What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 136 added, 129 removed, 214 unchanged (55% of the section changed)

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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, including the effects of the coronavirus pandemic (“COVID-19”) and successful integration of our new ERP system on our business, financial condition, and results of operations, 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.

These statements involve known and unknown risks, uncertainties and other factors, including the effects of the coronavirus pandemic (“COVID-19”) and successful integration of our new Enterprise Resource Planning (“ERP”) system on our business, financial condition, and results of operations, 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.

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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.

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.

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Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.

In the second quarter of 2020, we deployed a new Enterprise Resource Planning (“ERP”) system, which was the result of a multi-year planning and implementation process.

The implementation was substantially completed during the quarter, but required significant focus by key employees and management, as well as additional efforts by members of our sales team in certain circumstances, that adversely affected our second quarter execution and sales.

While we cannot quantify the adverse impact on our second quarter results, we believe the impact resulted in reduced potential incremental sales but did not result in any material cancelation of or inability to fulfill orders.

These additional efforts have continued in the third quarter, at successively decreasing levels, as we work toward complete integration with our business processes.

Ultimately, we expect the new ERP system to improve business performance by automating certain manual processes, standardizing business practices, and strengthening our internal financial controls.

In the second quarter of 2020, we deployed a new ERP system, which was the result of a multi-year planning and implementation process.

The implementation was substantially completed during the second quarter and we continue to work toward complete integration with our business processes and ultimately expect the new ERP system to improve business performance by automating certain manual processes and standardizing business practices.

EFFECTS OF COVID-19

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We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.

We have also evaluated the potential impact of the pandemic on the carrying values

of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.

We have also evaluated the potential impact of the pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.

The COVID-19 pandemic has resulted in adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers.

Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our suppliers and customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions have and may continue to materially adversely impact our business, financial condition, results of operations and cash flows.

Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our suppliers and

customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions have and may continue to materially adversely impact our business, financial condition, results of operations and cash flows.

The COVID-19 pandemic has caused material disruptions to our business and operations and could cause further material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions.

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We also experienced, and may continue to experience, delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether.

As a result, we have increased our customer allowance for doubtful accounts by $3.3 million in the six months ended June 30, 2020 compared with the prior year.

As a result, we have increased our customer allowance for doubtful accounts by $3.3 million in the nine months ended September 30, 2020.

As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future.

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Three Months Ended

Six Months Ended

Net sales (in millions)

Nine Months Ended

September 30,

($ in millions)

Selling, general and administrative expenses

Income from operations

Net sales of $550.0 million for the second quarter of 2020 reflected a decrease of $191.1 million compared to the second quarter of 2019, which was driven by lower net sales across all of our business segments, primarily as a result of the decline in macroeconomic conditions due to the COVID-19 pandemic compared with the prior year.

course of the second quarter was felt by customers across our business and caused a significant reduction in demand for our products.

Gross profit dollars decreased year-over-year by $28.0 million, primarily due to the decrease in net sales.

SG&A expenses decreased by $7.2 million, driven primarily by lower personnel costs associated with reduced headcount and lower variable compensation, along with lower product marketing expenses year-over-year.

These decreases were partially offset by increases in bad debt expense year-over-year resulting from anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic.

Also contributing to the offset were increased professional service fees resulting from the deployment of our new ERP system, which was largely completed in the second quarter of 2020.

Operating income in the second quarter of 2020 decreased year-over-year both in dollars and as a percentage of net sales by $21.7 million and 244 basis points, respectively, primarily as a result of the decrease in net sales.

Net sales of $652.8 million for the third quarter of 2020 reflected a decrease of $76.6 million compared to the third quarter of 2019, which was driven by lower net sales across all of our business segments, primarily as a result of the decline in macroeconomic conditions due to the COVID-19 pandemic compared with the prior year.

While we continue to supply our customers with necessary technologies to implement work-from-home strategies, remote learning capabilities, and assist on the front lines of the COVID-19 pandemic fight, the impact of the shrinking economy over the course of the year has been felt by customers across our business and caused a significant reduction in demand for our products.

Included in net sales for the three months ended September 30, 2020 was $0.9 million of revenue related to the correction of errors in the second quarter operating results.

Gross profit decreased year-over-year by $11.0 million, primarily due to the decline in net sales, partially offset by a $3.2 million reduction to cost of sales related to the correction of errors in the second quarter operating results.

SG&A expenses increased by $0.5 million, driven primarily

by increased professional service fees of $3.2 million resulting from the deployment of our new ERP system and increased depreciation expense of $0.7 million.

These increases were partially offset by lower product marketing and advertising expenses of $2.2 million and a decrease in personnel costs of $1.1 million associated with reduced headcount and lower variable compensation.

Operating income in the third quarter of 2020 decreased year-over-year both in dollars and as a percentage of net sales by $11.6 million and 125 basis points, respectively, primarily as a result of the decrease in net sales.

Net Sales Distribution

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales Segment

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales Segment

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

($ in millions)

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In connection with these restructuring initiatives, we incurred restructuring and other costs of $1.0 million in the second quarter of 2020, which were related to an involuntary reduction in workforce across our business segments and included cash severance and other related termination benefits.

These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses at June 30, 2020.

There were no restructuring and other charges recorded in the second quarter of 2019.

These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses and other liabilities at September 30, 2020.

There were no restructuring and other charges recorded in the third quarter of 2020 or 2019.

Year-Over-Year Comparisons

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Changes in net sales and gross profit by segment are shown in the following table:

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions)

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Public Sector Solutions

Net sales decreased in the second quarter of 2020 compared to the second quarter of 2019, as explained below:

Net sales decreased in the third quarter of 2020 compared to the third quarter of 2019, as explained below:

● Net sales of $259.8 million for the Enterprise Solutions segment reflect a decrease of $18.5 million, or 6.6%, year-over-year.

We experienced decreases in net sales across the majority of our product offerings primarily as a result of the deterioration in macroeconomic conditions in the second quarter of 2020.

The United States

economy shrank significantly period-over-period, the impact of which was felt by our customers and business partners and was reflected in our financial results.

Net sales of accessory products decreased by $26.9 million, primarily due to the change in macroeconomic conditions and the timing of large product rollouts.

We also experienced decreases in net sales of notebooks/mobility products, desktop products, other hardware/services, and software products of $17.1 million, $12.3 million, $11.4 million, and $10.9 million, respectively.

We experienced decreases in net sales across the majority of our product offerings primarily as

a result of the deterioration in macroeconomic conditions in the third quarter of 2020.

The United States economy shrank significantly period-over-period, the impact of which was felt by our customers and business partners and was reflected in our financial results.

We experienced decreases in net sales of notebooks/mobility products, displays and sound products, accessory products, and desktop products of $14.1 million, $13.1 million, $6.0 million, and $3.4 million, respectively.

Net sales of net/com products increased by $16.3 million year-over-year, primarily due to the timing of large project rollouts.

● Net sales of $231.0 million for the Business Solutions segment reflect a decrease of $42.8 million, or 15.6%, year-over-year.

The Business Solutions Segment, which primarily serves the small- and medium-sized business sector, has been heavily impacted by the deterioration in macroeconomic conditions and drove the significant decrease in net sales year-over-year.

We experienced a decrease in net sales of desktop products of $20.3 million, notebooks/mobility products of $17.8 million, software products of $15.0 million, and net/com products of $8.6 million.

We experienced a decrease in net sales of desktop products of $14.7 million, notebooks/mobility products of $6.6 million, server/storage products of $6.1 million, and net/com products of $6.1 million.

No other product category decreased by more than $4.9 million.

● Net sales of $112.2 million for the Public Sector Solutions segment decreased by $39.8 million, or 26.2%, compared with the same period a year ago.

The decrease in net sales was primarily driven by a deterioration in macroeconomic conditions and some larger projects with the federal government in the second quarter of 2019 that did not repeat in the current year.

Though we experienced decreases across the majority of our product lines, including software products of $12.5 million and servers/storage products of $12.1 million, net sales for notebooks and mobility products increased by $15.6 million year-over-year, which was primarily driven by orders by educational institutions preparing for and implementing remote learning capabilities.

Gross profit for the second quarter of 2020 decreased year-over-year in dollars, but increased as a percentage of net sales (gross margin), as explained below:

● Gross profit for the Enterprise Solutions segment decreased primarily as a result of the 22.4% decrease in net sales year-over-year.

Gross margin improved by 70 basis points in the current quarter, driven by fluctuations in customer and hardware product mix.

Gross margin for the quarter also benefitted from a higher percentage of our software sales in the current period being reported on a net basis.

● Gross profit for the Business Solutions segment decreased year-over-year due primarily to a 29.5% decrease in net sales, while gross margin remained relatively flat.

Also included in net sales for the three months ended September 30, 2020 was $2.4 million related to the correction of errors in the second quarter 2020 operating results.

● Net sales of $162.0 million for the Public Sector Solutions segment reflect a decrease of $15.3 million, or 8.6%, compared with the same period a year ago.

The decrease in net sales was primarily driven by a deterioration in macroeconomic conditions and strong comparative results in the same quarter a year ago.

Though we experienced decreases across the majority of our product lines, including desktop products of $10.6 million, other hardware/services of $8.2 million, and server/storage products of $4.3 million, net sales for software and notebooks/mobility products grew by $4.5 million and $3.6 million, respectively.

Also included in net sales for the three months ended September 30, 2020 was a decrease of $1.5 million related to the correction of errors in the second quarter 2020 operating results.

Gross profit for the third quarter of 2020 decreased year-over-year in dollars, but increased as a percentage of net sales (gross margin), as explained below:

● Gross profit for the Enterprise Solutions segment decreased primarily as a result of the 6.6% decrease in net sales year-over-year and fluctuations in customer and hardware product mix.

Partially offsetting the decrease in gross profit period-over-period was $0.7 million in gross profit recognized in the three months ended September 30, 2020, driven, in part, by a $0.6 million reduction to cost of sales, related to the correction of errors in the second quarter 2020 operating results.

The decrease in net sales year-over-year and the change in customer and hardware product mix also explains the decrease in gross margin of 30 basis points in the current quarter.

● Gross profit for the Business Solutions segment decreased year-over-year due primarily to a 15.6% decrease in net sales.

Partially offsetting the decrease in gross profit period-over-period was $3.1 million in gross profit recognized in the three months ended September 30, 2020, driven, in part, by a $0.8 million reduction to cost of sales, related to the correction of errors in the second quarter 2020 operating results.

Gross margin increased by approximately 120 basis points, driven, in part, by a higher percentage of our software sales in the quarter being reported on a net basis and by the out of period adjustments of $2.4 million in net sales and $0.8 million in cost of sales recorded in the current period.

● Gross profit for the Public Sector Solutions segment decreased as a result of a 8.6% decrease in net sales.

Gross margin improved by 90 basis points year-over-year resulting from changes in customer mix, improved hardware margins, and as a result of a higher percentage of our software sales in the current period being reported on a net basis.

Selling, general and administrative expenses decreased in dollars, but increased as a percentage of net sales in the second quarter of 2020 compared to the prior year quarter.

Partially offsetting the decrease in gross profit period-over-period was $0.4 million in gross profit recognized in the three months ended September 30, 2020, driven, in part, by a $1.9 million reduction to cost of sales, related to the correction of errors in the second quarter 2020 operating results.

Gross margin improved slightly by 20 basis points year-over-year and benefitted from a higher percentage of our software sales in the current period being reported on a net basis, along with the out of period adjustments of $1.5 million in net sales and $1.9 million in cost of sales recorded in the current period.

Selling, general and administrative expenses increased in dollars and as a percentage of net sales in the third quarter of 2020 compared to the prior year quarter.

SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below:

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions)

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Headquarters/Other, unallocated

● SG&A expenses for the Enterprise Solutions segment decreased in dollars, but increased as a percentage of net sales.

● SG&A expenses for the Enterprise Solutions segment decreased in dollars and as a percentage of net sales.

The year-over-year change in SG&A dollars was attributable to decreased personnel costs of $1.8 million, driven primarily by a reduction in headcount and lower variable compensation expense associated with lower gross profit, along with lower product marketing and advertising expenses of $0.4 million.

These decreases were partially offset by increases of $0.2 million in the use of Headquarter services, including increased

contractor and consulting fees associated with the deployment of our new ERP system, and an increase of $0.2 million in bad debt expense, resulting from anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic.

SG&A expenses as a percentage of net sales was 9.6% for the Enterprise Solutions segment in the second quarter of 2020, which reflects an increase of 120 basis points and is a result of lower net sales in the quarter compared with the same period a year ago.

SG&A expenses as a percentage of net sales was 9.1% for the Enterprise Solutions segment in the third quarter of 2020, which reflects a decrease of 20 basis points and is a result of cost savings associated with lower net sales that outpaced the decrease in net sales.

● SG&A expenses for the Business Solutions segment decreased in dollars and increased as a percentage of net sales.

The year-over-year change in SG&A dollars was attributable to decreased personnel costs of $1.7 million, driven primarily by a reduction in headcount and lower variable compensation expense associated with lower gross profit.

Also contributing to the decrease in the current quarter were lower product marketing and advertising expenses of $1.0 million and lower credit card fees of $0.3 million.

These decreases were partially offset by increases of $1.3 million in bad debt expense, resulting from anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic, and a $0.5 million increase in the use of Headquarter services, driven, in part, by increased contractor and consulting fees associated with the deployment of our new ERP system.

SG&A expenses as a percentage of net sales was 18.6% for the Business Solutions segment in the second quarter of 2020, which reflects an increase of 510 basis points and is a result of lower net sales in the quarter compared with the same period a year ago.

● SG&A expenses for the Public Sector Solutions segment decreased in dollars and increased as a percentage of net sales.

Personnel costs decreased by $1.6 million year-over-year, mainly due to a reduction in headcount and lower variable compensation associated with lower gross profit.

Partially offsetting the expense savings was an increase in the use of Headquarter services by $0.3 million period-over-period, which included increased contractor and consulting fees associated with the deployment of our new ERP system .

SG&A expenses as a percentage of net sales was 14.4% for the Public Sector Solutions segment in the second quarter of 2020, which reflects an increase of 300 basis points.

The year-over-year change in SG&A dollars was driven primarily by lower product marketing and advertising expenses of $1.5 million .

Personnel costs also decreased by $0.5 million period-over-period as a result of a reduction in headcount and lower variable compensation expense associated with lower gross profit.

Also contributing to the decrease in the current quarter were lower credit card fees of $0.2 million.

These decreases were partially offset by increases in the use of Headquarter services of $1.7 million, driven, in part, by increased contractor and consulting fees primarily associated with the deployment of our new ERP system.

SG&A expenses as a percentage of net sales was 16.4% for the Business Solutions segment in the third quarter of 2020, which reflects an increase of 230 basis points and is a result of lower net sales in the quarter compared with the same period a year ago.

● SG&A expenses for the Public Sector Solutions segment increased in dollars and as a percentage of net sales.

Personnel costs increased by $1.1 million year-over-year, mainly driven by increases in variable compensation, and an increase in the use of Headquarter services of $0.9 million, which included increased contractor and consulting fees primarily associated with the deployment of our new ERP system .

Credit card fees also increased by $0.2 million year-over-year.

SG&A expenses as a percentage of net sales was 12.1% for the Public Sector Solutions segment in the third quarter of 2020, which reflects an increase of 220 basis points.

This increase year-over-year is primarily attributable to lower net sales in the quarter compared with the same period a year ago .

● SG&A expenses for the Headquarters/Other group decreased primarily resulting from a $2.0 million decrease in personnel-related costs driven primarily by a lower headcount and decreased variable compensation associated with lower gross profit.

Unallocated executive oversight costs also decreased by $1.0 million in the current period.

● SG&A expenses for the Headquarters/Other group increased primarily as a result of a $3.2 million increase in contractor and consulting fees primarily associated with the deployment of our new ERP system and an increase of $0.8 million in service contracts.

Depreciation expense also increased by $0.6 million year-over-year.

These increases were partially offset by a reduction in the allocation of Headquarter services of $3.2 million in the current period.

The Headquarters/Other group provides services to the three segments in areas such as finance, human resources, IT, marketing, and product management.

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The amounts shown in the table above represent the remaining unallocated costs.

These decreases were partially offset by an increase in professional service fees of $1.1 million year-over-year, primarily driven by an increase in contractor and consulting fees arising from the deployment of our new ERP system in the second quarter of 2020.

Restructuring and other charges incurred in the second quarter of 2020 were $1.0 million and related to an involuntary reduction in workforce across our business segments, and included cash severance payments and other termination related benefits.

There were no such charges incurred in the second quarter of 2019.

Income from operations for the second quarter of 2020 decreased to $10.6 million, compared to $32.3 million for the second quarter of 2019, primarily due to the decreases in net sales and gross profit, along with lower SG&A expenses that decreased at a lower rate than net sales year-over-year.

Income from operations as a percentage of net sales was 1.9% for the second quarter of 2020, compared to 4.4% of net sales for the prior year quarter, primarily as a result of the decrease in net sales and increase in SG&A expenses.

Our effective tax rate was 27.9% for the second quarter of 2020, compared to 27.2% for the second quarter of 2019.

We expect our corporate income tax rate for 2020 to range from 26% to 28%.

Net income for the second quarter of 2020 decreased to $7.6 million, compared to $23.7 million for the second quarter of 2019, primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the second quarter of 2020, as compared to the second quarter of 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Income from operations for the third quarter of 2020 decreased to $21.1 million, compared to $32.7 million for the third quarter of 2019, primarily due to the decreases in net sales and gross profit, along with increased SG&A expenses.

Income from operations as a percentage of net sales was 3.2% for the third quarter of 2020, compared to 4.5% of net sales for the prior year quarter, primarily as a result of the decrease in net sales and increase in SG&A expenses.

Our provision for income taxes in the three months ended September 30, 2020 was $4.1 million, which included $1.7 million of discrete items mainly related to R&D tax credits.

Net income for the third quarter of 2020 decreased to $16.9 million, compared to $23.8 million for the third quarter of 2019, primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the third quarter of 2020, as compared to the third quarter of 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

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

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

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Public Sector Solutions

Net sales decreased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, as explained below:

Net sales decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as explained below:

● Net sales of $839.9 million for the Enterprise Solutions segment reflect a decrease of $32.1 million, or 3.7%, year-over-year as customers and business partners face the challenges of the decline in macroeconomic conditions resulting from COVID-19.

Net sales of desktop, software, and displays and sound products decreased year-over-year by $14.0 million, $12.5 million, and $11.1 million, respectively.

These decreases were partially offset by increases in net/com and accessory products of $17.0 million and $7.6 million, respectively.

Net sales of displays and sound, notebook/mobility, desktop, and software products decreased year-over-year by $24.2 million, $18.5 million, $17.4 million, and $14.6 million, respectively.

These decreases were partially offset by increases in net/com and server/storage products of $33.3 million and $14.5 million, respectively, primarily as a result of the timing of large project rollouts.

● Net sales of $700.9 million for the Business Solutions segment reflect a decrease of $96.8 million, or 12.1% year-over-year.

The majority of the customers served by our Business Solutions segment are small- to medium-sized business, which have been heavily impacted by the decline in macroeconomic conditions in the quarter resulting from the COVID-19 pandemic.

We experienced declines in net sales across virtually all of our product lines, including decreases in desktop, software, net/com, and other hardware/services of $28.5 million, $17.1 million, $15.9 million, and $13.2 million, respectively.

● Net sales of $373.8 million for the Public Sector Solutions segment decreased by $59.9 million, or 13.8%, compared with the same period a year ago.

We experienced decreases year-over-year in other hardware and services of $14.3 million, primarily as a result of the decline in the current macroeconomic environment, along with some larger projects with the Federal government in the half of 2019 that did not repeat in the current year.

Net sales of software and servers/storage products also decreased by $14.5 million and $12.8 million, respectively, compared with the prior year.

We experienced decreases year-over-year in other hardware and services of $22.5 million, primarily as a result of the decline in the current macroeconomic environment, along with some larger projects with the Federal government in the first half of 2019 that did not repeat in the current year.

Net sales of desktop, servers/storage, and software products also decreased by $20.6 million, $17.1 million, and $10.0 million, respectively, compared with the prior year.

These decreases in net sales were partially offset by an increase in sales of notebooks/mobility products of $20.8 million, primarily driven by orders from educational institutions preparing for and implementing remote learning capabilities.

Gross profit for the six months ended June 30, 2020 decreased year-over-year in dollars, but increased as a percentage of net sales (gross margin), as explained below:

Gross profit for the nine months ended September 30, 2020 decreased year-over-year in dollars, but increased as a percentage of net sales (gross margin), as explained below:

● Gross profit for the Enterprise Solutions segment decreased year-over-year, primarily due to the 3.7% decrease in net sales.

The decrease in gross margin in the quarter of 30 basis points was driven by fluctuations in customer and hardware product mix.

The decrease in gross margin of 30 basis points compared with the prior year was driven by fluctuations in customer and hardware product mix.

● Gross profit for the Business Solutions segment decreased as a result of an 12.1% decrease in net sales.

However, gross margin increased year-over-year by 40 basis points, resulting from higher invoice selling margins and a greater percentage of our software sales in the current quarter reported on a net basis.

However, gross margin increased year-over-year by 60 basis points, resulting from higher invoice selling margins and a greater percentage of our software sales in the current period reported on a net basis.

● Gross profit for the Public Sector Solutions segment decreased by $4.4 million year-over-year, primarily as a result of lower net sales in the current period.

Gross margin improved by 140 basis points based on changes in

customer mix, improved hardware margins, and a higher percentage of our software sales in the current period reported on a net basis.

Selling, general and administrative expenses increased in dollars and as a percentage of net sales in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Gross margin improved by 90 basis points based on changes in customer mix, improved hardware margins, and a higher percentage of our software sales in the current period reported on a net basis.

Selling, general and administrative expenses increased in dollars and as a percentage of net sales in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions):

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

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Headquarters/Other, unallocated

● SG&A expenses for the Enterprise Solutions segment increased in dollars and as a percentage of net sales.

The year-over-year change in SG&A dollars was primarily attributable to a $1.0 million increase in bad debt expense, resulting from anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic, and a $0.6 million increase in the use of Headquarter services, which included increased contractor and consulting fees associated with the deployment of our new ERP system.

These increases were partially offset by a decrease of $1.3 million in product marketing and advertising expense.

There were no other costs incurred during the quarter that had an individually significant impact on the change period-over-period.

SG&A expenses as a percentage of net sales was 9.1% for the Enterprise Solutions segment in the first half of 2020, which reflects an increase of 30 basis points.

This increase year-over-year is primarily attributable to lower net sales and increased spending compared with the same period a year ago .

● SG&A expenses for the Enterprise Solutions segment decreased in dollars, but increased as a percentage of net sales.

The year-over-year change in SG&A dollars was primarily attributable to a $1.8 million decrease in personnel costs, driven mostly by lower variable compensation expense associated with lower gross profit, along with a $1.7 million decrease product marketing and advertising expense.

These changes were partially offset by an increase in the use of Headquarter services of $1.2 million, which included increased contractor and consulting fees primarily associated with the deployment of our new ERP system.

Bad debt expense also increased period-over-period by $0.5 million due to anticipated collection challenges from customers who have been significantly impacted by the COVID-19 pandemic.

SG&A expenses as a percentage of net sales was 9.1% for the Enterprise Solutions segment in the nine months ended September 30, 2020, which reflects an increase of 10 basis points.

There are no individually significant drivers of this change period-over-period, but is primarily attributable to lower net sales compared with the same period a year ago .

● SG&A expenses for the Business Solutions segment increased in both dollars and as a percentage of net sales.

The year-over-year increase in SG&A dollars was primarily driven by a $3.3 million increase in bad debt expense resulting from higher expected credit losses from customers who have been significantly impacted by the COVID-19 pandemic.

The use of Headquarter services also increased by $1.9 million year-over-year, driven, in part, by an increase in contractor and consulting fees associated with the deployment of our new ERP system .

These increases were partially offset by a decrease in product marketing and advertising expense of $1.2 million.

SG&A expenses as a percentage of net sales was 16.4% for the Business Solutions segment in the first half of 2020 compared to 13.9% in the first half of 2019, which reflects an increase of 250 basis points year-over-year, resulting from lower net sales and increased spending compared with the same period a year ago.

The year-over-year increase in SG&A dollars was primarily due to a $3.6 million increase in the use of Headquarter services, driven, in part, by an increase in contractor and consulting fees primarily associated with the deployment of our new ERP system .

B ad debt expense also increased by $2.8 million year-over-year resulting from higher expected credit losses from customers who have been significantly impacted by the COVID-19 pandemic.

These increases were partially offset by decreases in product marketing and advertising expense, credit card fees, and personnel costs of $2.6 million, $0.4 million, and $0.3 million, respectively.

SG&A expenses as a percentage of net sales was 16.4% for the Business Solutions segment in the nine months ended September 30, 2020 compared to 14.0% in the prior year, which reflects an increase of 240 basis points year-over-year, resulting from lower net sales and increased spending compared with the same period a year ago.

● SG&A expenses for the Public Sector Solutions segment increased in both dollars and as a percentage of net sales.

The increase in SG&A dollars year-over-year is almost entirely attributable to an increase in the usage of Headquarter services of $0.9 million, which included an increase in contractor and consulting fees associated with the deployment of our new ERP system .

This increase was partially offset by a decrease in personnel costs, driven by lower variable compensation associated with lower gross profit.

SG&A expenses as a percentage of net sales was 16.0% for the Public Sector Solutions segment in the first half of 2020, which reflects an increase of 290 basis points.

The increase in SG&A dollars year-over-year was driven by an increase in the usage of Headquarter services of $1.8 million, which included an increase in contractor and consulting fees primarily associated with the deployment of our new ERP system , and an increase in personnel costs of $0.4 million.

SG&A expenses as

a percentage of net sales was 14.3% for the Public Sector Solutions segment in the nine months ended September 30, 2020, which reflects an increase of 250 basis points.

This increase year-over-year is primarily attributable to lower net sales and increased spending compared with the same period a year ago .

● SG&A expenses for the Headquarters/Other group decreased primarily due to a $3.4 million decrease in unallocated executive oversight costs year-over-year.

This increase was partially offset by increases in personnel costs of $1.5 million and professional service fees of $1.3, which were primarily driven by an increase in contractor and consulting fees arising from the deployment of our new ERP system in the second quarter of 2020.

● SG&A expenses for the Headquarters/Other group increased primarily as a result of a $4.5 million increase in contractor and consulting fees primarily associated with the deployment of our new ERP system and an increase of $1.6 million in service contracts.

Personnel costs also increased by $1.5 million year-over-year.

These increases were partially offset by a reduction in the allocation of Headquarter services of $6.6 million in the current period.

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 segments based on their estimated usage of the underlying services.

The amounts shown in the table above represent the remaining unallocated costs.

Restructuring and other charges in the current year of $1.0 million were incurred in the second quarter of 2020 and related to an involuntary reduction in workforce across our business segments, and included cash severance payments and other related termination benefits .

Restructuring and other charges were $0.7 million in the six months ended June

30, 2019 and related to a reduction in workforce in our Headquarters/Other group, and included cash severance payments and other related benefits.

Restructuring and other charges were $0.7 million in the nine months ended September 30, 2019 and related to a reduction in workforce in our Headquarters/Other group, and included cash severance payments and other related benefits.

Also included were costs incurred related to the closing of one of our office facilities.

Income from operations for the six months ended June 30, 2020 decreased to $31.2 million, compared to $49.7 million for the six months ended June 30, 2019, primarily due to the decreases in net sales and gross profit, along with an increase in SG&A expense year-over-year.

Income from operations as a percentage of net sales decreased to 2.5% for the second quarter of 2020, compared to 3.6% of net sales for the prior year, primarily due to the decrease in net sales and increase in SG&A expenses year-over-year.

Our effective tax rate was 28.1% for the six months ended June 30, 2020, compared to 27.4% for the six months ended June 30, 2019.

We expect our corporate income tax rate for 2020 to range from 26% to 28%.

Net income for the six months ended June 30, 2020 decreased to $22.5 million, compared to $36.4 million for the six months ended June 30, 2019, primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the first half of 2020, as compared to the first half of 2019.

Income from operations for the nine months ended September 30, 2020 decreased to $52.3 million, compared to $82.4 million for the nine months ended September 30, 2019, primarily due to the decreases in net sales and gross profit, along with an increase in SG&A expense year-over-year.

Income from operations as a percentage of net sales decreased to 2.7% for the nine months ended September 30, 2020, compared to 3.9% of net sales for the same period in the prior year, primarily due to the decrease in net sales and increase in SG&A expenses year-over-year.

Our provision for income taxes in the nine months ended September 30, 2020 was $12.9 million, which included $1.7 million of discrete items mainly related to R&D tax credits recognized in the third quarter.

Net income for the nine months ended September 30, 2020 decreased to $39.5 million, compared to $60.1 million for the nine months ended September 30, 2019, primarily due to lower net sales and gross profit, combined with an increase in operating expenses in the first three quarters of 2020, as compared to the first three quarters of 2019.

Liquidity and Capital Resources

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● Cash on Hand .

At June 30, 2020, we had $165.9 million in cash and cash equivalents.

At September 30, 2020, we had $108.1 million in cash and cash equivalents.

● Cash Generated from Operations .

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● Credit Facilities.

As of June 30, 2020, we had no borrowings under our $50.0 million bank line of credit, which is available until February 10, 2022.

As of September 30, 2020, we had no borrowings under our $50.0 million bank line of credit, which is available until February 10, 2022.

The COVID-19 global pandemic has created some uncertainty in financial liquidity.

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We have worked closely with our partners to mitigate the impact these concessions might have on us, but we expect that these situations may continue to arise as we navigate through this crisis.

In certain cases, our partners provided us with extended payment terms, which will generally return to their original terms beginning in the third quarter of 2020.

In certain cases, our partners have previously provided us with extended payment terms, which generally returned to their original terms beginning in the third quarter of 2020.

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.

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The following table summarizes our sources and uses of cash over the periods indicated:

Six Months Ended

Nine Months Ended

($ in millions)

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Net cash used in financing activities

Increase (decrease) in cash and cash equivalents

Cash provided by operating activities was $102.4 million in the six months ended June 30, 2020.

Cash flow provided by operations in the six months ended June 30, 2020 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, which was reduced by $99.3 million year-over-year driven primarily by a decrease in net sales and the timing of product shipments.

Accounts payable also increased year-over-year, which led to improved cash flows from operations.

These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in inventory of $41.0 million.

Our days sales outstanding increased to 68 days at June 30, 2020, compared to 55 days at June 30, 2019.

Inventory increased from the prior year-end balance due to higher levels of inventory on-hand, which resulted primarily from an increase in purchases due to anticipated shortages of certain products and increased prices resulting from the COVID-19 pandemic.

Inventory turns, which measures the number of times inventory was sold and replaced during the period, decreased to 12 for the second quarter of 2020 compared to 17 turns for the prior year quarter.

Operating cash flow in the six months ended June 30, 2019 resulted primarily from net income before depreciation and amortization, an increase in accounts payable, an increase in accrued expenses, and a decrease in prepaid expenses, partially offset by increases in inventory and accounts receivable.

Cash used in investing activities in the six months ended June 30, 2020 represented $8.2 million of purchases of property and equipment.

Increase in cash and cash equivalents

Cash provided by operating activities was $46.4 million in the nine months ended September 30, 2020.

Cash flow provided by operations in the nine months ended September 30, 2020 resulted primarily from net income before depreciation and amortization and an increase in accounts payable, which increased by $48.7 million in the current year and was driven primarily by the timing of payments and, to a lesser extent, extended payment terms from certain vendors.

These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in accounts receivable of $42.6 million in the current year, primarily due to the timing of collections and, in some cases, delayed collections from customers who have received extended payment terms.

Our days sales outstanding increased to 73 days at September 30, 2020, compared to 52 days at September 30, 2019.

Inventory increased from the prior year-end balance due to higher levels of inventory on-hand related to future backlog and an increase in shipments in transit but not received by our customers as of September 30, 2020.

Inventory turns, which measures the number of times inventory was sold and replaced during the period, decreased to 15 for the third quarter of 2020 compared to 16 turns for the prior year quarter.

Operating cash flow in the nine months ended September 30, 2019 resulted primarily from net income before depreciation and amortization, an increase in accrued expenses, and a decrease in prepaid expenses, and partially offset by increases in accounts receivable and inventory.

Cash used in investing activities in the nine months ended September 30, 2020 represented $9.6 million of purchases of property and equipment.

These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure, particularly related to our new ERP system implementation.

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Our new ERP system was deployed in the second quarter of 2020, which resulted in fewer capital expenditures in the current year as the project was winding down.

Cash used in financing activities in the six months ended June 30, 2020 consisted primarily of $10.2 million for the repurchase treasury shares and an $8.4 million payment of a special $0.32 per share dividend.

In the six months ended June 30, 2020, we have purchased 0.2 million shares at an average price of $41.34, and we are authorized to purchase an additional $12.7 million in shares under our Board-approved repurchase program.

Cash used in financing activities in the nine months ended September 30, 2020 consisted primarily of $10.2 million for the repurchase treasury shares and an $8.4 million payment of a special $0.32 per share dividend.

In the nine months ended September 30, 2020, we have purchased 0.2 million shares at an average price of $41.34, and we are authorized to purchase an additional $12.7 million in shares under our Board-approved repurchase program.

In the prior year period, financing activities primarily represented an $8.5 million payment of a special $0.32 per share dividend and $4.4 million for the purchase of treasury shares.

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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 the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors

Affecting Sources of Liquidity” below.

For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report .

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Our borrowing capacity is up to $50.0 million.

Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at June 30, 2020).

The one-month LIBOR rate at June 30, 2020 was 0.16%.

The one-month LIBOR rate at September 30, 2020 was 0.15%.

In addition, we have the option to increase the facility by an additional $30.0 million to meet additional borrowing requirements.

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At June 30, 2020, $50.0 million was available for borrowing under the facility.

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At September 30, 2020, $50.0 million was available for borrowing under the facility.

Off-Balance Sheet Arrangements.

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● Our funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by our consolidated trailing twelve months Adjusted EBITDA—earnings before interest expense, taxes, depreciation, amortization, and special charges—for the trailing four quarters) must not be more than 2.0 to 1.0.

Our outstanding borrowings under the credit facility during the six months ended June 30, 2020 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of June 30, 2020.

Our outstanding borrowings under the credit facility during the nine months ended September 30, 2020 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 2020.

Future decreases in our consolidated trailing twelve months Adjusted EBITDA, could limit our potential borrowings under the credit facility.

● Our minimum consolidated net worth (defined as our consolidated total assets less our consolidated total liabilities) must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016 (loss quarters not counted).

Such amount was calculated as $465.2 million at June 30, 2020, whereas our consolidated stockholders’ equity at that date was $611.2 million.

Such amount was calculated as $473.7 million at September 30, 2020, whereas our consolidated stockholders’ equity at that date was $628.3 million.

Capital Markets.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis