our credit facility, extending the expiration date to February 10, 2022, at which
time any amounts outstanding become due. The credit facility was renewed with substantially the same terms and
conditions as with the preceding agreement.
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 December 31, 2016, the
entire $50.0 million facility was available for borrowing.
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
$65.0 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 $33.1 million in the aggregate as of December 31,
29
2016, are recorded in accounts payable. The inventory financed is classified as inventory on the consolidated balance
sheet.
Contractual Obligations. The following table sets forth information with respect to our long-term obligations
payable in cash as of December 31, 2016 (in thousands):
Contractual Obligations:
Operating lease obligations (1)
Payments Due By Period
Total
Less Than 1 – 3
Years
1 Year
3 – 5
Years
More Than
5 Years
$ 17,910
4,454 6,350 3,808
3,298
(1) Excluding taxes, insurance, and common area maintenance charges.
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits
at December 31, 2016, we are unable to make reasonably reliable estimates of the period of cash settlement with the
respective taxing authority. Therefore, $1.0 million of unrecognized tax benefits, including interest and penalties, have
been excluded from the contractual obligations table above. See Note 9 to the Consolidated Financial Statements for a
discussion on income taxes.
Operating Leases. We lease facilities from our principal stockholders and facilities from third parties under non-
cancelable operating leases. Certain leases require us to pay real estate taxes, insurance, and common area maintenance
charges.
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 that is material to investors.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to manage 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 2022 and is collateralized by our accounts
receivable. As of December 31, 2016, 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 to 1.0. We did not have
any outstanding borrowings under the credit facility during the fourth quarter of 2015, and accordingly, the funded
debt ratio did not limit potential borrowings as of December 31, 2016. 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
at December 31, 2016, as $353.2 million, whereas our actual consolidated stockholders’ equity at this date was
$433.4 million. Under our renewed credit facility, Minimum Consolidated Net Worth must be at least $346.7
million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31,
2016.
30
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. Such 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. The net amount outstanding
under such agreements as of December 31, 2016 was $33.1 million.
Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things,
general economic conditions, the condition of the information technology industry, our financial performance and stock
price, and the state of the capital markets.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A “critical accounting policy” has been defined as one that is both important to the portrayal of the registrant’s
financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. Further, “critical
accounting policies” are those that are reflective of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions.
We believe that our accounting policies described below fit the definition of “critical accounting policies.”
Revenue Recognition
Revenue on product sales is recognized at the point in time when persuasive evidence of an arrangement exists, the
price is fixed or determinable, delivery has occurred, and there is a reasonable assurance of collection of the sales
proceeds. We generally obtain oral or written purchase authorizations from our customers for a specified amount of
product at a specified price. Because we either (i) have a general practice of covering customer losses while products are
in-transit despite title transferring at the point of shipment or (ii) have FOB–destination shipping terms specifically set
out in our arrangements with federal agencies and certain commercial customers, delivery is deemed to have occurred at
the point in time when the product is received by the customer. We use product delivery information regarding
shipments at or near the end of the reporting period to estimate the products that have not reached the destination and
recognize those revenues in the following period. This process requires us to make estimates of product that is in transit
at the reporting date. These estimates are derived from current and historic shipping documentation and the volume of
sales. The impact of the deferral of these revenues has not been material in the periods presented.
We provide our customers with a limited thirty-day right of return generally limited to defective merchandise.
Revenue is recognized at delivery and a reserve for sales returns is recorded. We make reasonable and reliable estimates
of product returns based on significant historical experience and record our sales reserves as a reduction of revenues and
either as offsets to accounts receivable or, for customers who have already paid, as offsets to accrued expenses. At
December 31, 2016, we recorded sales reserves of $3.7 million and $0.2 million as components of accounts receivable
and accrued expenses, respectively. At December 31, 2015, we recorded sales reserves of $3.2 million and $0.2 million
as components of accounts receivable and accrued expenses, respectively.
All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues
earned for the goods provided, and these amounts have been classified as “net sales.” Costs related to such shipping and
handling billings are classified as “cost of sales.” Sales are reported net of sales, use, or other transaction taxes that are
collected from customers and remitted to taxing authorities.
We use our own engineering personnel in projects involving the design and installation of systems and networks,
and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposals, and
other services. This service revenue represents a small percentage of our consolidated revenue. We evaluate such
engagements to determine whether we or the third party assumes the general risk and reward of ownership in these
transactions. For those transactions in which we do not assume the risk and reward but instead act as an agent, we
recognize the transaction revenue on a net basis. Under net sales recognition, the cost of the third party is recorded as a
31
reduction to the selling price, resulting in net sales being equal to the gross profit on the transaction. In those
engagements in which we are the principal and primary obligor, we report the sale on a gross basis, and the cost of the
service provider is recognized in cost of goods sold.
Similarly, we recognize revenue from agency sales transactions on a net sales basis. In agency sales transactions,
we facilitate product sales by equipment and software manufacturers directly to our customers and receive agency, or
referral, fees for such transactions. We do not take title to the products or assume any maintenance or return obligations
in these transactions; title is passed directly from the supplier to our customer.
Amounts recognized on a net basis included in net sales for such third-party services and agency sales transactions
were $30.2 million, $24.2 million, and $25.7 million for the years ended December 31, 2016, 2015, and 2014,
respectively.
In certain revenue arrangements, our contracts require that we provide multiple units of hardware, software, or
services deliverables. Under these multiple-element arrangements, each service performed and product delivered is
considered a separate deliverable and qualifies as a separate unit of accounting. For multiple element arrangements, we
allocate revenue based on vendor-specific objective evidence of fair value of the underlying services and products. If
we were to enter into a multiple element arrangement in which vendor-specific objective evidence was not available, we
would utilize third-party evidence to allocate the selling price. If neither vendor-specific objective evidence nor third-
party evidence was available, we would estimate the selling price based on market price and company specific factors.
Revenue is recognized when the product or service is delivered, consistent with our general revenue recognition policy.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and
customers’ current creditworthiness. Our allowance is generally computed by (1) applying specific percentage reserves
on accounts that are past due, and (2) specifically reserving for customers known to be in financial difficulty. Therefore,
if the financial condition of certain of our customers were to deteriorate, or if we noted there was a lengthening of the
timing of the settlement of receivables that was symptomatic of a general deterioration in the ability of our customers to
pay, we would have to increase our allowance for doubtful accounts. This would negatively impact our earnings. Our
cash flows would be impacted to the extent that receivables could not be collected.
In addition to accounts receivable from customers, we record receivables from our vendors/suppliers for cooperative
advertising, price protection, supplier reimbursements, rebates, and other similar arrangements. A portion of such
receivables is estimated based on information available from our vendors at discrete points in time. While such
estimates have historically approximated actual cash received, a change in estimates could give rise to a reduction in the
receivable. This could negatively impact our earnings and our cash flows.
Considerable judgment is used in assessing the ultimate realization of customer receivables and vendor/supplier
receivables, including reviewing the financial stability of a customer, vendor information, and gauging current market
conditions. If our evaluations are incorrect, we may incur additional charges in the future on our consolidated statements
of income. Our trade receivables are charged off in the period in which they are deemed uncollectible. Recoveries of
trade receivables previously charged are recorded when received. Write offs of customer and vendor receivables totaled
$0.3 million in 2016, and $1.0 million in 2015.
Vendor Allowances
We receive allowances from merchandise vendors for price protections, discounts, product rebates, and other
programs. These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of
sales or inventory, as applicable. We also receive vendor co-op advertising funding for our catalogs and other programs.
Vendors have the ability to place advertisements in the catalogs or fund other advertising activities for which we receive
advertising allowances. These vendor allowances, to the extent that they represent specific reimbursements of
incremental and identifiable costs, are offset against SG&A expense on the consolidated statements of income.
Advertising allowances that cannot be associated with a specific program funded by an individual vendor or that exceed
32
the fair value of advertising expense associated with that program are classified as offsets to cost of sales or inventory.
Our vendor partners generally consolidate their funding of advertising and other marketing programs, and as a result, we
classify substantially all vendor allowances as a reduction of cost of inventory purchases rather than a reduction of
advertising expense.
Inventories
Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment are
stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or
market, whichever is lower. Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete,
slow moving, and non-saleable inventory, based primarily on management’s forecast of customer demand for those
products in inventory. The IT industry is characterized by rapid technological change and new product development that
could result in increased obsolescence of inventory on hand. Increased obsolescence or decreased customer demand
beyond management’s expectations could require additional provisions, which could negatively impact our earnings.
Our obsolescence charges have ranged between $4.0 million and $5.3 million per annum. Historically, there have been
no unusual charges precipitated by specific technological or forecast issues.
Value of Goodwill and Long-Lived Assets, Including Intangibles
We carry a variety of long-lived assets on our consolidated balance sheet. These are all currently classified as held
for use. These include property and equipment, identifiable intangibles, and goodwill. An impairment review is
undertaken on (1) an annual basis for goodwill and an indefinite-lived intangible; and (2) on an event-driven basis for all
long-lived assets when facts and circumstances suggest that cash flows from such assets may be diminished. We have
historically reviewed the carrying value of all these assets based partly on our projections of anticipated cash flows.
These projections are, in part, dependent upon anticipated market conditions, operational performance, and legal status.
Any impairment charge that is recorded negatively impacts our earnings. Cash flows are generally not impacted by an
impairment charge.
We complete our annual impairment test of goodwill and the indefinite-lived domain name on the first day of each
year. The two-step quantitative test for goodwill requires, under the first step, that we determine the fair value of the
reporting unit holding goodwill and compare it to the reporting unit’s carrying value. We determine the fair value of a
reporting unit by preparing a discounted cash flow analysis using projections of the reporting unit’s future operating
results, as well as consideration of market valuation approaches.
Our Large Account and SMB segments hold $66.2 million and $7.4 million of goodwill, respectively. We
concluded that the fair values of the two reporting units and the domain name each substantially exceeded the respective
carrying value, and accordingly, an impairment was not identified in the annual test. While we believe that our estimates
of fair value are reasonable, different assumptions regarding items such as future cash flows and the volatility inherent in
markets which we serve could materially affect our valuations and result in impairment charges against the carrying
values of those remaining assets in our Large Account and SMB segments. Please see Note 3, “Goodwill and Other
Intangible Assets” to the Consolidated Financial Statements included in Item 8 of Part II of this report for a discussion of
the significant assumptions used in our discounted cash flow analysis.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting
Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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.
33
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We invest cash balances in excess of operating requirements in short-term securities, generally with maturities of 90
days or less. In addition, our unsecured credit agreement provides for borrowings which bear interest at variable rates
based on LIBOR plus a spread or the prime rate. We believe the effect, if any, of reasonably possible near-term changes
in interest rates on our financial position, results of operations, and cash flows should not be material. Our credit
agreement exposes earnings to changes in short-term interest rates since interest rates on the underlying obligations are
variable. We did not have any borrowings against our line of credit during the year ended December 31, 2016.
Accordingly, the change in earnings resulting from a hypothetical 10% increase or decrease in interest rates is not
applicable.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by this Item is included in this Report beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Interim Chief Financial
Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2016. 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 Interim Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective
at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those
policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention
34
or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal controls over financial reporting
as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework
(2013).
As discussed in Note 2 to the consolidated financial statements of this Annual Report on Form 10-K, we acquired
substantially all of the assets Softmart, Inc. on May 27, 2016 in an asset purchase agreement, whose financial statements
reflect total assets and revenue constituting 7% and 4% respectively, of the Company's consolidated financial statement
amounts as of and for the year ended December 31, 2016. As a result of the timing of the acquisition and as permitted by
the Securities and Exchange Commission, management has excluded internal controls at Softmart from its assessment of
the internal control over financial reporting as of December 31, 2016.
Based on our assessment, management concluded that, as of December 31, 2016, the Company’s internal control
over financial reporting is effective based on those criteria.
The Company’s Independent Registered Public Accounting Firm has issued an audit report on the Company’s
internal control over financial reporting as of December 31, 2016. This report appears below.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PC Connection, Inc.
Merrimack, New Hampshire
We have audited the internal control over financial reporting of PC Connection, Inc. and subsidiaries (the
"Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s
Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal
control over financial reporting at Softmart, which was acquired on May 27, 2016 and whose financial statements reflect
total assets and revenues constituting 7% and 4%, respectively, of the consolidated financial statement amounts as of and
for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial
reporting at Softmart. The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected by
the company's board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31,
2016 of the Company and our report dated March 3, 2017 expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 3, 2017
36
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Rule 13a – 15(f) and 15d – 15(f)
under the Exchange Act) occurred during the quarter ended December 31, 2016, which has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other information
None.
37
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information included under the headings, “Executive Officers of PC Connection” in Item 3 of Part I hereof and
“Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Code of Business Conduct and Ethics Policy,” and “Board Committees
– Audit Committee” in our definitive Proxy Statement for our 2017 Annual Meeting of Stockholders to be held on May
17, 2017 (the “Proxy Statement”) is incorporated herein by reference. We anticipate filing the Proxy Statement within
120 days after December 31, 2016. With the exception of the foregoing information and other information specifically
incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof.
Item 11. Executive Compensation
The information included under the headings “Executive Compensation” and “Director Compensation” in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information included under the headings “Security Ownership of Certain Beneficial Owners and Management”
and “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information included under the headings “Certain Relationships and Related Transactions” and “Director
Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information included under the heading “Principal Accounting Fees and Services” in the Proxy Statement is
incorporated herein by reference.
38
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of Documents Filed as Part of this Report:
(1) Consolidated Financial Statements
The consolidated financial statements listed below are included in this document.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
References
F-2
F-3
F-4
F-5
F-6
F-7
(2) Consolidated Financial Statement Schedule:
The following Consolidated Financial Statement Schedule, as set forth below, is filed with this report:
Schedule
Schedule II—Valuation and Qualifying Accounts
Page
Reference
S-1
All other schedules have been omitted because they are either not applicable or the relevant information has already been
disclosed in the financial statements.
(3) The exhibits listed in the Exhibit Index in Item 15(b) below are filed as part of this Annual Report on Form 10-K.
(b) Exhibits
The exhibits listed below are filed herewith or are incorporated herein by reference to other filings.
39
EXHIBIT INDEX
Exhibits
3.1(5)
3.2(10)
4.1(1)
9.1(1)*
10.1(1)*
10.2(4)*
10.3(21)*
10.4(23)*
10.5(9)*
10.6(9)*
10.7(15)*
10.8(15)*
10.9(17)
10.10(19)*
10.11(1)*
10.12(11)*
10.13(7)
Amended and Restated Certificate of Incorporation of Registrant, as amended.
Amended and Restated Bylaws of Registrant.
Form of specimen certificate for shares of Common Stock, $0.01 par value per share, of the Registrant.
Form of 1998 PC Connection Voting Trust Agreement among the Registrant, Patricia Gallup
individually and as a trustee, and David Hall individually and as trustee.
Form of Registration Rights Agreement among the Registrant, Patricia Gallup, David Hall, and the
1998 PC Connection Voting Trust.
Amended and Restated 1997 Stock Incentive Plan.
Amended and Restated 2007 Stock Incentive Plan, as amended.
Amended and Restated 1997 Employee Stock Purchase Plan, as amended.
Form of Incentive Stock Option Agreement for 2007 Stock Incentive Plan.
Form of Nonstatutory Stock Option Agreement for 2007 Stock Incentive Plan.
Amended and Restated Form of Restricted Stock Agreement for Amended and Restated 2007 Stock
Incentive Plan.
Form of Restricted Stock Unit Agreement for Amended and Restated 2007 Stock Incentive Plan.
Form of Stock Equivalent Unit Agreement for 2007 Amended and Restated Stock Incentive Plan.
Executive Bonus Plan, as amended.
Employment Agreement, dated as of January 1, 1998, between the Registrant and Patricia Gallup.
Employment Agreement, dated as of May 12, 2008, between the Registrant and Timothy McGrath.
Agreement for Inventory Financing, dated as of October 31, 2002, by and among the Registrant,
Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit Corporation.
10.14(7)
Guaranty, dated as of November 14, 2002, entered into by Registrant in connection with the
Agreement for Inventory Financing, dated as of October 31, 2002, by and among the Registrant,
Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM Credit Corporation.
10.15(7)
Guaranty, dated as of November 14, 2002, entered into by PC Connection Sales Corporation in
connection with the Agreement for Inventory Financing, dated as of October 31, 2002, by and among
the Registrant, Merrimack Services Corporation, GovConnection, Inc., MoreDirect, Inc., and IBM
Credit Corporation.
10.16(7)
Acknowledgement, Waiver, and Amendment to Agreement for Inventory Financing, dated as of
10.17(8)
10.18(8)
10.19(18)
10.20(18)
10.21(18)
10.22
10.23
November 25, 2003, by and among the Registrant, Merrimack Services Corporation, GovConnection,
Inc., MoreDirect, Inc., and IBM Credit LLC.
Second Amendment, dated May 9, 2004, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect,
Inc., and IBM Credit LLC.
Third Amendment, dated May 27, 2005, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect,
Inc., and IBM Credit LLC.
Fourth Amendment, dated May 11, 2006, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect,
Inc., and IBM Credit LLC.
Fifth Amendment, dated September 19, 2010, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries Merrimack Services Corporation, GovConnection, Inc., and MoreDirect,
Inc., and IBM Credit LLC.
Sixth Amendment, dated January 10, 2012, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
Seventh Amendment, dated July 16, 2014, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
Eighth Amendment, dated July 13, 2015, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
40
10.24
10.25
Ninth Amendment, dated January 4, 2017, to the Agreement for Inventory Financing between the
Registrant and its subsidiaries GovConnection, Inc., and MoreDirect, Inc., and IBM Credit LLC.
Agreement for Credit, dated January 1, 2014, by and among the Registrant, and its subsidiaries PC
10.26(16)
10.27
10.28(24)
Connection Sales Corporation, GovConnection, Inc., and MoreDirect, Inc., and Castle Pines Capital
LLC.
Third Amended and Restated Credit and Security Agreement, dated February 24, 2012, among
Citizens Bank of Massachusetts, as lender and as agent, other financial institutions party thereto from
time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC Connection Sales
Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as guarantors.
First Amendment, dated December 24, 2013, to the Third Amended and Restated Credit and Security
Agreement, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions
party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC
Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as
guarantors.
Second Amendment, dated February 10, 2017, to the Third Amended and Restated Credit and Security
Agreement, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions
party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC
Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as
guarantors.
10.29(1)
Amended and Restated Lease between the Registrant and G&H Post, LLC, dated December 29, 1997,
for property located at Route 101A, Merrimack, New Hampshire.
10.30(2)
Amendment No. 1 to Amended and Restated Lease between the Registrant and G&H Post, LLC, dated
10.31(14)
Amendment No. 2 to Amended and Restated Lease between the Registrant and G&H Post, LLC, dated
December 29, 1998, for property located at Route 101A, Merrimack, New Hampshire.
10.32(20)
10.33(12)
10.34(22)
10.35(3)
10.36(3)
10.37(3)
10.38(3)
10.39(6)
10.40(8)
10.41(13)
10.42(17)
21.1
23.1
December 29, 1998, for property located at Route 101A, Merrimack, New Hampshire.
Amendment No. 3, dated May 9, 2014, to Amended and Restated Lease between the Registrant and
G&H Post, LLC, dated December 29, 1998, for property located at Route 101A, Merrimack, New
Hampshire.
Lease between the Merrimack Services Corporation and G&H Post LLC, dated August 11, 2008, for
property located at Merrimack, New Hampshire.
Lease Agreement between the Registrant and Wilmington Investors, LLC, dated August 27, 2014, for
property located at 3188 Progress Way, Building 11, Wilmington, Ohio.
Lease between ComTeq Federal, Inc. and Rockville Office/Industrial Associates dated December 14,
1993, for property located at 7503 Standish Place, Rockville, Maryland.
First Amendment, dated November 1, 1996, to the Lease Agreement between ComTeq Federal, Inc.
and Rockville Office/Industrial Associates, dated December 14, 1993, for property located in
Rockville, Maryland.
Second Amendment, dated March 31, 1998, to the Lease Agreement between ComTeq Federal, Inc.
and Rockville Office/Industrial Associates, dated December 14, 1993, for property located in
Rockville, Maryland.
Third Amendment, dated August 31, 2000, to the Lease Agreement between ComTeq Federal, Inc. and
Rockville Office/Industrial Associates, dated December 14, 1993, property located in Rockville,
Maryland.
Fourth Amendment, dated November 20, 2002, to the Lease Agreement between GovConnection, Inc.
(formerly known as ComTeq Federal, Inc.) and Metro Park I, LLC (formerly known as Rockville
Office/Industrial Associates), dated December 14, 1993, for property located in Rockville, Maryland.
Fifth Amendment, dated December 12, 2005, to the Lease Agreement between GovConnection, Inc.
and Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
Sixth Amendment, dated September 18, 2008, to the Lease Agreement between GovConnection, Inc.
and Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
Seventh Amendment, dated May 21, 2012, to the Lease Agreement between GovConnection, Inc. and
Metro Park I, LLC, dated December 14, 1993, for property located in Rockville, Maryland.
Subsidiaries of Registrant.
Consent of Deloitte & Touche LLP.
41
31.1
31.2
32.1
32.2
Certification of the Company’s President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of the Company’s Vice President, and Interim Treasurer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
Certification of the Company’s Vice President, and Interim 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.
101.SCH ** XBRL Taxonomy Extension Schema Document.
101.CAL ** XBRL Taxonomy Calculation Linkbase Document.
101.LAB ** XBRL Taxonomy Label Linkbase Document.
101.PRE ** XBRL Taxonomy Presentation Linkbase Document.
101.DEF ** XBRL Taxonomy Extension Definition Linkbase Document.
(1) Incorporated by reference from the exhibits filed with the Company’s registration statement (333-41171) on Form S-
1 filed under the Securities Act of 1933.
(2) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-
23827, filed on March 31, 1999.
(3) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-
23827, filed on March 30, 2001.
(4) Incorporated by reference from exhibits filed with the Company’s proxy statement pursuant to Section 14(a), File
Number 0-23827, filed on April 17, 2001.
(5) Incorporated by reference from the exhibits filed with the Company’s registration statement (333-63272) on Form S-
4 filed under the Securities Act of 1933.
(6) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-
23827, filed on March 31, 2003.
(7) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number 0-
23827, filed on March 30, 2004.
(8) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number
0-23827, filed on March 30, 2006.
(9) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August
10, 2007.
(10) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on January 9,
2008.
(11) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 12,
2008.
(12) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August
11, 2008.
(13) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on
November 10, 2008.
(14) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number
0-23827, filed on March 16, 2009.
(15) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on November
10, 2010.
(16) Incorporated by reference from exhibits filed with the Company’s annual report on Form 10-K, File Number
0-23827, filed on February 28, 2012.
(17) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on August 8,
2012.
(18) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-
23827, filed on March 4, 2013.
(19) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on May 29,
2013.
42
(20) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 9,
2014.
(21) Incorporated by reference from exhibits filed with the Company's current report on Form 8-K, filed on May 27,
2014.
(22) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on October
31, 2014.
(23) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on May 21,
2015.
(24) Incorporated by reference from exhibits filed with the Company’s current report on Form 8-K, filed on February 16,
2017.
* Management contract or compensatory plan or arrangement.
** Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting
Language): (i) Consolidated Balance Sheets at December 31, 2016 and December 31, 2015, (ii) Consolidated
Statements of Income for the years ended December 31, 2016, 2015, and 2014, (iii) Consolidated Statements of Changes
in Stockholders’ Equity for the years ended December 31, 2016, 2015, and 2014, (iv) Consolidated Statements of Cash
Flows for the years ended December 31, 2016, 2015, and 2014, and (v) Notes to Consolidated Financial Statements.
43
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 3, 2017
PC CONNECTION, INC.
By:
/s/ TIMOTHY MCGRATH
Timothy McGrath
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ TIMOTHY MCGRATH
Timothy McGrath
/s/ WILLIAM SCHULZE
William Schulze
/s/ PATRICIA GALLUP
Patricia Gallup
/s/ JOSEPH BAUTE
Joseph Baute
/s/ DAVID BEFFA-NEGRINI
David Beffa-Negrini
/s/ BARBARA DUCKETT
Barbara Duckett
/s/ JACK FERGUSON
Jack Ferguson
/s/ DAVID HALL
David Hall
President and Chief Executive Officer (Principal
Executive Officer)
March 3, 2017
Vice President, Interim Treasurer and Chief
March 3, 2017
Financial Officer
Chairman of the Board
March 3, 2017
Vice Chairman of the Board
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
Director
Director
Director
Director
44
PC CONNECTION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PC Connection, Inc.
Merrimack, New Hampshire
We have audited the accompanying consolidated balance sheets of PC Connection, Inc. and subsidiaries (the
"Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also
included the financial statement schedule listed in the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on
the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
PC Connection, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 3, 2017 expressed an unqualified opinion on the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 3, 2017
F-2
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Income taxes receivable
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property and equipment, net
Goodwill
Other intangibles, net
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses and other liabilities
Accrued payroll
Total current liabilities
Deferred income taxes
Other liabilities
Total Liabilities
Commitments and Contingencies (Note 11)
Stockholders’ Equity:
Preferred Stock, $.01 par value, 10,000 shares authorized, none issued
Common Stock, $.01 par value, 100,000 shares authorized, 28,465 and 28,353 issued,
26,609 and 26,498 outstanding at December 31, 2016 and 2015, respectively
Additional paid-in capital
Retained earnings
Treasury stock at cost, 1,856 shares at December 31, 2016 and 2015
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
December 31,
2016
2015
49,180
$
411,883
90,535
2,120
5,453
—
559,171
39,402
73,602
12,586
1,373
$ 686,134
80,188
$
356,145
102,780
1,575
4,254
7,909
552,851
32,227
51,276
1,668
1,052
$ 639,074
$ 177,862
31,047
21,345
230,254
19,602
2,836
252,692
$ 166,516
36,207
19,280
222,003
21,615
3,005
246,623
─
─
285
111,081
337,938
(15,862)
433,442
$ 686,134
284
109,161
298,868
(15,862)
392,451
$ 639,074
F-3
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest expense
Income before taxes
Income tax provision
Net income
Earnings per common share:
Basic
Diluted
Shares used in computation of earnings per common share:
Basic
Diluted
Years Ended December 31,
2016
$ 2,692,592
2,321,435
371,157
290,637
80,520
(67)
80,453
(32,342)
48,111
$
2015
2014
$ 2,573,973 $ 2,463,339
2,139,950
2,232,954
323,389
341,019
251,935
262,465
71,454
78,554
(86)
(87)
71,368
78,467
(28,687)
(31,640)
42,681
46,827 $
$
$
$
1.81
1.80
$
$
1.77 $
1.76 $
1.63
1.61
26,528
26,719
26,398
26,616
26,246
26,512
See notes to consolidated financial statements.
F-4
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands)
Balance - January 1, 2014
Issuance of common stock under stock incentive plans
Issuance of common stock under Employee Stock
Purchase Plan
Stock-based compensation expense
Nonvested stock awards
Shares withheld for taxes paid on stock awards
Tax benefit from stock-based compensation
Dividend payment
Net income
Balance - December 31, 2014
Issuance of common stock under stock incentive plans
Issuance of common stock under Employee Stock
Purchase Plan
Stock-based compensation expense
Nonvested stock awards
Shares withheld for taxes paid on stock awards
Tax benefit from stock-based compensation
Dividend declaration
Net income
Balance - December 31, 2015
Issuance of common stock under stock incentive plans
Issuance of common stock under Employee Stock
Purchase Plan
Stock-based compensation expense
Nonvested stock awards
Shares withheld for taxes paid on stock awards
Tax benefit from stock-based compensation
Dividend declaration
Net income
Balance - December 31, 2016
Common Stock
Shares Amount Paid-In Capital Earnings Shares Amount Total
Treasury Shares
Additional
Retained
28,056
49
$
281
─
$
104,932
356
$ 230,478
─
(1,856)
─
$ (15,862) $ 319,829
356
─
35
─
59
─
─
─
─
28,199
41
39
—
74
—
—
—
—
28,353
11
39
—
62
—
—
—
—
28,465
─
─
1
─
─
─
─
282
1
—
—
1
—
—
—
—
284
—
—
—
1
—
—
—
—
285
$
$
753
929
(1)
(578)
565
─
─
106,956
436
875
994
(1)
(660)
561
—
—
109,161
135
961
1,049
(1)
(737)
513
—
—
111,081
─
─
─
─
─
—
—
—
—
—
─
─
─
─
─
─
─
(1,856)
─
─
─
─
─
─
─
─
(1,856)
—
─
─
─
─
─
─
─
(15,862)
─
─
─
─
─
─
─
─
(15,862)
—
753
929
─
(578)
565
(10,527)
42,681
354,008
437
875
994
—
(660)
561
(10,591)
46,827
392,451
135
(10,527)
42,681
262,632
—
(10,591)
46,827
298,868
—
—
—
—
—
—
(9,041)
48,111
$ 337,938
—
—
—
—
—
—
—
(1,856)
—
—
—
—
—
—
—
961
1,049
—
(737)
513
(9,041)
48,111
$ (15,862) $ 433,442
See notes to consolidated financial statements.
F-5
PC CONNECTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Years Ended December 31,
2015
2014
2016
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation expense
Provision for doubtful accounts
Deferred income taxes
Loss on disposal of fixed assets
Excess tax benefit from exercise of equity awards
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Cash paid for acquisitions
Purchases of property and equipment
Purchase of intangible assets
Proceeds from sale of equipment
Net cash used for investing activities
Cash Flows from Financing Activities:
Dividend payment
Issuance of stock under Employee Stock Purchase Plan
Excess tax benefit from exercise of equity awards
Exercise of stock options
Payment of payroll taxes on stock-based compensation through shares
withheld
Net cash (used for) provided by financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Non-cash Investing and Financing Activities:
Accrued capital expenditures
Dividend declaration
Supplemental Cash Flow Information:
Income taxes paid
$ 48,111
$ 46,827 $ 42,681
10,453
1,049
360
3,506
92
(513)
(33,835)
12,401
(1,274)
(321)
(3,012)
(3,431)
33,586
8,961
994
1,097
2,652
44
(552)
8,092
929
1,383
1,212
14
(556)
(64,215)
(11,863)
(285)
(328)
41,324
6,206
30,862
(11,359)
(11,776)
1,829
(4)
202
2,751
35,398
(42,990)
(11,885)
—
—
(54,875)
—
(12,337)
(450)
—
(12,787)
—
(7,609)
—
13
(7,596)
(10,591)
961
513
135
—
875
552
437
(10,527)
753
556
356
(737)
(9,719)
(31,008)
80,188
$ 49,180
(578)
(660)
(9,440)
1,204
18,362
19,279
42,547
60,909
$ 80,188 $ 60,909
109
9,041
504
10,591
205
—
$ 29,740
$ 30,371 $ 24,219
See notes to consolidated financial statements.
F-6
PC CONNECTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are a national solutions provider of a wide range of information technology (“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, in our SMB
segment, 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 government and educational institutions, in our
Public Sector segment, through our GovConnection subsidiary.
The following is a summary of our significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of PC Connection, Inc. and its subsidiaries, all of which
are wholly-owned. Intercompany transactions and balances are eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions. These estimates and assumptions affect the
reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and
expenses during the period. By nature, estimates are subject to an inherent degree of uncertainty. Actual results could
differ from those estimates and assumptions.
Revenue Recognition
Revenue on product sales is recognized at the point in time when persuasive evidence of an arrangement exists, the
price is fixed or determinable, delivery has occurred, and there is a reasonable assurance of collection of the sales
proceeds. We generally obtain oral or written purchase authorizations from our customers for a specified amount of
product at a specified price. Because we either (i) have a general practice of covering customer losses while products are
in-transit despite title transferring at the point of shipment or (ii) have FOB–destination shipping terms specifically set
out in our arrangements with federal agencies and certain commercial customers, delivery is deemed to have occurred at
the point in time when the product is received by the customer.
We provide our customers with a limited thirty-day right of return generally limited to defective merchandise.
Revenue is recognized at delivery and a reserve for sales returns is recorded. We make reasonable and reliable estimates
of product returns based on significant historical experience and record our sales reserves as a reduction of revenues and
either as offsets to accounts receivable or, for customers who have already paid, as offsets to accrued expenses. At
December 31, 2016, we recorded sales reserves of $3,709 and $220 as components of accounts receivable and accrued
expenses, respectively. At December 31, 2015, we recorded sales reserves of $3,235 and $178 as components of
accounts receivable and accrued expenses, respectively.
All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues
earned for the goods provided, and these amounts have been classified as “net sales.” Costs related to such shipping and
handling billings are classified as “cost of sales.” Sales are reported net of sales, use, or other transaction taxes that are
collected from customers and remitted to taxing authorities.
F-7
We use our own engineering personnel in projects involving the design and installation of systems and networks,
and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposals, and
other services. This service revenue represents a small percentage of our consolidated revenue. We evaluate such
engagements to determine whether we or the third party assumes the general risk and reward of ownership in these
transactions. For those transactions in which we do not assume the risk and reward but instead act as an agent, we
recognize the transaction revenue on a net basis. Under net sales recognition, the cost of the third party is recorded as a
reduction to the selling price, resulting in net sales being equal to the gross profit on the transaction. In those
engagements in which we are the principal and primary obligor, we report the sale on a gross basis, and the cost of the
service provider is recognized in cost of goods sold.
Similarly, we recognize revenue from agency sales transactions on a net sales basis. In agency sales transactions,
we facilitate product sales by equipment and software manufacturers directly to our customers and receive agency, or
referral, fees for such transactions. We do not take title to the products or assume any maintenance or return obligations
in these transactions; title is passed directly from the supplier to our customer.
Amounts recognized on a net basis included in net sales for such third-party services and agency sales transactions
were $30,234, $24,158, and $25,696 for the years ended December 31, 2016, 2015, and 2014, respectively.
In certain revenue arrangements, our contracts require that we provide multiple units of hardware, software, or
services deliverables. Under these multiple-element arrangements, each service performed and product delivered is
considered a separate deliverable and qualifies as a separate unit of accounting. For material multiple element
arrangements, we allocate revenue based on vendor-specific objective evidence of fair value of the underlying services
and products. If we were to enter into a multiple element arrangement in which vendor-specific objective evidence was
not available, we would utilize third-party evidence to allocate the selling price. If neither vendor-specific objective
evidence nor third-party evidence was available, we would estimate the selling price based on market price and company
specific factors.
Cost of Sales and Certain Other Costs
Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, direct costs of
packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and
other vendor allowances.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with original maturities of 90 days or less to be cash
equivalents. The carrying value of our cash equivalents approximates fair value. The majority of payments due from
credit card processors and banks for third-party credit card and debit card transactions process within one to five
business days. All credit card and debit card transactions that process in less than seven days are classified as cash and
cash equivalents. Amounts due from banks for credit card transactions classified as cash equivalents totaled $4,345 and
$6,786 at December 31, 2016 and 2015, respectively.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and
customer creditworthiness. We maintain an allowance for estimated doubtful accounts based on our historical
experience and the customer credit issues identified. Our customers do not post collateral for open accounts receivable.
We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to recognize any changes
in credit exposure. Trade receivables are written off in the period in which they are deemed uncollectible. Recoveries of
trade receivables previously charged are recorded when received.
F-8
Inventories
Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment, are
stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or
market, whichever is lower. Inventory quantities on hand are reviewed regularly, and allowances are maintained for
obsolete, slow moving, and nonsalable inventory.
Vendor Consideration
We receive funding from merchandise vendors for price protections, discounts, product rebates, and other programs.
These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales or
inventory, as applicable. Allowances for product rebates that require certain volumes of product sales or purchases are
recorded as the related milestones are probable of being met.
Advertising Costs and Vendor Consideration
Costs of producing and distributing catalogs are charged to expense in the period in which the catalogs are first
circulated. Other advertising costs are expensed as incurred.
Vendors have the ability to place advertisements in our catalogs or fund other advertising activities for which we
receive advertising consideration. This vendor consideration, to the extent that it represents specific reimbursements of
incremental and identifiable costs, is offset against SG&A expenses. Advertising consideration that cannot be associated
with a specific program or that exceeds the fair value of advertising expense associated with that program is classified as
an offset to cost of sales. Our vendor partners generally consolidate their funding of advertising and other marketing
programs, and accordingly, we classify substantially all vendor consideration as a reduction of cost of sales rather than a
reduction of advertising expense. Advertising expense, which is classified as a component of SG&A expenses, totaled
$16,083, $15,689, and $15,767, for the years ended December 31, 2016, 2015, and 2014, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and
amortization is provided for financial reporting purposes over the estimated useful lives of the assets ranging from three
to seven years. Computer software, including licenses and internally developed software, is capitalized and amortized
over lives ranging from three to seven years. Depreciation is recorded using the straight-line method. Leasehold
improvements and facilities under capital leases are amortized over the terms of the related leases or their useful lives,
whichever is shorter, whereas for income tax reporting purposes, they are amortized over the applicable tax lives.
Costs incurred to develop internal-use software during the application development stage are recorded in property
and equipment at cost. External direct costs of materials and services consumed in developing or obtaining internal-use
computer software and payroll-related costs for employees developing internal-use computer software projects, to the
extent of their time spent directly on the project and specific to application development, are capitalized.
When events or circumstances indicate a potential impairment, we evaluate the carrying value of property and
equipment based upon current and anticipated undiscounted cash flows. We recognize impairment when it is probable
that such estimated future cash flows will be less than the asset carrying value.
Goodwill and Other Intangible Assets
Our intangible assets consist of (1) goodwill, which is not subject to amortization; (2) an internet domain name,
which is an indefinite-lived intangible not subject to amortization; and (3) amortizing intangibles, which consist of
customer lists, trade names, and certain technology licensing agreements, which are being amortized over their useful
lives.
F-9
Note 3 describes the annual impairment methodology that we employ on January 1st of each year in calculating the
recoverability of goodwill and non-amortizing intangibles. This same impairment test is performed at other times during
the course of a year should an event occur or circumstance change that would more likely than not reduce the fair value
of a reporting unit below its carrying amount.
Recoverability of amortizing intangible assets is assessed only when events have occurred that may give rise to
impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations
to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If
such cash flows are less than such carrying amounts, long-lived assets including such intangibles, are written down to
their respective fair values.
Concentrations
Concentrations of credit risk with respect to trade account receivables are limited due to the large number of
customers comprising our customer base. No single customer accounted for more than 2% of total net sales in 2016,
2015, and 2014. While no single agency of the federal government comprised more than 2% of total sales, aggregate
sales to the federal government as a percentage of total net sales were 7.5%, 6.7%, and 6.5% in 2016, 2015, and 2014,
respectively.
Product purchases from Ingram Micro, Inc. (“Ingram”), our largest supplier, accounted for approximately 21% of
our total product purchases in 2016 and 2015, respectively, and 25% in 2014. Purchases from Synnex Corporation
(“Synnex”) comprised 13%, 15%, and 13% of our total product purchases in 2016, 2015, and 2014, respectively. No
other vendor supplied more than 10% of our total product purchases in 2016, 2015, or 2014. We believe that, while we
may experience some short-term disruption, alternative sources for products obtained directly from Ingram and Synnex
are available to us.
Products manufactured by HP represented 20% of our net sales in 2016 and 22% in both 2015 and 2014. We
believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such
disruption would likely have a material adverse effect on our results of operations and cash flows.
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:
Numerator:
Net income
Denominator:
Denominator for basic earnings per share
Dilutive effect of employee stock awards
Denominator for diluted earnings per share
Earnings per share:
Basic
Diluted
2016
2015
2014
$ 48,111
$ 46,827
$ 42,681
26,528
191
26,719
26,398
218
26,616
26,246
266
26,512
$
$
1.81
1.80
$
$
1.77
1.76
$
$
1.63
1.61
F-10
For the years ended December 31, 2016, 2015, and 2014, the following outstanding nonvested stock units and stock
options were excluded from the computation of diluted earnings per share because including them would have had an
anti-dilutive effect:
Employee stock awards
Comprehensive Income
2016
—
2015
—
2014
98
We had no items of comprehensive income, other than our net income for each of the periods presented.
Recently Issued Financial Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for
revenue recognition. The core principle of the guidance is that an entity should recognize 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 July 2015, the FASB voted to amend ASU 2014-09 by approving a
one-year deferral of the mandatory effective date as well as providing the option to early adopt the standard on the
original effective date. Accordingly, the Company may adopt the standard in either its first quarter of 2017 or 2018. An
entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the
start of the first period for which it applies the new standard. We are in the process of determining the effect that the
adoption will have on our consolidated financial statements. Based on our analysis to date, we have reached the
following tentative conclusions regarding the new standard and how we expect it to affect our consolidated financial
statements and related disclosures:
• We expect to adopt the standard in the first quarter of 2018 and will not early adopt.
• We expect to use the full restrospective method. Such method provides that upon applying the new standard,
prior periods will be retrospectively adjusted and the cumulative effect of the change recognized in the opening
retained earnings as of January 1, 2016.
• We believe that since substantially all of our revenue is contractual, substantially all of our revenue falls within
the scope of ASU No. 2014-09, as amended.
• As discussed above, our hardware and software revenue is generally recognized on a gross basis upon delivery.
Upon adoption of the new standard, we do not expect this to change. However, we are continuing to analyze
each of our material revenue streams to determine any changes that may be required under the new standard.
• As discussed above, we hold inventories not available for sale related to certain product sales transactions in
which we are warehousing the product and will be deploying the product to our clients’ designated locations
subsequent to period-end. We are currently still evaluating the effect of the new standard on our inventories not
available for sale to identify the differing performance conditions within the underlying contracts and to
determine if a portion of revenue under the contracts should be recognized at an earlier point in time than we
are recognizing under current accounting standards.
• We expect that our disclosures in our notes to our consolidated financial statements related to revenue
recognition will be significantly expanded under the new standard.
Our analysis and evaluation of the new standard will continue through its effective date in the first quarter of 2018. A
substantial amount of work remains to be completed due to the complexity of the new standard, the application of
judgment, and the requirement for the use of estimates in applying the new standard, as well as the volume of our client
portfolio and the related terms and conditions of our contracts that must be reviewed.
F-11
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which modifies existing
requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount
requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit
margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation. This eliminates the need to determine and
consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. This standard
is effective for the Company prospectively beginning January 1, 2017, with early adoption permitted. We do not expect
the adoption of ASU 2015-11 to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of
Deferred Taxes, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax
liabilities and deferred tax assets are required to be classified as non-current on the consolidated balance sheet. ASU
2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15,
2016 with early adoption permitted. The Company elected to early adopt ASU 2015-17 on January 1, 2016,
prospectively, as permitted, and reclassified $7,909 of current deferred tax assets to non-current liabilities upon adoption
of the standard. The prior reporting period was not retroactively adjusted. The adoption of the guidance had no impact on
the Company’s condensed consolidated statements of income and comprehensive income.
In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is
required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is
currently assessing the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718). The new standard
simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for
income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash
flows. Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or
benefit in the income statement. This change eliminates the notion of the additional paid-in capital pool and reduces the
complexity in accounting for excess tax benefits and tax deficiencies. The new standard is effective for public companies
for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting
periods, however, early adoption is allowed. We do not expect the adoption of ASU 2016-09 to have a material impact
on our consolidated financial statements
In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairments by
eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its
fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of
goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating
foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill
impairment and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the
carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is
effective for us beginning January 1, 2020 for both interim and annual reporting periods. We are currently assessing the
potential impact of the adoption of ASC 2017-04 on our consolidated financial statements.
2. ACQUISITIONS
Softmart Acquisition
On May 27, 2016, we acquired substantially all of the assets of Softmart Inc. (“Softmart”), a global supplier of
information technology and software services solutions. The purchase of Softmart is consistent with our strategy to
F-12
expand our software services capabilities. Under the terms of the asset purchase agreement, we paid $31,889, net of
cash acquired, and allocated the total purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values on the date of acquisition. The excess of the purchase price over
the net assets acquired represents potential synergies from Softmart’s customer base and its assembled workforce of
sales representatives and software service specialists that we acquired in the transaction. This excess of purchase price
over the aggregate fair values was recorded as goodwill. We incurred $357 of transaction costs in 2016 related to the
acquisition which we have reported in selling, general and administrative expenses in our consolidated statement of
income for the year ended December 31, 2016. The operating results of Softmart have been included in the SMB and
Large Accounts segments since the acquisition date. Softmart’s revenues and income from operations were not material
to our consolidated results, and accordingly, we have not presented Softmart’s revenues or operating results on a pro
forma basis.
The following table reflects components of the net assets acquired and liabilities assumed at fair value as of the
closing date.
Current assets
Fixed assets
Goodwill
Customer relationships
Total assets acquired
Acquired liabilities
Net assets acquired
Less cash acquired
Purchase price at closing, net of cash acquired
Purchase Price
Allocation
$
$
22,812
343
14,314
11,300
48,769
(16,252)
32,517
(628)
31,889
We recorded goodwill of $7,366 and $6,948 in our SMB and Large Account segments, respectively, and the
aggregate is expected to be fully deductible for tax purposes.
GlobalServe Acquisition
On October 11, 2016, we acquired the outstanding common shares of GlobalServe, Inc. (“GlobalServe”), which has
developed an internet portal tool that simplifies customers’ global IT procurement. Under the terms of the stock
purchase agreement, we paid $11,101, net of cash acquired. The purchase of GlobalServe allows us to service our
customers’ global IT needs through their OneSource internet portal with consistent delivery, reporting, pricing, and
logistics. We allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values on the date of acquisition and recorded the excess of purchase price over
the aggregate fair values as goodwill. The initial allocation of the purchase price was based upon a preliminary
valuation, and accordingly, our estimates and assumptions are subject to change as we obtain additional information
during the measurement period and completion of the valuation of intangible assets. Measurement period adjustments
reflect new information obtained about facts and circumstances that existed as of the acquisition date. We believe that
such preliminary allocations provide a reasonable basis for estimating the fair values of assets acquired and liabilities
assumed but we are waiting for additional information necessary to finalize fair value. We expect to finalize the
valuation and complete the purchase price allocation as soon as practicable but no later than one year from the
acquisition date. Final determination of the fair value may result in further adjustments to the values presented below.
We incurred $118 of transaction costs in 2016 related to the acquisition which we have reported in selling, general and
administrative expenses in our consolidated statement of income for the year ended December 31, 2016. We have
included the operating results of GlobalServe in the Large Account segment since the acquisition date. GlobalServe’s
revenues and income from operations were not material to our consolidated results, and accordingly, we have not
presented GlobalServe’s revenues or operating results on a pro forma basis.
F-13
The following table reflects components of the net assets acquired and liabilities assumed at fair value as of the
closing date. The fair values of the intangibles were determined through a third-party valuation using management
estimates, which have not been finalized.
Current assets
Fixed assets
Goodwill
Customer relationships
Total assets acquired
Acquired liabilities
Deferred taxes, unrecognized tax benefits
Net assets acquired
Less cash acquired
Purchase price at closing, net of cash acquired
Purchase Price
Allocation
$
$
1,486
4,609
8,012
900
15,007
(734)
(2,390)
11,883
(782)
11,101
We recorded $8,012 of goodwill as a result of our acquisition of GlobalServe in our Large Account segment. None
of the goodwill related to this acquisition will be deductible for tax purposes.
k
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill and intangible assets with indefinite lives are subject to an annual impairment test and tested more
frequently if events or circumstances occur that would indicate a potential decline in fair value. For goodwill, a two-step
quantitative test is performed at a reporting unit level which requires, under the first step, that the fair value of a
reporting unit is determined and compared to the reporting unit’s carrying value, including goodwill. To assess the fair
value of a reporting unit, both income and market valuation approaches are used. If the fair value is determined to be
less than the carrying value, the second step is performed to measure the amount, if any, of the impairment.
Our annual impairment test of an indefinite-lived domain name and goodwill is set as of the first day of the year.
Goodwill is held by our Large Account and SMB reporting units. The fair value of the domain name and the Large
Account and SMB reporting units each substantially exceeded the respective carrying value, and accordingly, an
impairment was not identified in the annual test. We also did not identify any events or circumstances that would
indicate that it is more likely than not that the carrying values of the reporting unit or the domain name were in excess of
the respective fair values during the year ended December 31, 2016.
To determine the fair value of our reporting units, we considered operating results and future projections, as well as
changes in the Company’s overall market capitalization. The significant assumptions used in our discounted cash flow
analysis include: projected cash flows and profitability, the discount rate used to present value future cash flows,
working capital requirements, and terminal growth rates. Cash flows and profitability assumptions include sales growth,
gross margin, and SG&A growth assumptions which are generally based on historical trends. The discount rate used is a
"market participant" weighted average cost of capital ("WACC"). For our computation of fair value as of January 1,
F-14
2016, we used a WACC rate of 10.9%, and estimated terminal growth rate at 5.0% and working capital requirements at
7.5% of revenues. The carrying amount of goodwill for the periods presented is detailed below:
Balance at December 31, 2015
Goodwill, gross
Accumulated impairment losses
Net balance
Balance at December 31, 2016
Goodwill, gross
Accumulated impairment losses
Net balance
Intangible Assets
SMB
Large Account Public Sector Total
$ 1,173 $
(1,173)
$
— $
51,276 $
─
51,276 $
7,634 $ 60,083
(8,807)
(7,634)
— $ 51,276
SMB
Large Account Public Sector Total
$ 8,539 $
(1,173)
$ 7,366 $
66,236 $
─
66,236 $
7,634 $ 82,409
(8,807)
(7,634)
— $ 73,602
At December 31, 2016, our intangible assets included a domain name for $450, which has an indefinite life and is
not subject to amortization. In addition, we acquired in 2016 customer relationships from our Softmart and GlobalServe
acquisitions, which will be amortized on a straight-line basis over their estimated useful lives of 10 years. Our
remaining intangible assets are amortized in proportion to the estimates of the future cash flows underlying the valuation
of the assets. Intangible assets and related accumulated amortization are detailed below:
Customer List
Tradename
Customer Relationships
Total Intangible Assets
Estimated Gross
Useful Lives Amount
$ 3,400
1,190
12,200
$ 16,790
8
5
10
Net
December 31, 2016
Accumulated
Amortization Amount
2,861 $
$
1,111
682
79
11,518
Gross
Amount
539 $ 3,400 $
1,190
—
$
4,654 $ 12,136 $ 4,590 $
December 31, 2015
Accumulated Net
Amortization Amount
901
317
—
$ 1,218
2,499
873
—
3,372
$
In 2016, 2015, and 2014, we recorded amortization expense of $1,281, $735, and $901, respectively. The estimated
amortization expense relating to intangible assets in each of the five succeeding years and thereafter is as follows:
For the Years Ended December 31,
2017
2018
2019
2020
2021
2022 and thereafter
$ 1,582
1,441
1,256
1,220
1,220
5,417
$ 12,136
F-15
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
Trade
Vendor returns, consideration and other
Due from employees
Due from affiliates
Total Gross Accounts Receivable
Allowances for:
Sales returns
Doubtful accounts
Accounts Receivable, net
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Computer software, including licenses and internally-developed software
Furniture and equipment
Leasehold improvements
Total
Accumulated depreciation and amortization
Property and equipment, net
December 31,
2016
$ 384,709
33,020
173
—
417,902
2015
$ 328,319
33,064
155
61
361,599
(3,709)
(2,310)
$ 411,883
(3,235)
(2,219)
$ 356,145
December 31,
2016
$ 69,006
31,218
7,300
107,524
(68,122)
$ 39,402
2015
$ 61,468
28,663
8,124
98,255
(66,028)
$ 32,227
We recorded depreciation and amortization expense for property and equipment of $9,172, $8,226, and $7,191 in
2016, 2015, and 2014, respectively.
6. BANK BORROWINGS
We have a $50,000 credit facility collateralized by our receivables that expires February 10, 2022. 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
(“LIBOR”), plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.75% at
December 31, 2016). The one-month LIBOR rate at December 31, 2016 was 0.77%. 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 in 2016 or 2015, and accordingly, the entire $50,000 facility was available for borrowings under the
credit facility.
In February of 2017, we renewed our credit facility, extending the expiration date to February 10, 2022, at which
time any amounts outstanding become due. The credit facility was renewed with substantially the same terms and
conditions as with the preceding agreement.
7. TRADE CREDIT AGREEMENTS
At December 31, 2016 and 2015, 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
F-16
first position in certain branded products in our inventory financed by the financial institutions up to an aggregated
amount of $65,000. 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 December 31,
2016 and 2015, accounts payable included $33,061 and $23,044, respectively, owed to these financial institutions.
8. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Preferred Stock
Our Amended and Restated Certificate of Incorporation (the “Restated Certificate”) authorizes the issuance of up to
10,000 shares of preferred stock, $.01 par value per share (the “Preferred Stock”). Under the terms of the Restated
Certificate, the Board is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue
by a unanimous vote such shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall
have such rights, preferences, privileges, and restrictions, including voting rights, dividend rights, redemption privileges,
and liquidation preferences, as shall be determined by the Board. There were no preferred shares outstanding at
December 31, 2016 or 2015.
Share Repurchase Authorization
In 2001, our Board of Directors authorized the spending of up to $15,000 to repurchase our common stock. We
consider block repurchases directly from larger stockholders, as well as open market purchases, in carrying out our
ongoing stock repurchase program.
We did not repurchase any shares in the three years ended December 31, 2016. As of December 31, 2016, we have
repurchased an aggregate of 1,682 shares for $12,233 under our repurchase program, and the maximum approximate
dollar value of shares that may yet be purchased under this program is $2,767. In 2014, our Board of Directors approved
a new share repurchase program authorizing up to $15,000 in share repurchases. There is no fixed termination date for
this new repurchase program. Purchases may be made in open-market transactions, block transactions on or off an
exchange, or in privately negotiated transactions. We intend to complete the 2001 repurchase program before
repurchasing shares under the new program. The timing and amount of any share repurchases will be based on market
conditions and other factors.
Dividend Payments
The following table summarizes our special cash dividends declared in the three years ended December 31, 2016:
Dividend per share
Stockholder record date
Total dividend
Payment date
$
2016
0.34
2015
$
0.40
12/30/2016 12/29/2015 12/01/2014
$
10,591
1/12/2017 1/12/2016 12/15/2014
$ 10,527
2014
0.40
9,041
$
$
The dividends paid in January 2016 and 2017 were included in accrued expenses and other liabilities at December
31, 2015 and 2016, respectively. We have no current plans to pay additional cash dividends on our common stock in the
foreseeable future, and declaration of any future cash dividends will depend upon our financial position, strategic plans,
and general business conditions.
Equity Compensation Plan Descriptions
In November 1997, the Board adopted and our stockholders approved the 1997 Stock Incentive Plan (the “1997
Plan”). Under the terms of the 1997 Plan, we were authorized, for a ten-year period, to grant stock options, nonvested
stock, and other stock-based awards. The 1997 Plan expired in November 2007. Under such plan, options to purchase
107 shares remained outstanding as of December 31, 2016.
F-17
In 2007, the Board adopted and our stockholders approved the 2007 Stock Incentive Plan. In 2010, the Board
adopted and our stockholders approved the Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”), which
among other things, extended the term of the 2007 Plan to 2020. In May 2016, our stockholders approved an
amendment to the 2007 Plan, which authorized the issuance of 1,700 shares of common stock. Under the terms of the
2007 Plan, we are authorized for a ten-year period to grant options, stock appreciation rights, nonvested stock, nonvested
stock units, and other stock-based awards to employees, officers, directors, and consultants. As of December 31, 2016,
there were 194 shares eligible for future grants under the 2007 Plan.
1997 Employee Stock Purchase Plan
In November 1997, the Board adopted and our stockholders approved the 1997 Employee Stock Purchase Plan (the
“Purchase Plan”). The Purchase Plan authorizes the issuance of common stock to participating employees. Under the
Purchase Plan, as amended, our employees are eligible to purchase company stock at 95% of the purchase price as of the
last business day of each six-month offering period. An aggregate of 1,138 shares of common stock has been reserved
for issuance under the Purchase Plan, of which 1,067 shares have been purchased.
Accounting for Share-Based Compensation
We measure the grant date fair value of equity awards given to employees and recognize that cost, adjusted for
forfeitures, over the period that services are performed. We value grants with multiple vesting periods as a single award,
estimate expected forfeitures based upon historical patterns of employee turnover, and record share-based compensation
as a component of SG&A expenses. In 2014 and 2016, we granted nonvested stock units. No equity awards were
granted in 2015, however, in previous years both nonvested stock awards and stock options were granted.
We employ the Black-Scholes option valuation model to assess the grant date fair value of each option grant. The
application of this model requires certain key input assumptions, including expected volatility, option term, and risk-free
interest rates. Expected volatility is based on the historical volatility of our common stock. The expected term of an
option grant is estimated using the historical exercise behavior of employees and directors. The risk-free interest rate for
periods within the contractual life of the option is based on the U.S. Treasury yield curve that corresponds most closely
to the stock option’s expected average life.
The following table summarizes the components of share-based compensation recorded as expense for the three
years ended December 31, 2016:
Nonvested units
Stock options
Pre-tax compensation expense
Tax benefit
Net effect on net income
2014
2016
2015
$ 1,049 $ 994 $ 946
(17)
929
(355)
629 $ 596 $ 574
—
1,049
(420)
—
994
(398)
$
We have historically settled stock option exercises with newly issued common shares. The intrinsic value of options
exercised in 2016, 2015, and 2014 was $156, $553, and $732, respectively. The following table sets forth our stock
option activity in 2016:
Outstanding, January 1, 2016
Exercised
Outstanding, December 31, 2016
Vested and expected to vest
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Weighted
Average
Options Exercise Price Term (Years) Value
168
(11)
157
157
$
$
$
11.24
13.13
11.12
11.12
2.39 $ 1,911
1.44 $ 2,670
1.44 $ 2,670
F-18
In 2014 and 2016, we issued nonvested stock units that settle in stock and vest over periods up to fifteen years. No
awards were issued in 2015. Recipients of nonvested stock units do not possess stockholder rights. The fair value of
nonvested stock units is based on the end of day market value of our common stock on the grant date. The following
table summarizes our nonvested stock unit activity in 2016:
Nonvested at January 1, 2016
Granted
Vested
Canceled
Nonvested at December 31, 2016
Nonvested Stock Units
Weighted-Average
Shares
383 $
117
(90)
(56)
354
Grant Date
Fair Value
16.45
24.72
12.62
21.62
19.34
The weighted-average grant-date fair value of nonvested stock units granted in 2014 was $22.50. No awards were
granted in 2015. The total fair value of nonvested stock units that vested in 2016, 2015, and 2014 was $2,348, $2,287,
and $1,854, respectively. Unearned compensation cost related to the nonvested portion of outstanding nonvested stock
units was $6,037 as of December 31, 2016, and is expected to be recognized over a weighted-average period of
approximately 7.7 years.
Stock Equivalent Units
We have also issued stock equivalent units, (“SEUs”), which settle in cash and vest ratably over four years. The fair
value of these liability awards is based on the closing market price of our common stock, and is remeasured at the end of
each reporting period until the SEUs vest. We report the compensation as a component of SG&A expense and the
related liability as accrued payroll on the consolidated balance sheets.
Units issued
Compensation expense
9. INCOME TAXES
The provision for income taxes consisted of the following:
2016
2015
2014
23
$ 1,973
95
99
$ 2,054 $ 1,428
Years Ended December 31,
2015
2014
2016
$ 23,923 $ 23,872 $ 22,612
4,863
27,475
4,913
28,836
5,116
28,988
2,920
586
3,506
991
221
1,212
$ 32,342 $ 31,640 $ 28,687
2,220
432
2,652
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Net provision
F-19
The components of the deferred taxes at December 31, 2016 and 2015 are as follows:
Deferred tax assets:
Provisions for doubtful accounts
Inventory costs capitalized for tax purposes
Inventory valuation reserves
Sales return reserves
Deductible expenses, primarily employee-benefit related
Accrued compensation
State tax liability
Revenue deferral
Other
Compensation under non-statutory stock option agreements
State tax loss carryforwards
Federal benefit for uncertain state tax positions
Total gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Goodwill and other intangibles
Property and equipment
Total gross deferred tax liabilities
Net deferred tax liability
Current deferred tax assets
Noncurrent deferred tax liability
Net deferred tax liability
$
2016
2015
751
157
331
218
745
2,662
110
565
1,076
499
618
480
8,212
(485)
7,727
$
879
177
652
190
713
2,999
235
797
1,276
565
505
641
9,629
(383)
9,246
(17,776)
(9,553)
(27,329)
$ (19,602)
(15,868)
(7,084)
(22,952)
$ (13,706)
$
—
(19,602)
$ (19,602)
7,909
$
(21,615)
$ (13,706)
We have state net operating loss carryforwards aggregating $951 at December 31, 2016 representing state tax
benefits, net of federal taxes, of approximately $618. These loss carryforwards are subject to between five, fifteen, and
twenty-year carryforward periods, with $8 expiring after 2017, $6 expiring after 2018, $5 expiring after 2019, $2
expiring after 2021, and $927 expiring beyond 2022. We have provided valuation allowances of $485 and $383 at
December 31, 2016 and 2015, respectively, against the state tax loss carryforwards, representing the portion of
carryforward losses that we believe are not likely to be realized. The net change in the total valuation allowance reflects
a $102, $70, and $64 increase in 2016, 2015, and 2014, respectively. The valuation allowance was increased in 2016,
2015, and 2014 to offset the corresponding increase to the deferred tax asset associated with state net operating loss
carryforwards.
A reconciliation of our 2016, 2015, and 2014 income tax provision to total income taxes at the statutory federal tax
rate is as follows:
2016
2015
2014
Federal income taxes, at statutory tax rate
State income taxes, net of federal benefit
Nondeductible expenses
Other–net
Tax provision
$ 28,159 $ 27,463 $ 24,979
3,459
503
(254)
$ 32,342 $ 31,640 $ 28,687
3,962
538
(323)
3,947
602
(366)
We file one consolidated U.S. Federal income tax return that includes all of our subsidiaries as well as several
consolidated, combined, and separate company returns in many U.S. state tax jurisdictions. The Internal Revenue
Service completed its review of the income tax return for the 2012 tax year with no changes to the reported tax. The tax
F-20
years 2012-2015 remain open to examination by the major state taxing jurisdictions in which we file. The tax years
2013-2015 remain open to examination by the Internal Revenue Service.
A reconciliation of unrecognized tax benefits for 2016, 2015, and 2014, is as follows:
Balance at January 1,
Additions on tax positions of prior years
Lapses of applicable statute of limitations
Balance at December 31,
2016
2015
$
$
869
—
(185)
684
$
$
892
106
(129)
869
2014
$ 1,008
—
(116)
892
$
We recognize interest and penalties related to unrecognized income tax benefits as a component of income tax
expense, and the corresponding accrual is included as a component of our liability for unrecognized income tax benefits.
During the years ended December 31, 2016, 2015, and 2014, we recognized interest and penalties totaling $62, $110,
and $80, respectively. At December 31, 2016 and 2015, accrued interest aggregated $693 and $967, respectively, and
accrued penalties aggregated $171 and $218, respectively. As of December 31, 2016 and 2015, all unrecognized tax
benefits and the related interest and penalties, if recognized, would favorably affect our effective tax rate.
We do not anticipate that total unrecognized tax benefits will change significantly due to the settlement of audits,
expiration of statutes of limitations, or other reasons in the next twelve months.
10. EMPLOYEE BENEFIT PLAN
We have a contributory profit-sharing and employee savings plan covering all qualified employees. No
contributions to the profit-sharing element of the plan were made by us in 2016, 2015, or 2014. We made matching
contributions to the employee savings element of such plan of $2,320, $2,034, and $1,873 in 2016, 2015, and 2014,
respectively.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease our corporate headquarters and an adjacent office facility from an entity controlled by our principal
stockholders. The five-year operating lease for our corporate headquarters ends November 30, 2018 and has an option to
renew for an additional five-year term. The operating lease for the adjacent facility began in August 2008 and has a ten-
year term with the option to renew for two additional two-year terms. We also lease several other buildings from our
principal stockholders on a month-to-month basis. We believe that the above operating lease transactions were
consummated on terms comparable to terms we could have obtained with unrelated third parties. In addition, we lease
offices from unrelated parties with remaining terms of one to ten years.
Future aggregate minimum annual lease payments under these leases at December 31, 2016 are as follows:
Year Ended December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Related Parties Others Total
$
1,511 $ 2,943 $ 4,454
4,075
2,776
1,299
2,275
2,275
—
2,321
2,321
—
1,487
1,487
—
3,298
3,298
—
Total rent expense aggregated $4,753, $4,904, and $4,322 for the years ended December 31, 2016, 2015, and 2014,
respectively, under the terms of the operating leases described above. Such amounts included $1,640, $1,633, and
$1,639 in 2016, 2015, and 2014, respectively, paid to related parties.
F-21
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 business, financial position, results of operations, or cash flows.
We record a liability when we believe that a loss is both probable and reasonably estimable. On a quarterly basis, we
review each of these legal proceedings to determine whether it is probable, reasonably possible, or remote that a liability
has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated.
Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of such
loss. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and
such amounts could be material. We expense legal fees in the period in which they are incurred.
We are subject to audits by states on sales and income taxes, unclaimed property, employment matters, and other
assessments. While management believes that known and estimated liabilities have been adequately provided for, it is
too early to determine the ultimate outcome of such audits, which could be assessed, and such outcomes could have a
material negative impact on our financial position, results of operations, and cash flows.
12. OTHER RELATED-PARTY TRANSACTIONS
As described in Note 11, we lease certain facilities from related parties. Other related-party transactions include the
transactions summarized below. Related parties consist primarily of affiliated companies related to us through common
ownership.
Revenue:
Sales of services to affiliated companies
13. SEGMENT AND RELATED DISCLOSURES
2016
2015
2014
$ 159 $ 177
$ 118
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 Chief Executive
Officer, and he 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 government 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. We
report these charges to the operating segments as “Allocations.” Certain headquarters costs relating to executive
oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of
Headquarters/Other in the tables below.
In May 2016, we acquired Softmart, a global supplier of information technology and software services solutions.
We have included the operating results for Softmart in our SMB and Large Account segments from May 27, 2016, the
closing date of the acquisition. The external sales and operating results of Softmart since the date of acquisition were
immaterial to our consolidated results.
In October 2016, we acquired GlobalServe, which has developed a industry-leading tool that simplifies customers’
global IT procurement. We have included the operating results for GlobalServe in our Large Account segment from
October 11, 2016, the closing date of the acquisition. The external sales and operating results of GlobalServe since the
date of acquisition were immaterial to our consolidated results.
F-22
Net sales presented below exclude inter-segment product revenues. Segment information applicable to our
reportable operating segments for the years ended December 31, 2016, 2015, and 2014 is shown below:
Net sales:
SMB
Large Account
Public Sector
Total net sales
Operating income (loss):
SMB
Large Account
Public Sector
Headquarters/Other
Total operating income
Interest expense
Income before taxes
Selected operating expense:
Depreciation and amortization:
SMB
Large Account
Public Sector
Headquarters/Other
Total depreciation and amortization
Total assets:
SMB
Large Account
Public Sector
Headquarters/Other
Total assets
Years Ended December 31,
2016
2015
2014
$ 1,091,182 $ 1,040,586 $ 1,037,620
850,796
1,011,990
574,923
589,420
$ 2,692,592 $ 2,573,973 $ 2,463,339
961,013
572,374
$
$
$
$
$
$
41,596 $
42,504
8,561
(12,141)
80,520
(67)
80,453 $
42,855 $
41,234
6,879
(12,414)
78,554
(87)
78,467 $
39,608
39,229
3,621
(11,004)
71,454
(86)
71,368
425 $
1,784
160
8,084
10,453 $
24 $
1,297
156
7,484
8,961 $
5
1,368
124
6,595
8,092
240,665
361,431
95,278
(11,240)
686,134
$
$
207,147
320,633
73,374
37,920
639,074
The assets of our operating segments presented above consist primarily of accounts receivable, intercompany
receivable, goodwill, and other intangibles. Goodwill of $66,236 and $7,366 is held by our Large Account and SMB
segments, respectively, for the year ended December 31, 2016. 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 $49,937 and $36,752 for the years
ended December 31, 2016 and 2015, respectively. 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.
Substantially, all of our sales in 2016, 2015, and 2014 were made to customers located in the United States.
Shipments to customers located in foreign countries were not more than 2% of total net sales in 2016, 2015, and 2014.
All of our assets at December 31, 2016 and 2015 were located in the United States. Our primary target customers are
SMBs, federal, state, and local government agencies, educational institutions, and medium-to-large corporate accounts.
No single customer accounted for more than 2% of total net sales in 2016, 2015, or 2014. While no single agency of the
federal government comprised more than 2% of total sales, aggregate sales to the federal government were 7.5%, 6.7%,
and 6.5% in 2016, 2015, and 2014, respectively.
F-23
14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly data of the Company for each of the calendar quarters in
2016 and 2015. This information has been prepared on the same basis as the annual financial statements, and all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below
to present fairly the selected quarterly information when read in conjunction with the annual financial statements and the
notes thereto included elsewhere in this document. The quarterly operating results are not necessarily indicative of
future results of operations.
March 31, June 30,
September 30, December 31,
2016
2016
2016
2016
Quarters Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest expense
Income before taxes
Income tax provision
Net income
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest expense
Income before taxes
Income tax provision
Net income
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$ 572,394 $ 676,165 $ 708,485 $ 735,548
637,425
98,123
76,222
21,901
(14)
21,887
(8,890)
12,997
490,201
82,193
67,029
15,164
(14)
15,150
(6,087)
9,063 $ 12,458 $
611,518
96,967
74,522
22,445
(27)
22,418
(8,825)
13,593 $
582,291
93,874
72,864
21,010
(12)
20,998
(8,540)
$
$
$
0.34 $
0.34 $
0.47 $
0.47 $
0.51 $
0.51 $
0.49
0.49
26,499
26,671
26,501
26,691
26,542
26,736
26,569
26,738
Quarters Ended
March 31, June 30,
September 30, December 31,
2015
2015
2015
$ 581,259
503,646
77,613
63,434
14,179
1
14,180
(5,596)
8,584
$
$ 627,622 $ 680,769
592,201
544,635
88,568
82,987
66,707
63,364
21,861
19,623
(29)
(39)
21,832
19,584
(8,831)
(7,955)
13,001
$ 11,629 $
2015
$ 684,323
592,472
91,851
68,960
22,891
(20)
22,871
(9,258)
13,613
$
$
$
0.33
0.32
$
$
0.44 $
0.44 $
0.49
0.49
$
$
0.51
0.51
26,346
26,593
26,363
26,616
26,423
26,622
26,459
26,632
F-24
PC CONNECTION, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Description
Allowance for Sales Returns
Year Ended December 31, 2014
Year Ended December 31, 2015
Year Ended December 31, 2016
Allowance for Doubtful Accounts
Year Ended December 31, 2014
Year Ended December 31, 2015
Year Ended December 31, 2016
Balance at Charged to
Beginning Costs and
of Period
Expenses
Deductions/
Write-Offs
Balance at
End of
Period
$
$
$
$
$
$
3,060
3,223
3,235
32,882
30,289
32,909
(32,719) $
(30,277) $
(32,435) $
3,223
3,235
3,709
2,265
2,135
2,219
1,383
1,097
360
(1,513) $
(1,013) $
(269) $
2,135
2,219
2,310
S-1
Exhibit 31.1
I, Timothy McGrath, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of PC Connection, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 3, 2017
/S/ TIMOTHY MCGRATH
Timothy McGrath
President and Chief Executive Officer
I, William Schulze, certify that:
CERTIFICATIONS
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of PC Connection, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 3, 2017
/S/ WILLIAM SCHULZE
William Schulze
Vice President, Interim Treasurer and Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report on Form 10-K of PC Connection, Inc. (the “Company”) for the year ended
December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned, Timothy McGrath, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18
U.S.C. Section 1350, that to the best of his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 3, 2017
/S/ TIMOTHY MCGRATH
Timothy McGrath
President and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report on Form 10-K of PC Connection, Inc. (the “Company”) for the year ended
December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned, G. William Schulze, Vice President and Interim Chief Financial Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. Section 1350, that to the best of his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 3, 2017
/S/ WILLIAM SCHULZE
William Schulze
Vice President, Interim Treasurer and Chief Financial Officer
Board of Directors
Patricia Gallup
Chair
Joseph Baute
Director
Audit and Compensation Committees
David Beffa-Negrini
Director
Barbara Duckett
Director
Audit and Compensation Committees
Jack Ferguson
Director
Audit and Compensation Committees
David Hall
Director
Named Executive Officers
Timothy McGrath
President and
Chief Executive Officer
Patricia Gallup
Chief Administrative Officer
William Schulze
Vice President and
Interim Chief Financial Officer
Annual Meeting
The annual meeting of shareholders
will be held at 10:00 a.m. on
Wednesday, May 17, 2017.
Crowne Plaza
2 Somerset Parkway
Nashua, NH 03063
Transfer Agent
American Stock Transfer & Trust Co.
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Total Revenue
in Millions
Operating Income
in Millions
Net Income
in Millions
Earnings Per Share
Diluted
3
9
6
2
$
,
4
7
5
2
$
,
3
6
4
2
$
,
2
2
2
2
$
,
9
5
,1
2
$
.
5
0
8
$
.
6
8
7
$
5
.
1
7
$
1
.
8
4
$
.
8
6
4
$
.
7
2
4
$
.
4
9
5
$
.
6
4
5
$
.
7
5
3
$
.1
3
3
$
5
3
.
1
4 $
2
.
1
$
0
8
.
1
$
6
7
.
1
$
1
6
.
1
$
2012 13
14
15
16
2012 13
14
15
16
2012 13
14
15
16
2012 13
14
15
16
Shareholder Information
The Investor Relations Department is responsible for shareholder communications and
welcomes shareholder inquiries about PC Connection, Inc. either by telephone or in writing.
The Annual Report filings with the U.S. Securities and Exchange Commission as well as
general information can be obtained upon written request to the address below or by
visiting the PC Connection website at www.connection.com:
Investor Relations
PC Connection, Inc.
730 Milford Road
Merrimack, NH 03054-4631
(603) 683-2262
In the early 1980s, the Connection raccoon mascot made his (official)
debut in computer magazines everywhere. The raccoon symbolized
adaptability, innovativeness, and tenacity—traits that underlie Connection’s
remarkable success. Today, Connection is one of the nation’s largest and most
respected providers of a full range of information technology solutions to
business, government, healthcare, and education markets.
©2017 PC Connection, Inc. All rights reserved. Connection, PC Connection, GovConnection,
MacConnection, MoreDirect, GlobalServe and the raccoon characters are trademarks of
PC Connection, Inc. or its subsidiaries.
This Annual Report contains forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. When used in this Annual Report, the words “should,” “will,” “expects,”
“anticipates,” “believe,” “predict,” and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements are subject to risks and uncertainties, which could cause
actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not
limited to, the Company’s future capital needs and resources, fluctuations in customer demand, intensity of
competition from other vendors, timing and acceptance of new product introductions, delays or difficulties
in programs designed to increase sales and profitability, general economic and industry conditions, and
other risks set forth in the Company’s filings with the Securities and Exchange Commission, and the
information set forth herein should be read in light of such risks. In addition, any forward-looking statements
represent the Company’s estimates only as of the date of this Annual Report and should not be relied
upon as representing the Company’s estimates as of any subsequent date. While the Company may elect
to update forward-looking statements at some point in the future, the Company specifically disclaims any
obligation to do so, even if its estimates change.
Corporate Offices
PC Connection, Inc.
Corporate Headquarters
730 Milford Road
Merrimack, NH 03054
Connection®
Business Solutions
730 Milford Road
Merrimack, NH 03054
Connection®
Public Sector Solutions
7503 Standish Place
Rockville, MD 20855
Connection®
Enterprise Solutions
Suite 200
1001 Yamato Road
Boca Raton, FL 33431
GlobalServe
A Connection® Company
Global Headquarters
440 Sylvan Avenue, Suite 260
Englewood Cliffs, NJ 07632
2 0 1 6 A N N U A L R E P O R T