TABLE OF CONTENTS
PART I
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 …………………………………………………………………… 33
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 Schedules ………………………………………………………………………………………………… 39
SIGNATURES …………………………………………………………………………………………………………………………………………………………………………… 44
PART IV
SHAPING THE FUTURE
CORPORATE OFFICES
2 0 1 7 A N N U A L R E P O R T
Dear Shareholders,
As technology expands the limits of our capabilities, the
world has never seen a time period with greater potential
for innovation, productivity, and growth. Each technological
advancement presents not only a solution to a specific
challenge, but also an opportunity for us to shape the future—
to reimagine the ways our customers conduct business,
operate factories, manage storefronts, teach students, and
improve lives. In this digital world, organizations that do
not adopt new technologies put themselves at a significant
disadvantage. Truly great companies are customer focused,
and they understand how to use technology to engage and
inform their audiences. That same passion for delivering an
exceptional customer experience has fueled Connection’s
success for more than 35 years and continues to drive our
growth today.
Connection generated annual sales of $2.9 billion in 2017, an
increase of 8.1% from 2016. We continued to grow our earnings
per share, with a diluted EPS of $2.04 in 2017, up from $1.80 in
2016. This strong performance allowed Connection to declare
a special dividend, returning $9.1 million to shareholders in
the form of a $0.34 per share special cash dividend declared in
December of 2017. In addition, we paid $2.7 million to our non-
executive employees in the form of a one-time cash bonus. On
December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted,
which among other changes, required Connection to adjust
its net deferred tax balance, resulting in a non-cash income
tax benefit of $7.7 million recorded in the fourth quarter of
2017. The Company generated positive operating cash flow of
approximately $19 million in 2017, and ended the year with no
debt and a healthy cash balance of $50 million.
Connection Business Solutions, our SMB-focused subsidiary,
achieved net sales of $1.16 billion in 2017, up 6.2% from 2016.
Connection Enterprise Solutions reported revenues of $1.13
billion, up 11.8% year over year. Connection Public Sector
Solutions generated net sales of $621 million, up 5.4% from 2016.
Following our acquisitions and 2016 rebranding efforts, 2017
saw a continued focus on integration, optimization of our
operational efficiency, and consolidation of our position as a
leader and innovator in the marketplace. Spearheading our
digital-first strategy, we launched a redesigned eCommerce
platform in Q3 of 2017 to deliver the speed, velocity, and
convenience that today’s customers demand. In addition to
ensuring a consistent look and feel across all of the Connection
Web properties, our redesign offers improved functionality
and provides visitors with a better browsing experience. Our
efforts have already resulted in increased Web traffic, and we
continue to build on that progress with initiatives designed to
cultivate new accounts and promote closer integration with
existing customers. This focus includes ongoing refinements
to our data analytics, improvements to the user experience,
lead generation through measured social media activities, and
timely delivery of valuable content that increases our brand
recognition and value.
Throughout 2017, Connection made strategic investments in
our Technology Solutions Group, Vertical Center of Excellence,
and Distribution and Technology Integration Center. The
Technology Solutions Group provides technical expertise to
our Sales teams and customers, and is responsible for
developing advanced technology solutions and services
offerings. Our Vertical Center of Excellence works closely
with Sales, customers, and industry partners to forge
strong relationships and target key opportunities within
retail, healthcare, finance, and manufacturing markets. The
Distribution and Technology Integration Center houses our
ISO 9001-2008 certified technical configuration lab and
distribution operations. Improvements to our configuration
and distribution capabilities resulted in increased capacity
and a 99.992% shipping accuracy record in Q4 2017. In
addition to these external-facing improvements, we
upgraded our enterprise resource planning software and
corporate intranet to improve operational efficiency and
facilitate greater employee collaboration.
Our performance in 2017 was recognized with numerous
awards from industry partners. Connection was named a
Lenovo Platinum Data Center Partner and Red Hat Rising
Star Partner of the Year. In addition, we received Microsoft’s
Excellence in Operations—Double Gold Level Award, a CHIME
Foundation Partner Award, and a 2017 Innovative Technology
designation from Vizient, Inc. Connection placed #775 on the
annual ranking of Fortune 1000 companies, up 50 spots from
2016, and was also named to the CRN Solution Provider 500,
Internet Retailer Top 500, and CRN Tech Elite 250.
As we help our customers innovate, grow, and utilize
technology to its fullest potential, Connection will continue
to make investments in our Technology Solutions Group, with
a specific focus on five key areas: software-defined data center,
hybrid cloud, digital workspace, IT security, and managed
services. We will continue to refine our capabilities from the
top down—strengthening our subsidiaries, our Vertical Center
of Excellence, and our teams of in-house technical experts. We
are a company of specialists, focused on connecting people
with technology to enhance growth, elevate productivity,
and empower innovation. Moving forward, Connection will
continue to pursue strategies that reflect that mission, as well
as our goals to gain market share, strengthen our competitive
advantages, and increase long-term shareholder value.
Looking back on our history together, we are filled with a great
sense of pride and gratitude for all that we have been able to
accomplish. Connection is a remarkable company, and we are
grateful to have you as our shareholders and partners. We look
forward to bringing people and technology closer together and
shaping the future of our world in exciting new ways.
Timothy McGrath
President and
Chief Executive Officer
Patricia Gallup
Chair and
Chief Administrative Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File Number 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ___ Accelerated filer Non-accelerated filer ___ Smaller reporting company ___ Emerging growth 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, 2017, based on $27.06 per
share, the last reported sale price on the Nasdaq Global Select Market on that date, was $311,350,547.
The number of shares outstanding of each of the registrant’s classes of common stock, as of February 26, 2018:
Class
Common Stock, $.01 par value
Number of Shares
26,852,785
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
2018 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
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1
10
16
16
17
17
18
20
21
33
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 Business
Solutions segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Enterprise
Solutions segment, through our MoreDirect subsidiary, and (c) federal, state, and local government and educational
institutions, in our Public Sector Solutions segment, through our GovConnection subsidiary. Financial results for each of
our segments are included in the financial statements attached hereto. 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 seventeen straight years.
Over the past few years, we have received numerous awards, including the Microsoft Excellence in Operations—Double
Gold Level Award for delivering market-leading operational excellence, as well as being recently named to the CRN
Tech Elite 250 for the second year. 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, 2017, we employed 836 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 12 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, 2017, we generated approximately 40% of our sales from the Business
Solutions segment, 39% from medium-to-large corporate accounts (Fortune 1000), and 21% 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
solutions providers, 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
solutions providers 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 national solutions provider;
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 Enterprise Solutions 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 seventeen 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 and solutions, 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 is 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 and solution 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 national solutions providers 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 customers 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.
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
targeted marketing programs to specific customer populations.
All of our marketing approaches emphasize our broad product and service 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: Business Solutions,
Enterprise Solutions, and Public Sector Solutions.
Business Solutions 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.
Enterprise Solutions 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 Solutions 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,
2017 2016 2015
Sales Segment
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
6
41 %
40 %
40 %
38
39
22
21
100 % 100 % 100 %
37
22
Our brand, and each of Connection’s business segments, is supported by targeted marketing campaigns across a
variety of media:
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 3% of our consolidated revenue in 2017. While no single agency of the federal government
comprised more than 3% of total sales, aggregate sales to the federal government were 7.8%, 7.5%, and 6.7% in 2017,
2016, and 2015, 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 and service 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,
2016
2015
2017
Software
Notebooks/Mobility
Servers/Storage
Net/Com Product
Other Hardware/Services
Total
23 %
22
9
7
39
100 %
20 %
23
10
8
39
100 %
17 %
23
13
9
38
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 22% of our
total product purchases in 2017 and 21% in both 2016 and 2015. Purchases from Synnex Corporation, or Synnex,
comprised 12%, 13%, and 15% of our total product purchases in 2017, 2016, and 2015, respectively. Purchases from
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Hewlett-Packard Company, or HP, accounted for approximately 11% of our total product purchases in 2017 and 9% in
both 2016 and 2015. Purchases from Tech Data, comprised of 11% in 2017 and 8% in both 2016 and 2015. No other
vendor supplied more than 10% of our total product purchases in 2017, 2016, or 2015. We believe that, while we may
experience some short-term disruption if products from Ingram, Synnex, HP and/or Tech Data become unavailable to us,
alternative sources for products obtained directly from Ingram, Synnex, HP and Tech Data are available to us.
Products manufactured by HP represented 20% of our net sales in both 2017 and 2016, and 22% in 2015. 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, depot maintenance, 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. 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 77%, 75%, and 74% of net sales in 2017, 2016, and 2015, 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 $32.0 million and $23.2 million at December 31, 2017 and 2016, 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.
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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
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. In October 2017, we
began a multi-year initiative to upgrade our IT infrastructure, and accordingly we expect our related capital investments
to range from $15.0 to $18.0 million over the next two 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 Microsoft, VMware, Adobe, 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, solutions capabilities, 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®, we
solve IT®, Everything Overnight®, The Connection™, HealthConnectionTM, Mobile Connection®, Cloud Connection®,
ServiceConnection®, ProConnection™, Education Connection®, MoreDirect A PC Connection Company®, TRAXX®,
WebSPOC®, Softmart®, GlobalServeTM, Raccoon CharacterTM, and their related logos and all iterations thereof. 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, 2017, we employed 2,505 persons (full-time equivalent), of whom 1,228 (including 392
management and support personnel) were engaged in sales-related activities, 469 were engaged in providing IT services
and customer service and support, 520 were engaged in purchasing, marketing, and distribution-related activities, 89
were engaged in the operation and development of management information systems, and 199 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.
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;
10
•
•
•
•
•
•
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 solution providers 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. 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.
11
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 technology reseller
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 business partners and 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. In our case, these attacks and attempted attacks
have generally been in the form of active intrusion attempts from the internet, passive vulnerability mapping from the
internet, and internal malware and or phishing attempts delivered through user actions. 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. Similar risks exist with respect to our business partners and third-party providers. As a
result, we are subject to the risk that the activities of our business partners and third-party providers may adversely affect
our business even if an attack or breach does not directly impact our systems.
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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, a significant component of
our 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 Business Solutions and Enterprise Solutions 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 Business Solutions and Enterprise Solutions
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 Solutions 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 61% of our total product
purchases in the year ended December 31, 2017 and 59% and 61% in 2016 and 2015, respectively. Among these five
suppliers, product purchases from Ingram, our largest supplier, accounted for approximately 22% of our total product
purchases in 2017 and 21% in both 2016 and 2015. Purchases from Synnex comprised 12%, 13%, and 15% of our total
product purchases in 2017, 2016, and 2015, respectively. Purchases from HP accounted for approximately 11% of our
total product purchases in 2017 and 9% in both 2016 and 2015. Purchases from Tech Data comprised of 11% of our
total product purchases in 2017 and 8% in both 2016 and 2015. No other vendor supplied more than 10% of our total
13
product purchases in 2017, 2016, or 2015. If we were unable to acquire products from Ingram, Synnex, HP or Tech
Data, 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.
Products manufactured by HP represented 20% of our net sales in both 2017 and 2016, and 22% in 2015. 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, 2017 was $194.3 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 current environment for qualified management personnel in the computer
products industry is very competitive, 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
14
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
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
15
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
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.
Various states have from time-to-time initiated unclaimed property audits of our company escheatment practices. A
multi-state unclaimed property audit continues to be in process, and total accruals for unclaimed property aggregated
$0.9 million at December 31, 2017.
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 55% of the outstanding shares of our common stock as of December 31, 2017. 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
16
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.
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.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of PC Connection
Our executive officers and their ages as of March 9, 2018 are as follows:
Name
Patricia Gallup
Timothy McGrath
G. William Schulze
Age
63
59
57
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.
G. 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.
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 26, 2018, there were 26,852,785 shares of our common stock outstanding,
held by approximately 48 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.
2017
High
Low
Quarter Ended:
December 31
September 30
June 30
March 31
Quarter Ended:
December 31
September 30
June 30
March 31
$ 29.23
28.19
29.64
29.79
$ 25.72
24.33
25.65
26.68
2016
High
Low
$ 29.40 $ 22.81
23.46
22.55
20.02
26.89
25.48
25.81
In 2017, we declared a special cash dividend of $0.34 per share. The total cash payment of $9.1 million was made
on January 12, 2018 to stockholders of record at the close of business on December 29, 2017. 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. 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 2016 or 2017. As of December 31, 2017, 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, 2012 through December 31, 2017 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, 2012 and
ending December 31, 2017. This graph assumes the investment of $100 on January 1, 2012 in our common stock and in
each of the two Nasdaq indices, and that dividends are reinvested.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2017
300
250
200
150
100
50
0
2012
2013
2014
2015
2016
2017
PC Connection, Inc.
NASDAQ Composite-Total Returns
NASDAQ Retail Trade Index
Years Ended
14-Dec
13-Dec
17-Dec
15-Dec
219.88 221.03 207.51 260.61 246.30
140.12 160.78 171.97 187.22 242.71
129.59 143.32 149.25 150.96 160.58
16-Dec
Company Name / Index
PC Connection, Inc.
Nasdaq Stock Market-Composite
Nasdaq Retail Trade (Peer Index)
Base
Period
12-Dec
100.00
100.00
100.00
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
Income from operations
Interest income (expense)
Income before taxes
Income tax provision
Net income
Basic earnings per share
Diluted earnings per share
2017
Years Ended December 31,
2016
2014
2015
(dollars in thousands, except per share)
2013
$ 2,911,883 $ 2,692,592 $ 2,573,973
2,232,954
2,321,435
341,019
371,157
2,529,807
382,076
$ 2,463,339 $ 2,221,638
1,928,638
2,139,950
293,000
323,389
304,549
77,527
98
77,625
(22,768)
54,857 $
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
$
2.05 $
2.04 $
1.81 $
1.80 $
1.77
1.76
$
$
1.63 $
1.61 $
1.37
1.35
2017
2016
As of December 31,
2015
(dollars in thousands)
2014
2013
$
$
$
$ 328,917 $ 330,848 $ 293,449
539,960
639,074
686,134
354,008
433,442
392,451
0.40
$
0.34 $
0.40 $
$ 256,376
500,944
319,829
0.40
$
Consolidated Balance Sheet Data:
Working capital
Total assets
Total stockholders’ equity
Cash dividends declared per share
$ 368,080
747,851
482,252
0.34
$
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 in our Business
Solutions segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Enterprise
Solutions segment, through our MoreDirect subsidiary, and (c) federal, state, and local government and educational
institutions, in our Public Sector Solutions 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 Technical Solutions Group we are able to provide customers complete IT solutions, from identifying
their needs, to designing, developing, and managing the integration of products and services to implement their IT
projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical
certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher
gross margins. We expect these service offerings and technical certifications to continue to play a role in sales
generation and improve gross margins in this competitive environment.
The primary challenges we continue to face in effectively managing our business 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 on an ongoing basis in our own IT development to
meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers
enhanced functionality. In October 2017, we began a two-year initiative to upgrade our IT infrastructure, and
accordingly we expect our related capital investments to range from $15.0 to $18.0 million over the next two years.
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net
sales for the periods indicated:
Net sales (in millions)
Gross margin
Selling, general and administrative expenses
Income from operations
2017
Years Ended December 31,
2016
$ 2,692.6
2015
$ 2,574.0
$ 2,911.9
13.1 %
10.5
2.7
13.8 %
10.8
3.0
13.2 %
10.2
3.0
Net sales in 2017 increased by $219.3 million, or 8.1%, compared to 2016, due to increased sales in all three sales
segments. Our investments in advanced solution sales including our acquisition of Softmart in May 2016 led to higher
sales of software and other advanced technology solutions. Sales of notebooks and desktops, collectively referred to as
client devices, also increased year over year as customers upgraded these client devices to increase productivity and
enhance security. The year-over-year decrease in gross margin (gross profit expressed as a percentage of net sales) was
attributed primarily to a more competitive marketplace in 2017. SG&A expenses increased in dollars due to investments
in solution sales personnel, incremental variable compensation associated with higher gross profits, and the acquisitions
in May and October 2016 of Softmart and GlobalServe, respectively. Operating income in 2017 decreased year over
year in dollars and as a percentage of net sales as the increase in gross profit was more than offset by higher SG&A.
Sales Distribution
The following table sets forth our percentage of net sales by sales segment and product mix:
Years Ended December 31,
2016
2017
2015
Sales Segment
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
Product Mix
Software
Notebooks/Mobility
Servers/Storage
Net/Com Product
Other Hardware/Services
Total
40 %
39
21
100 %
40 %
38
22
100 %
41 %
37
22
100 %
23 %
22
9
7
39
100 %
20 %
23
10
8
39
100 %
17 %
23
13
9
38
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
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
Cost of Sales
Years Ended December 31,
2016
2015
2017
15.3 %
12.3
10.5
13.1 %
15.8 %
12.8
11.7
13.8 %
15.5 %
12.0
11.3
13.2 %
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,
2016
$ 226.2
16.1
14.2
8.3
6.9
10.5
8.4
$ 290.6
2015
$ 200.5
15.7
12.7
7.5
7.1
9.0
10.0
$ 262.5
2017
$ 235.3
14.4
15.0
8.8
7.2
11.8
12.0
$ 304.5
10.5 %
10.8 %
10.2 %
Personnel costs increased in 2017 compared to 2016 primarily due to investments in solutions sales personnel,
increased variable compensation associated with higher gross profits, and the inclusion of the personnel costs of Softmart
and GlobalServe since their respective May and October 2016 acquisition dates. Depreciation and amortization
increased in 2016 and 2017 due to investments in our IT infrastructure and the amortization of intangible assets added in
2016 with our two acquisitions.
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.
23
YEAR-OVER-YEAR COMPARISONS
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net sales increased by 8.1% to $2,911.8 million in 2017 from $2,692.6 million in 2016. Changes in net sales and
gross profit by operating segment are shown in the following table (dollars in millions):
Years Ended December 31,
2017
2016
Amount
% of
Net Sales
Amount
% of
Net Sales
%
Change
Sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
Gross Profit:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
$ 1,158.6
1,131.8
621.4
$ 2,911.8
39.8 % $ 1,091.2
38.9
21.3
100.0 % $ 2,692.6
1,012.0
589.4
6.2 %
40.5 %
37.6
21.9
100.0 %
11.8
5.4
8.1 %
$
177.8
139.0
65.3
$
382.1
15.3 % $
12.3
10.5
13.1 % $
172.4
129.6
69.2
371.2
15.8 %
12.8
11.7
13.8 %
3.2 %
7.3
(5.7)
2.9 %
• Net sales for the Business Solutions segment increased due to higher sales of software, notebooks, and desktops.
Software sales for this segment increased by 11% due to our investments in additional security and software services
technical specialists as well as our May 2016 acquisition of Softmart. Net sales of notebooks/mobility and desktops
(collectively referred to as client devices) increased by 10% and 19%, respectively, as small- to medium-sized
businesses upgraded client devices to improve productivity and enhance security.
• Net sales for the Enterprise Solutions segment increased due to higher sales of software, servers, and net/com
products. Software net sales for this segment increased year over year by 22% due to strong demand for security
and office productivity tools as well as our May 2016 acquisition of Softmart. Sales of servers and net/com products
increased by 21% and 22%, respectively, as large enterprises increased IT investments to transform their workplace.
• Net sales for the Public Sector Solutions segment increased to both federal government and state and local
government and educational customers. Sales to federal government customers grew by 12% in part due to higher
sales of desktops made under federal government contracts. Sales to state and local government and educational
institutions increased by 2% due to modest sales growth across all its markets.
Gross profit for 2017 increased year over year in dollars but decreased as a percentage of net sales (gross margin), as
explained below:
• Gross profit for the Business Solutions segment increased as lower invoice selling margins were offset by higher net
sales. Invoice selling margins decreased year over year by 74 basis points due to lower vendor funding and a shift in
both client and product mix, which included increased sales of lower-margin client devices. We also 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. A 30 basis-point increase in
these agency revenues partially offset the decrease in invoice selling margins.
• Gross profit for the Enterprise Solutions segment increased as lower invoice selling margins were offset by an
increase in net sales. Invoice selling margins decreased by 62 basis points due to a hyper-competitive marketplace.
This margin decrease was offset by higher agency revenues (12 basis points).
• Gross profit for the Public Sector Solutions segment decreased due to a decrease in gross margin. Invoice selling
margins decreased by 121 basis points due to a hyper-competitive marketplace.
24
Selling, general and administrative expenses in 2017 increased in dollars but decreased 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,
2016
2017
Business Solutions
Enterprise Solutions
Public Sector Solutions
Headquarters/Other, unallocated
Total
Amount
$ 137.4
88.8
64.3
14.0
$ 304.5
% of Net
Sales
Amount
11.9 % $ 130.8
7.9
10.4
87.1
60.6
12.1
10.5 % $ 290.6
% of Net %
Sales
12.0 %
8.6
10.3
Change
5.0 %
2.0
6.1
15.7
10.8 %
4.8 %
• SG&A expenses for the Business Solutions segment increased in dollars but decreased as a percentage of net sales.
The dollar increase resulted from higher personnel costs ($4.0 million) and greater usage of Headquarters/Other
($3.2 million). Personnel costs increased due to the transfer in Q2 2017 of technical staff from Headquarters/Other
as well as incremental variable compensation on higher gross profits. The increase in Headquarters/Other services
was partially related to our investments in technical and engineering support provided to this segment. The decrease
in SG&A as a percentage of net sales was due to the leveraging of fixed costs over larger net sales.
• SG&A expenses for the Enterprise Solutions segment increased in dollars but decreased as a percentage of net sales.
The increase in SG&A dollars was due to the inclusion of $2.9 million of operating expenses for GlobalServe, which
we acquired in Q4 2016. This increase related to GlobalServe was partially offset by cost expense savings initiated
in Q2 2017.
• SG&A expenses for the Public Sector Solutions segment increased in dollars and as a percentage of net sales. The
dollar increase resulted from higher personnel costs ($1.2 million) and greater usage of Headquarters/Other ($1.6
million). Personnel costs increased due to the transfer in Q2 2017 of technical staff from Headquarters/Other as well
as incremental variable compensation on higher gross profits. The increase in Headquarters/Other services was
partly related to our investments in technical and engineering support provided to this segment.
• SG&A expenses for the Headquarters/Other group increased due to an increase in allocated personnel and costs
related to our investments in solution services. In the fourth quarter of 2017, we recorded a charge of $1.3 million
relating to a one-time bonus paid to all non-executive employees, including those in this group. The impact of this
one-time bonus on the three selling segments was not as meaningful to their overall SG&A expense. 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 decreased by $3.0 million to $77.5 million in 2017, compared to 2016. Income from
operations as a percentage of net sales was 2.7% in 2017, compared to 3.0% in 2016. The decrease in operating income
resulted primarily from the increase in SG&A costs. The decrease in operating income as a percentage of net sales
resulted primarily from the decrease in gross margin.
Income taxes. Our effective tax rate was 29.3% for the year ended December 31, 2017, compared to 40.2% for the
year ended December 31, 2016. In December 2017, the U.S. Tax Cuts and Jobs Act was enacted, which among other
changes, reduced the federal corporate income tax rate. This rate reduction, which took effect on January 1, 2018,
required the revaluation of our net deferred tax liability. The revaluation resulted in the recording of an income tax
benefit of $7.7 million for the fourth quarter of 2017. We expect our corporate income tax rate for 2018 to range from
27% to 29%.
25
Net income increased by $6.7 million to $54.9 million in 2017, from $48.1 million in 2016, as the decrease in
operating income was more than offset by the decrease in income tax described above.
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:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total
Gross Profit:
Business Solutions
Enterprise Solutions
Public Sector Solutions
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 Business Solutions 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 Business Solution customers.
• Net sales for the Enterprise Solutions 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 28% due to strong
demand for security and office productivity tools as well as our 2016 acquisition of Softmart.
• Net sales to the Public Sector Solutions 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 Business Solutions 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 Enterprise Solutions 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 Solutions 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.
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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
Business Solutions
Enterprise Solutions
Public Sector Solutions
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 Business Solutions 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 this segment.
• SG&A expenses for the Enterprise Solutions 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 this segment.
• SG&A expenses for the Public Sector Solutions 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 this 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.
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.
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,
27
repurchases of common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new
businesses.
We believe that funds generated from operations, together with available credit under our bank line of credit, will be
sufficient to finance our working capital, capital 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
$18.0 to $20.0 million and payments on leases and other contractual obligations of approximately $4.7 million. We
completed in 2017 a comprehensive review and assessment of our entire business software needs, and in October 2017,
we began a two-year initiative to upgrade our IT infrastructure. Accordingly we expect our related capital investments to
range from $15.0 to $18.0 million over the next two years.
We expect to meet our cash requirements for 2018 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, 2017, we had $50.0 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, 2017, 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, 2017. 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,
2016
2015
2017
Net cash provided by operating activities
Net cash used for investing activities
Net cash (used for) provided by financing activities
Increase (decrease) in cash and cash equivalents
$
$
19.3
(11.8)
(6.7)
0.8
$
$
33.6
(54.9)
(9.7)
(31.0)
$
$
30.9
(12.8)
1.2
19.3
Cash provided by operating activities decreased $14.3 million in 2017. Operating cash flow in 2017 resulted
primarily from net income before depreciation and amortization and an increase in accounts payable, offset partially by
an increase in accounts receivable and inventory. Accounts receivable increased year over year by $37.8 million
primarily due to our $26.7 million increase in sales in the fourth quarter of 2017 compared to the prior year period. Days
sales outstanding were unchanged at 48 days at both December 31, 2017 and 2016. Inventory increased year over year
by $16.2 million in 2017 due to inventory purchased for customer orders in backlog as of December 31, 2017. Inventory
days, which is the measure of the average number of days goods remain in inventory before being sold, increased from
13 days at December 31, 2016, to 15 days at December 31, 2017. Operating cash in 2016 was primarily generated by net
income before depreciation and amortization and a decrease in inventory, offset by an increase in accounts receivable.
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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.
At December 31, 2017, we had $194.3 million in outstanding accounts payable. Such accounts are generally paid
within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be financed by cash
flows from operations or short-term borrowings under the line of credit. 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 decreased $43.1 million in 2017, compared to 2016. 2016 included our
acquisitions of Softmart, Inc. and GlobalServe, Inc., while in 2017 we did not enter into acquisitions. Cash used to
purchase property and equipment less proceeds from the sale of equipment amounted to $11.8 million in 2017, compared
to $11.9 million in 2016, and $12.3 million in 2015. These expenditures were primarily related to capitalized internally-
developed software in connection with 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. In addition, in 2017 we invested $1.7 million in an
ongoing upgrade of our internal IT systems, which we expect to complete mid-year 2019. We expect that the cost to
complete this upgrade will be between $15.0 million and $18.0 million.
Cash (used for) provided by financing activities decreased $3.0 million in 2017, compared to 2016. Financing uses
of cash in 2017 included dividends of $9.0 million declared in December 2016 and paid in January 2017, and in 2016
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. In January 2018, the Company paid a dividend of $9.1 million which was declared in December 2017.
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 (4.50% at December 31, 2017).
The one-month LIBOR rate at December 31, 2017 was 1.56%. 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 at December 31, 2017.
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, 2017, the
entire $50.0 million facility was available for borrowing.
29
Contractual Obligations. The following table sets forth information with respect to our long-term obligations
payable in cash as of December 31, 2017 (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
$ 17,221
4,665 6,607 3,734
2,215
(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, 2017, we are unable to make reasonably reliable estimates of the period of cash settlement with the
respective taxing authority. Therefore, $0.9 million of unrecognized tax benefits, including interest and penalties, have
been excluded from the contractual obligations table above. See Note 8 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, 2017, 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. Our outstanding
borrowings under the credit facility during the fourth quarter of 2017 were immaterial, and accordingly, the funded
debt ratio did not limit potential borrowings as of December 31, 2017. 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 $346.7 million, plus 50% of consolidated net income for each
quarter, beginning with the quarter ended December 31, 2017. Such amount was calculated at December 31, 2017,
as $380.6 million, whereas our actual consolidated stockholders’ equity at this date was $482.3 million.
Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things,
general economic conditions, the condition of the information technology industry, our financial performance and stock
price, and the state of the capital markets.
30
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, 2017, we recorded sales reserves of $3.3 million and $0.2 million as components of accounts receivable
and accrued expenses, respectively. 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.
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
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.
31
Amounts recognized on a net basis included in net sales for such third-party services and agency sales transactions
were $38.3 million, $30.2 million, and $24.2 million for the years ended December 31, 2017, 2016, and 2015,
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
$1.2 million in 2017, and $0.3 million in 2016.
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
the fair value of advertising expense associated with that program are classified as offsets to cost of sales. 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 net
32
realizable value, 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 $5.0 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 Enterprise Solutions and Business Solutions 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 Enterprise Solutions and Business Solutions
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.
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
33
variable. Our average outstanding borrowings during 2017 was minimal. 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, 2017. 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
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.
34
The Company’s management assessed the effectiveness of the Company’s internal controls over financial reporting
as of December 31, 2017. 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).
Based on our assessment, management concluded that, as of December 31, 2017, 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, 2017. This report appears below.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of PC Connection, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of PC Connection, Inc. and subsidiaries (the "Company") as of December
31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated
March 9, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 9, 2018
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, 2017, 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 2018 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of December 31, 2017 (the “Proxy Statement”) is incorporated herein by reference. 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.
We have adopted a Code of Business Conduct and Ethics that applies to our officers, including our principal
executive, financial and accounting officers, and our directors and employees. We have posted the text of our Code of
Business Conduct and Ethics under the “Investor Relations” section of our website, www.connection.com. We intend to
disclose on our website any amendments to, or waivers from, the Code of Business Conduct and Ethics that are required
to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
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(25)
10.23(25)
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(25)
10.25(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(25)
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.
(25) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, File Number 0-
23827, filed on March 3, 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, 2017 and December 31, 2016, (ii) Consolidated
Statements of Income for the years ended December 31, 2017, 2016, and 2015, (iii) Consolidated Statements of Changes
in Stockholders’ Equity for the years ended December 31, 2017, 2016, and 2015, (iv) Consolidated Statements of Cash
Flows for the years ended December 31, 2017, 2016, and 2015, 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 9, 2018
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/ G. WILLIAM SCHULZE
G. 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 9, 2018
Vice President, Interim Treasurer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
March 9, 2018
Chairman of the Board
March 9, 2018
Vice Chairman of the Board
March 9, 2018
March 9, 2018
March 9, 2018
March 9, 2018
March 9, 2018
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, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016
and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
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 Stockholders and Board of Directors of PC Connection, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PC Connection, Inc. and subsidiaries (the "Company") as of
December 31, 2017 and 2016, 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, 2017, and the related notes and the schedule listed in the Index at item 15
(collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 9, 2018
We have served as the Company’s auditor since 1984.
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
Prepaid expenses and other current assets
Income taxes receivable
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 10)
Stockholders’ Equity:
Preferred Stock, $.01 par value, 10,000 shares authorized, none issued
Common Stock, $.01 par value, 100,000 shares authorized, 28,709 and 28,465 issued,
26,853 and 26,609 outstanding at December 31, 2017 and 2016, respectively
Additional paid-in capital
Retained earnings
Treasury stock at cost, 1,856 shares at December 31, 2017 and 2016
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
December 31,
2017
2016
49,990
$
449,682
106,753
5,737
3,933
616,095
41,491
73,602
11,025
5,638
$ 747,851
49,180
$
411,883
90,535
5,453
2,120
559,171
39,402
73,602
12,586
1,373
$ 686,134
$ 194,257
31,096
22,662
248,015
15,696
1,888
265,599
$ 177,862
31,047
21,345
230,254
19,602
2,836
252,692
─
─
287
114,154
383,673
(15,862)
482,252
$ 747,851
285
111,081
337,938
(15,862)
433,442
$ 686,134
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 income (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,
2017
$ 2,911,883
2,529,807
382,076
304,549
77,527
98
77,625
(22,768)
54,857
$
2016
2015
$ 2,692,592 $ 2,573,973
2,232,954
2,321,435
341,019
371,157
262,465
290,637
78,554
80,520
(87)
(67)
78,467
80,453
(31,640)
(32,342)
46,827
48,111 $
$
$
$
2.05
2.04
$
$
1.81 $
1.80 $
1.77
1.76
26,771
26,891
26,528
26,719
26,398
26,616
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, 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 payment
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
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
Dividend declaration
Net income
Balance - December 31, 2017
Common Stock
Shares Amount Paid-In Capital Earnings Shares Amount Total
Treasury Shares
Additional
Retained
28,199
41
$
282
1
$
106,956
436
$ 262,632
—
(1,856)
─
$ (15,862) $ 354,008
437
─
39
—
74
—
—
—
—
28,353
11
39
—
62
—
—
—
—
28,465
157
47
—
40
—
—
—
28,709
—
—
1
—
—
—
—
284
—
—
—
1
—
—
—
—
285
2
—
—
—
—
—
—
287
$
$
875
994
(1)
(660)
561
—
—
109,161
135
961
1,049
(1)
(737)
513
—
—
111,081
1,748
1,197
741
—
(613)
—
—
114,154
—
—
—
—
—
─
─
─
─
─
─
─
(1,856)
—
(10,591)
46,827
298,868
—
—
—
—
—
—
(9,041)
48,111
337,938
—
—
—
—
—
—
—
—
(1,856)
—
─
─
─
─
─
─
─
(15,862)
—
—
—
—
—
—
—
—
(15,862)
—
875
994
—
(660)
561
(10,591)
46,827
392,451
135
961
1,049
—
(737)
513
(9,041)
48,111
433,442
1,750
—
—
—
—
(9,122)
54,857
$ 383,673
—
—
—
—
—
—
(1,856)
—
—
—
—
—
—
1,197
741
—
(613)
(9,122)
54,857
$ (15,862) $ 482,252
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,
2016
2015
2017
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation expense
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, income tax receivables 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:
Purchases of equipment
Cash paid for acquisitions
Purchase of intangible assets
Net cash used for investing activities
Cash Flows from Financing Activities:
Dividend payment
Exercise of stock options
Issuance of stock under Employee Stock Purchase Plan
Excess tax benefit from exercise of equity awards
Payment of payroll taxes on stock-based compensation through shares
withheld
Net cash (used for) provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Non-cash Investing and Financing Activities:
Accrued capital expenditures
Dividend declaration
Supplemental Cash Flow Information:
Income taxes paid
$ 54,857
$ 48,111 $ 46,827
11,839
1,658
741
(3,906)
24
—
(39,457)
(16,218)
(2,097)
(4,265)
15,807
337
19,320
10,453
360
1,049
3,506
92
(513)
(33,835)
12,401
(1,274)
(321)
(3,012)
(3,431)
33,586
8,961
1,097
994
2,652
44
(552)
(64,215)
(11,863)
(285)
(328)
41,324
6,206
30,862
(11,803)
—
—
(11,803)
(11,885)
(42,990)
—
(54,875)
(12,337)
—
(450)
(12,787)
(9,041)
1,750
1,197
—
(10,591)
135
961
513
—
437
875
552
(613)
(6,707)
810
49,180
$ 49,990
(660)
(737)
1,204
(9,719)
19,279
(31,008)
80,188
60,909
$ 49,180 $ 80,188
$
699
9,122
$
109 $
9,041
504
10,591
$ 28,927
$ 29,740 $ 30,371
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 Business
Solutions segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Enterprise
Solutions segment, through our MoreDirect and GlobalServe subsidiaries, and (c) federal, state, and local government
and educational institutions, in our Public Sector Solutions 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, 2017, we recorded sales reserves of $3,308 and $167 as components of accounts receivable and accrued
expenses, respectively. At December 31, 2016, we recorded sales reserves of $3,709 and $220 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. Service revenue is recognized over time as the services are performed. 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 $38,341, $30,234, and $24,158 for the years ended December 31, 2017, 2016, and 2015, 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 $6,776 and
$4,345 at December 31, 2017 and 2016, 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
net realizable value, 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
$14,437, $16,083, and $15,689, for the years ended December 31, 2017, 2016, and 2015, 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 generally 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 customer relationships, 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 3% of total net sales in 2017,
2016, and 2015. While no single agency of the federal government comprised more than 3% of total sales, aggregate
sales to the federal government as a percentage of total net sales were 7.8%, 7.5%, and 6.7% in 2017, 2016, and 2015,
respectively.
Product purchases from Ingram Micro, Inc. (“Ingram”), our largest supplier, accounted for approximately 22% of
our total product purchases in 2017 and 21% in both 2016 and 2015. Purchases from Synnex Corporation (“Synnex”)
comprised 12%, 13%, and 15% of our total product purchases in 2017, 2016, and 2015, respectively. Purchases from
HP accounted for approximately 11% of our total product purchases in 2017 and 9% in both 2016 and 2015. Purchases
from Tech Data accounted for approximately 11% of our total product purchases in 2017 and 8% in both 2016 and 2015.
No other vendor supplied more than 10% of our total product purchases in 2017, 2016, or 2015. We believe that, while
we may experience some short-term disruption, alternative sources for products obtained directly from Ingram, Synnex,
HP, and Tech Data are available to us.
Products manufactured by HP represented 20% of our net sales in 2017 and 2016, and 22% in 2015. 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
2017
2016
2015
$ 54,857
$ 48,111
$ 46,827
26,771
120
26,891
26,528
191
26,719
26,398
218
26,616
$
$
2.05
2.04
$
$
1.81
1.80
$
$
1.77
1.76
F-10
For the years ended December 31, 2017, 2016, and 2015, we did not exclude any outstanding nonvested stock units
or stock options from the computation of diluted earnings per share because including them would have had an anti-
dilutive effect.
Comprehensive Income
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. The Company expects to adopt the new standard using the modified
retrospective method that will result in a cumulative effect adjustment as of January 1, 2018. 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 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.
• Our hardware revenue is recognized on a gross basis upon delivery. Upon adoption of the new standard, we
expect to recognize revenue at an earlier point in time than we are recognizing under current accounting
standards for contracts where shipping terms are FOB shipping point.
• Upon adoption of the new standard we expect recognition of certain software products, including SAAS
offerings and security software, will be on a net basis. This will result in a decrease in net sales and cost of
sales, but no change in gross profit.
• 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 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. We have not
completed our final analysis of the quantitative impact of the adoption and the operation of our internal controls related
to the adoption of the standard.
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. We are currently
assessing the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, 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
F-11
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.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The
Company adopted this standard on January 1, 2017. 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 primary impact of our adoption was the recognition of excess tax benefits related
to equity compensation in our provision for income taxes rather than paid-in capital, which is a change required to be
applied on a prospective basis in accordance with the new guidance. There were no unrecognized excess tax benefits at
implementation. Accordingly, we recorded discrete income tax benefits in the consolidated statements of income of
$1,054 in the year ended December 31, 2017, for excess tax benefits related to equity compensation. The corresponding
cash flows are reflected in cash provided by operating activities instead of financing activities, as was previously
required. We adopted the cash flow presentation that requires presentation of excess tax benefits within operating
activities on a prospective basis. Additionally, under ASU 2016-09, we have elected to continue to estimate equity award
forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. Additional
amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on
our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld
shares also had no impact to any of the periods presented in our consolidated statements of cash flows since such cash
flows have historically been presented as a financing activity.
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 prior standards, the market amount
required 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. We adopted
the standard in the first quarter of 2017 and applied the provisions prospectively. The adoption of ASU 2015-11 did not
have a material impact 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
expand our software services capabilities. Under the terms of the asset purchase agreement, we paid $31,899, 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. The 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.
F-12
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 this 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. In 2016 we incurred $118 of transaction costs 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. The 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.
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
Deferred taxes and 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
F-13
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 two
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 units or the domain name were in excess of the respective fair
values during the year ended December 31, 2017.
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,
2017, we used a WACC rate of 10.7%, and estimated terminal growth rate at 3.0% and working capital requirements at
7.7% of revenues. The carrying amount of goodwill for the periods presented is detailed below:
Balance at December 31, 2016
Goodwill, gross
Accumulated impairment losses
Net balance
Balance at December 31, 2017
Goodwill, gross
Accumulated impairment losses
Net balance
Intangible Assets
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
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, 2017, 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, 2017
Accumulated
Amortization Amount
3,143 $
$
1,190
1,882
6,215 $ 10,575 $ 16,790 $
Gross
Amount
257 $ 3,400 $
December 31, 2016
Accumulated
Amortization Amount
539
79
11,518
4,654 $ 12,136
2,861 $
1,111
682
1,190
12,200
—
10,318
Net
$
F-14
In 2017, 2016, and 2015, we recorded amortization expense of $1,561, $1,281, and $735, 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,
2018
2019
2020
2021
2022
2023 and thereafter
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
Trade
Vendor returns, consideration and other
Due from employees
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
$ 1,462
1,256
1,220
1,220
1,220
4,197
$ 10,575
December 31,
2017
$ 398,524
57,043
149
455,716
2016
$ 384,709
33,020
173
417,902
(3,308)
(2,726)
$ 449,682
(3,709)
(2,310)
$ 411,883
December 31,
2017
$ 58,320
33,176
7,787
99,283
(57,792)
$ 41,491
2016
$ 69,006
31,218
7,300
107,524
(68,122)
$ 39,402
We recorded depreciation and amortization expense for property and equipment of $10,278, $9,172, and $8,226 in
2017, 2016, and 2015, respectively.
6. BANK BORROWINGS
We have a $50,000 credit facility collateralized by our account 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
(4.50% at December 31, 2017). The one-month LIBOR rate at December 31, 2017 was 1.56%. 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. The credit facility does not include restrictions on
future dividend payments. 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
F-15
maximum allowable funded debt ratio under the agreement is 2.0 to 1.0. Decreases in our consolidated Adjusted
EBITDA could limit our potential borrowing capacity under the credit facility. We had no outstanding bank borrowings
at December 31, 2017 or 2016, respectively, and accordingly, the entire $50,000 facility was available for borrowings
under the credit facility.
7. 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, 2017 or 2016.
Share Repurchase Authorization
In 2001, our Board of Directors authorized the spending of up to $15,000 to repurchase our common stock. We
have considered 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, 2017. As of December 31, 2017, 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, 2017:
Dividend per share
Stockholder record date
Total dividend
Payment date
$
2017
0.34
2016
$
0.34
12/29/2017 12/30/2016 12/29/2015
$
9,041
1/12/2018 1/12/2017 1/12/2016
$ 10,591
2015
0.40
9,122
$
$
The dividends paid in January 2017 and 2018 were included in accrued expenses and other liabilities at December
31, 2016 and 2017, 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 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
F-16
stock units, and other stock-based awards to employees, officers, directors, and consultants. As of December 31, 2017,
there were 198 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 1,114 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 2016, we granted nonvested stock units. No equity awards were granted in 2015
and 2017, however, in previous years both nonvested stock awards and stock options have been 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, 2017:
Pre-tax expense for nonvested units
Tax benefit
Net effect on net income
2017
2015
2016
$ 741 $ 1,049 $ 994
(398)
(420)
629 $ 596
(297)
$ 444 $
We have historically settled stock option exercises with newly issued common shares. The intrinsic value of options
exercised in 2017, 2016, and 2015 was $2,569, $156, and $553, respectively. The following table sets forth our stock
option activity in 2017:
Outstanding, January 1, 2017
Exercised
Outstanding, December 31, 2017
Vested and expected to vest
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Weighted
Average
Options Exercise Price Term (Years) Value
157 $
(157)
— $
— $
11.12
11.12
—
—
1.44
$ 2,670
—
—
$
$
—
—
In 2016, we issued nonvested stock units that settle in stock and vest over periods up to fifteen years. No awards
were issued in 2015 and 2017. Recipients of nonvested stock units do not possess stockholder rights. The fair value of
F-17
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 2017:
Nonvested at January 1, 2017
Vested
Canceled
Nonvested at December 31, 2017
Nonvested Stock Units
Weighted-Average
Shares
354 $
(62)
(4)
288
Grant Date
Fair Value
19.34
11.41
23.73
21.01
The weighted-average grant-date fair value of nonvested stock units granted in 2016 was $24.72. No awards were
granted in 2015 and 2017. The total fair value of nonvested stock units that vested in 2017, 2016, and 2015 was $1,638,
$2,348, and $2,287, respectively. Unearned compensation cost related to the nonvested portion of outstanding
nonvested stock units was $5,283 as of December 31, 2017, and is expected to be recognized over a weighted-average
period of approximately 7.1 years.
Stock Equivalent Units
We have also issued stock equivalent units, (“SEUs”), which settle in cash and vest ratably over four years, to non-
executive employees. 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.
2017
100
2016
2015
23
95
$ 1,973 $ 2,054
$ 1,429
Years Ended December 31,
2016
2015
2017
$ 21,813 $ 23,923 $ 23,872
5,116
28,988
4,861
26,674
4,913
28,836
(5,132)
1,226
(3,906)
2,220
432
2,652
$ 22,768 $ 32,342 $ 31,640
2,920
586
3,506
Units issued
Compensation expense
8. INCOME TAXES
The provision for income taxes consisted of the following:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Net provision
F-18
The components of the deferred taxes at December 31, 2017 and 2016 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 contingency
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
Prepaid expenses
Total gross deferred tax liabilities
Net deferred tax liability
Current deferred tax assets
Noncurrent deferred tax liability
Net deferred tax liability
$
2017
2016
724
127
275
129
357
981
79
409
796
34
877
177
4,965
(745)
4,220
$
751
157
331
218
745
2,662
110
565
1,076
499
618
480
8,212
(485)
7,727
(12,516)
(7,218)
(182)
(19,916)
$ (15,696)
(17,776)
(9,553)
—
(27,329)
$ (19,602)
$
—
(15,696)
$ (15,696)
$
—
(19,602)
$ (19,602)
We have state net operating loss carryforwards aggregating $1,110 at December 31, 2017 representing state tax
benefits, net of federal taxes, of approximately $877. These loss carryforwards are subject to between five, fifteen, and
twenty-year carryforward periods, with $9 expiring after 2018, $6 expiring after 2019, $5 expiring after 2020, $3
expiring after 2021, $3 expiring after 2022 and $1,084 expiring beyond 2022. We have provided valuation allowances
of $745 and $485 at December 31, 2017 and 2016, 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 $260, $102, and $70 increase in 2017, 2016, and 2015, respectively. The valuation allowance was
increased in 2017, 2016, and 2015 to offset the corresponding increase to the deferred tax asset associated with state net
operating loss carryforwards.
A reconciliation of our 2017, 2016, and 2015 income tax provision to total income taxes at the statutory federal tax
rate is as follows:
2017
2016
2015
Federal income taxes, at statutory tax rate
State income taxes, net of federal benefit
Nondeductible expenses
Remeasurement of net deferred tax balances
Other–net
Tax provision
F-19
$ 27,169 $ 28,159 $ 27,463
3,962
538
—
(323)
$ 22,768 $ 32,342 $ 31,640
3,843
(113)
(7,815)
(316)
3,947
602
—
(366)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which
significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate
from 35.0% to 21.0%, and setting limitations on deductibility of certain costs.
Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange
Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that we include in our financial statements the reasonable
estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined.
Accordingly, we recorded a preliminary $7.8 million in estimated tax benefit related to the change in net deferred tax
liabilities stemming from the Tax Act’s reduction of the U.S. federal tax rate from 35.0% to 21.0% for the year ended
December 31, 2017.
The final impact on our financial statements from the Tax Act may differ due to changes in interpretations of the
Tax Act, future legislative action to address questions that arise because of the Tax Act, and related interpretations in
response to the Tax Act.
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 tax years 2013-2016
remain open to examination by the major state taxing jurisdictions in which we file. The tax years 2014-2016 remain
open to examination by the Internal Revenue Service.
A reconciliation of unrecognized tax benefits for 2017, 2016, and 2015, is as follows:
Balance at January 1,
Additions on tax positions of prior years
Lapses of applicable statute of limitations
Settlements
Balance at December 31,
2017
2016
2015
684
—
(159)
(157)
368
$
$
869
—
(185)
—
684
$
$
892
106
(129)
—
869
$
$
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, 2017, 2016, and 2015, we recognized interest and penalties totaling $0, $62, and
$110, respectively. At December 31, 2017 and 2016, accrued interest aggregated $481 and $693, respectively, and
accrued penalties aggregated $93 and $171, respectively. As of December 31, 2017 and 2016, 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.
9. 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 2017, 2016, or 2015. We made matching
contributions to the employee savings element of such plan of $2,396, $2,320, and $2,034 in 2017, 2016, and 2015,
respectively.
10. 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
F-20
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, 2017 are as follows:
Year Ended December 31,
2018
2019
2020
2021
2022
2023 and thereafter
Related Parties Others Total
$
1,302 $ 3,363 $ 4,665
3,269
3,269
3,338
3,338
2,464
2,464
1,270
1,270
2,215
2,215
—
—
—
—
—
Total rent expense aggregated $5,225, $4,753, and $4,904 for the years ended December 31, 2017, 2016, and 2015,
respectively, under the terms of the operating leases described above. Such amounts included $1,647, $1,640, and
$1,633 in 2017, 2016, and 2015, respectively, paid to related parties.
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,employment matters, and other assessments.
Additional liabilities for these 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.
11. OTHER RELATED-PARTY TRANSACTIONS
As described in Note 10, 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
12. SEGMENT AND RELATED DISCLOSURES
2017
2016
2015
$ 151 $ 159
$ 177
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
F-21
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. 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. 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 were immaterial to our consolidated results.
Net sales presented below exclude inter-segment product revenues. Segment information applicable to our
reportable operating segments for the years ended December 31, 2017, 2016, and 2015 is shown below:
Net sales:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Total net sales
Operating income (loss):
SMB
Large Account
Public Sector
Headquarters/Other
Total operating income
Interest income (expense)
Income before taxes
Selected operating expense:
Depreciation and amortization:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Headquarters/Other
Total depreciation and amortization
Total assets:
Business Solutions
Enterprise Solutions
Public Sector Solutions
Headquarters/Other
Total assets
Years Ended December 31,
2017
2016
2015
$ 1,158,639 $ 1,091,182 $ 1,040,586
961,013
1,011,990
1,131,823
572,374
589,420
621,421
$ 2,911,883 $ 2,692,592 $ 2,573,973
$
$
$
$
$
$
40,425 $
50,163
953
(14,014)
77,527
98
77,625 $
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
592 $
2,163
159
8,925
11,839 $
425 $
1,784
160
8,084
10,453 $
24
1,297
156
7,484
8,961
249,064
413,921
75,531
9,335
747,851
$
$
240,665
361,431
95,278
(11,240)
686,134
The assets of our operating segments presented above consist primarily of accounts receivable, net intercompany
receivable, goodwill, and other intangibles. Goodwill of $66,236 and $7,366 is held by our Large Account and SMB
segments, respectively, as of December 31, 2017. Assets reported under the Headquarters/Other group are managed by
corporate headquarters, including cash, inventory, property and equipment and intercompany balance, net. Total assets
for the Headquarters/Other group are presented net of intercompany balances eliminations of $29,731 and $49,937 for
the years ended December 31, 2017 and 2016, respectively. Our capital expenditures consist largely of IT hardware and
F-22
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 2017, 2016, and 2015 were made to customers located in the United States.
Shipments to customers located in foreign countries were not more than 1% of total net sales in 2017, 2016, and 2015.
All of our assets at December 31, 2017 and 2016 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 3% of total net sales in 2017, 2016, or 2015. While no single agency of the
federal government comprised more than 3% of total sales, aggregate sales to the federal government were 7.8%, 7.5%,
and 6.7% in 2017, 2016, and 2015, respectively.
F-23
13. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly data of the Company for each of the calendar quarters in
2017 and 2016. 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,
2017
2017
2017
2017
Quarters Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest income (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
$ 670,594 $ 749,792 $ 729,230 $ 762,267
662,737
99,530
77,634
21,896
78
21,974
(1,251)
20,723
583,861
86,733
75,281
11,452
19
11,471
(4,039)
7,432 $ 13,585 $
633,087
96,143
74,404
21,739
(8)
21,731
(8,614)
13,117 $
650,122
99,670
77,230
22,440
9
22,449
(8,864)
$
$
$
0.28 $
0.28 $
0.51 $
0.51 $
0.49 $
0.49 $
0.77
0.77
26,697
26,866
26,761
26,893
26,802
26,899
26,822
26,907
Quarters Ended
March 31, June 30,
September 30, December 31,
2016
2016
2016
$ 572,394
490,201
82,193
67,029
15,164
(14)
15,150
(6,087)
9,063
$
$ 676,165 $ 708,485
611,518
582,291
96,967
93,874
74,522
72,864
22,445
21,010
(27)
(12)
22,418
20,998
(8,825)
(8,540)
13,593
$ 12,458 $
2016
$ 735,548
637,425
98,123
76,222
21,901
(14)
21,887
(8,890)
12,997
$
$
$
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
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, 2015
Year Ended December 31, 2016
Year Ended December 31, 2017
Allowance for Doubtful Accounts
Year Ended December 31, 2015
Year Ended December 31, 2016
Year Ended December 31, 2017
Balance at Charged to
Beginning Costs and
Expenses
of Period
Deductions/
Write-Offs
Balance at
End of
Period
$
$
$
$
$
$
3,223
3,235
3,709
30,289
32,909
32,399
(30,277) $
(32,435) $
(32,800) $
3,235
3,709
3,308
2,135
2,219
2,310
1,097
360
1,658
(1,013) $
(269) $
(1,242) $
2,219
2,310
2,726
S-1
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
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
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.
©2018 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.
CORP ORAT E OF F IC E S
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