What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-16 compared with 2020-02-06 · 20 added, 478 removed, 43 unchanged (92% of the section changed)

Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of 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 4, 2020, there were 26,344,841 shares of our common stock outstanding, held by approximately 46 stockholders of record.

Our common stock commenced trading on March 3, 1998, on the Nasdaq Global Select Market and trades today under the symbol “CNXN”.

As of March 12, 2021, there were 26,174,844 shares of our common stock outstanding, held by approximately 47 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.

In 2020, we declared a special cash dividend of $0.32 per share.

The total cash payment of $8.4 million was made on January 10, 2020 to stockholders of record at the close of business on December 27, 2019.

The total cash payment of $8.4 million was made on January 29, 2021 to stockholders of record at the close of business on January 12, 2021.

In 2019, we declared a special cash dividend of $0.32 per share.

The total cash payment of $8.4 million was made on January 10, 2020 to stockholders of record at the close of business on December 27, 2019.

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.

Declaration of any future cash dividends will depend upon our financial position, strategic plans, and general business conditions.

Share Repurchase Authorization

In 2001, our Board of Directors authorized the spending of up to $15.0 million to repurchase shares of our common stock.

In 2014, our Board approved a new share repurchase program authorizing up to an additional $15.0 million in share repurchases, for a total authorized repurchase amount of $30.0 million.

We consider block repurchases directly from larger stockholders, as well as open market purchases, in carrying out our ongoing stock repurchase program.

In 2018, our Board approved a new share repurchase program authorizing up to $25.0 million in additional 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.

The timing and amount of any share repurchases will be based on market conditions and other factors.

In 2019, we repurchased 0.1 million shares for $4.5 million under the Board-approved repurchase programs.

As of December 31, 2019, we have repurchased an aggregate of 2.4 million shares for $32.1 million under our Board-approved repurchase programs.

At December 31, 2019, the maximum approximate dollar value of shares that may yet be purchased under Board-authorized programs was $22.9 million.

The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended December 31, 2020.

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12/01/20-12/31/20

(1) In 2001, our Board of Directors authorized the spending of up to $15.0 million to repurchase shares of our common stock.

In 2014, our Board approved a new share repurchase program authorizing up to an additional $15.0 million in share repurchases, for a total authorized repurchase amount of $30.0 million.

We consider block repurchases directly from larger stockholders, as well as open market purchases, in carrying out our ongoing stock repurchase program.

In 2018, our Board approved a new share repurchase program authorizing up to $25.0 million in additional 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.

The timing and amount of any share repurchases will be based on market conditions and other factors.

In 2020, we repurchased 0.2 million shares for $10.2 million under the Board-approved repurchase programs.

As of December 31, 2020, we have repurchased an aggregate of 2.6 million shares for $42.3 million under our Board-approved repurchase programs.

At December 31, 2020, the maximum approximate dollar value of shares that may yet be purchased under Board-authorized programs was $12.7 million.

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 December 31, 2014 through December 31, 2019 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 December 31, 2014 and ending December 31, 2019.

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 December 31, 2015 through December 31, 2020 with the cumulative total return for (i) the Nasdaq Stock Market Composite and (ii) the Nasdaq Retail Trade Stocks (Peer Index) for the period starting December 31, 2015 and ending December 31, 2020.

This graph assumes the investment of $100 on December 31, 2015 in our common stock and in each of the two Nasdaq indices, and that dividends are reinvested.

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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.

Years Ended December 31,

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Income from operations

Other income, net

Other income (expenses)

Income before taxes

2 unchanged sentences

Diluted earnings per share

The Company adopted ASC 606—

Revenue from Contracts with Customers in 2018 using the modified retrospective approach, which primarily resulted in certain software sales being reported on a net basis where they would have otherwise been reported on a gross basis under the previous revenue recognition guidance.

As a result, net sales for 2019 and 2018 are not comparable to prior periods.

As of December 31,

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Working capital

Total assets (1)

Total stockholders’

Total stockholders’ equity

Cash dividends declared per share

The Company adopted ASC 842—

Leases in 2019, which primarily resulted in the establishment of a right-of-use asset and corresponding lease liability for certain of our operating leases.

As a result, total assets for 2019 are not comparable to prior periods.

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.”

We are a national 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, data center solutions, 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 direct responses from customers responding to our 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.

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.

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:

Years Ended December 31,

Net sales (in millions)

Selling, general and administrative expenses

Income from operations

Net sales of $2,820.0 million in 2019 reflected an increase of $120.5 million compared to 2018, primarily as a result of increased sales across all three of our sales segments.

Our investments in advance solutions sales and a strategic focus by customers across all three segments led to an increase in net sales of notebooks/mobility and desktop products.

We also saw an increase in net sales of software products, despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent.

Gross profit dollars increased year-over-year by $40.2 million due to increased sales and higher invoice selling margins.

SG&A expenses increased by $14.2 million, mostly due to higher personnel costs and increased advertising expense, but remained flat as a percentage of net sales.

Operating income in 2019 increased year-over-year, both in dollars and as a percentage of net sales, by $26.3 million and 80 basis points, respectively, primarily as a result of gross profit increasing at a higher rate than SG&A expenses.

Sales Distribution

The following table sets forth our percentage of net sales by sales segment and product mix:

Years Ended December 31,

Sales Segment

Enterprise Solutions

Business Solutions

Public Sector Solutions

Notebooks/Mobility

Servers/Storage

Net/Com Product

Displays and sound

Other Hardware/Services

The Company adopted ASC 606—

As a result, net sales for 2019 and 2018 are not comparable to 2017 amounts.

Gross Profit Margins

The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three years:

Years Ended December 31,

Sales Segment

Enterprise Solutions

Business Solutions

Public Sector Solutions

Total Company

Cost of Sales

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 most significant operating expenses for the last three years (in millions of dollars):

Years Ended December 31,

Personnel costs

Facilities operations

Professional fees

Credit card fees

Depreciation and amortization

Total SG&A expense

As a percentage of net sales

The year-ended December 31, 2017 SG&A amounts are shown net of restructuring and other charges of $3,636, which were included in SG&A expenses in prior-year disclosures.

Personnel costs increased in 2019 compared to 2018 primarily due to increased variable compensation associated with higher gross profit, combined with increases in other employee-related expenses.

Depreciation and amortization decreased in 2019 compared to 2018 primarily due to lower levels of IT infrastructure in service in 2019 compared to 2018.

Personnel costs increased in 2018 compared to 2017 primarily due to increased variable compensation associated with higher gross profit and changes in the stock price, which increased stock-based compensation, and increases in other employee-related expenses.

Depreciation and amortization increased in 2018 and 2017 due to investments in our IT infrastructure and the amortization of intangible assets added in 2016 with our two acquisitions.

Restructuring and other charges

In the years ended December 31 2019, 2018, and 2017, we undertook a wide range of actions across the Company to lower our cost structure and align our business in an effort to improve our ability to execute our strategy.

In connection with these restructuring initiatives, we incurred restructuring and related costs of $0.7 million, $1.0 million, and $3.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

YEAR-OVER-YEAR COMPARISONS

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net sales increased by 4.5% to $2,820.0 million in 2019 from $2,699.5 million in 2018.

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

Years Ended December 31,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

Net sales of $1,193.8 million for the Enterprise Solutions segment reflect an increase of $28.7 million, or 2.5% compared to the prior year, primarily due to increases in net sales of notebooks/mobility and desktop products, which grew by $49.9 million and $28.0 million, respectively.

The Enterprise Solutions segment also benefitted from the personal computer refresh driven by the anticipated end-of-life support for Windows 7 and technological advances in hardware that enables modern workplace solutions.

These increases in net sales were partially offset by decreases in sales of server/storage and other hardware products of $29.8 million and $21.1 million, respectively, which were primarily attributable to the timing of large product rollouts.

Net sales of $1,060.0 million for the Business Solutions segment reflect an increase of $32.1 million, or 3.1%.

The increase in net sales year-over-year was primarily driven by growth in desktops and notebooks/mobility products of $19.3 million and $18.0 million, respectively, as the Company benefitted from the personal computer refresh driven by the anticipated end-of-life support for Windows 7 and other technological advances in hardware that enables modern workplace solutions.

Net sales of software products also grew by $12.2 million year-over-year despite being negatively impacted by a higher percentage of our software sales recognized on a net basis in the current period in transactions where we are considered to be the agent.

Net sales growth was partially offset by a decrease in net/com products of $15.4 million, primarily driven by the timing of large product rollouts.

Net sales of $566.2 million for the Public Sector Solutions segment reflect an increase of $59.7 million, or 11.8%.

We experienced growth year-over-year in each of our product categories, highlighted by increases in net sales of notebooks/mobility, desktop, and software products of $27.3 million, $10.4 million, and $9.6 million, respectively.

Gross profit for 2019 increased year-over-year both in dollars and as a percentage of net sales (gross margin), as explained below:

Gross profit for the Enterprise Solutions segment increased primarily due to higher invoice selling margins of 54 basis points, driven primarily by an increase in software sales reported on a net basis.

Gross profit for the Business Solutions segment increased year-over-year largely due to higher invoice selling margins of 97 basis points, primarily driven by an increase in software sales reported on a net basis.

Also contributing to the growth were increased agency fees from enterprise software agreements, which grew by approximately 15.5% year-over-year.

We receive agency fees from vendors for certain software and hardware sales,

which are recorded as revenue with no corresponding cost of goods sold, resulting in a positive impact on gross margin.

Gross profit for the Public Sector Solutions segment increased as a result of changes in customer mix and higher invoice selling margins of 85 basis points, driven primarily by improved hardware margins and an increase in software sales reported on a net basis.

Selling, general and administrative expenses in 2019 increased in dollars, but remained flat 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,

Enterprise Solutions

Business Solutions

Public Sector Solutions

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 increase in SG&A dollars was primarily driven by a $1.9 million increase in personnel expenses, including merit increases and variable compensation associated with higher gross profit, a $1.4 million increase in the usage of Headquarters services, and increases in advertising expenses of $0.6 million.

SG&A expenses as a percentage of net sales was 8.7% for the Enterprise Solutions segment, which reflects an increase of 12 basis points compared to the prior period.

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

The year-over-year increase in SG&A dollars was primarily driven by a $3.4 million increase in the usage of Headquarter services and a $2.3 million increase in advertising expenses driven by increased marketing, advertising, and training campaigns directed towards driving sales.

These increases were partially offset by a $0.3 million decrease in credit card fees.

SG&A expenses as a percentage of net sales was 14.2% for the Business Solutions segment, which reflects an increase of 9 basis points compared to the prior period.

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

The year-over-year increase in SG&A dollars was mostly due to a $2.0 million increase in personnel expenses, including variable compensation associated with higher gross profit, and an increase in the usage of Headquarters services of $1.4 million.

Both professional fees and advertising costs also increased by $0.2 million year-over-year.

These increases were partially offset by a decrease in bad debt expense due to the timing of certain write-offs.

SG&A expenses as a percentage of net sales was 12.3% for the Public Sector segment, which reflects a decrease of 88 basis points compared to the prior period, resulting from net sales growth that outpaced spending compared with the same period a year ago.

SG&A expenses for the Headquarters/Other group increased year-over-year, which was driven primarily by a $4.1 million increase in personnel-related costs driven primarily by a higher headcount, increased payroll expense, and increased variable compensation associated with higher gross profits.

Facilities costs and professional fees also increased by $2.0 million and $1.8 million, respectively.

These increases were partially offset by a decrease in unallocated executive oversight costs of $6.2 million.

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 incurred in 2019, 2018, and 2017 were as follows:

Years Ended December 31,

Employee separations

Lease termination costs

Relocation expenses

Employee compensation

Total restructuring and other charges

The restructuring and other charges recorded in 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits.

These costs will be paid within a year of termination and any unpaid amounts are included in accrued expenses at December 31, 2019.

Also included in net restructuring charges were exit costs incurred associated with the closing of one of our office facilities.

The restructuring and other charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.

The restructuring and other charges recorded in 2017 were primarily driven by a reduction in workforce at our Headquarters segment, along with costs related to the Softmart business, which was acquired in 2016, including expenses to retain certain key personnel brought over in the acquisition.

Also in 2017, we incurred additional expense of $2.7 million related to a one-time cash bonus paid to all non-executive employees at the end of the year.

Income from operations increased by $26.3 million, or 30.7%, to $112.0 million in 2019 compared to 2018.

Income from operations as a percentage of net sales was 4.0% in 2019 compared to 3.2% in 2018.

The increase in operating income resulted primarily from gross profits increasing at a higher rate than SG&A costs.

The increase in operating income as a percentage of net sales resulted primarily from the increase in gross margin.

Income taxes.

Our effective tax rate was 27.1% for the year-ended December 31, 2019 and 2018.

We expect our corporate income tax rate for 2020 to range from 27% to 29%.

Net income increased by $17.5 million to $82.1 million in 2019, from $64.6 million in 2018, which resulted from the increase in operating income in the current year.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net sales decreased by 7.3% to $2,699.5 million in 2018 from $2,911.8 million in 2017.

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

Years Ended December 31,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

Net sales of $1,165.1 for the Enterprise Solutions segment increased by $33.3 million compared to the prior year.

This year-over-year increase was driven by increased sales of notebooks and mobility products of $59.2 million, and increased sales of desktop products of $19.9 million.

Sales of servers and storage equipment also increased by $17.6 million as large enterprises looked to upgrade their IT workplace with these product solutions.

Increased sales of other hardware products accounted for $86.9 million of the increase, which was driven primarily by large orders of handheld devices used by our retail customers.

These increases were partially offset by lower net sales of software products of $148.6 million, which resulted primarily from the adoption of ASC 606 where the Company is considered to be the agent on the transaction.

Had the year been reported under the previous revenue recognition guidance, net sales for the Enterprise Solutions segment would have increased by $202.5 million, or 17.9%.

Net sales of $1,027.9 for the Business Solutions segment reflect a decrease of $130.7 million due to lower net sales of software products of $137.7 million, primarily as a result of the adoption of ASC 606 where the Company is considered to be the agent on the transaction, and desktops of $8.8 million.

These decreases were partially offset by increased net sales of net/com products of $14.7 million as small- to medium-sized businesses increased their IT investments to transform their workplace.

Had the year been reported under the previous revenue recognition guidance, net sales for the Business Solutions segment would have increased by $42.8 million, or 3.7%.

Net sales of $506.5 million for the Public Sector Solutions segment reflect a decrease of $114.9 million, primarily driven by lower net sales of software products of $58.3 million, which resulted primarily from the adoption of ASC 606 where the Company is considered to be the agent on the transaction, lower net sales of desktops of $44.6 million and lower net sales of other hardware/services of $23.3 million.

Net sales to the federal government reflected a decrease of $79.8 million in 2018, which resulted primarily from a decrease in net sales of software products due to the adoption of ASC 606, and from a large sale of desktops to a federal agency in the first half of 2017 that did not repeat in 2018.

Net sales to state and local government and educational institutions reflect a decrease of $35.1 million, primarily driven by a decrease in net sales of software product due to the adoption of ASC 606, and to lower net sales to higher education customers.

Gross profit for 2018 increased year-over-year both in dollars and as a percentage of net sales (gross margin), as explained below:

Gross profit for the Enterprise Solutions segment increased primarily due to higher invoice selling margins, which increased by 120 basis points and was driven by the increase in revenues reported on a net basis as a result of the adoption of ASC 606.

Agency fees from enterprise software agreements represented a 28 basis-point increase due to the reduction in net sales year-over-year and cash discounts increased by 7 basis points year-over-year.

Gross profit for the Business Solutions segment increased due to higher invoice selling margins.

Invoice selling margins increased by 224 basis points primarily due to the increase in revenues reported on a net basis as a result of the adoption of ASC 606.

We also receive agency fees and early pay discounts from vendors for certain software and hardware sales.

Agency fees are recorded as revenue with no corresponding cost of goods sold, and accordingly such fees have a positive impact on gross margin.

Agency fees from enterprise software agreements represented a 20 basis-point increase due to the reduction in net sales year-over-year.

Cash discounts increased by 13 basis points year-over-year.

Gross profit for the Public Sector Solutions segment increased due to higher invoice selling margins.

Invoice selling margins increased by 221 basis points primarily due to the increase in revenues reported on a net basis as a result of the adoption of ASC 606.

Agency fees from enterprise software agreements represented a 5 basis-point increase due to the reduction in net sales year-over-year and cash discounts increased by 2 basis points year-over-year.

Selling, general and administrative expenses in 2018 increased both 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,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Headquarters/Other, unallocated

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

The increase in SG&A dollars was primarily due to increased personnel-related expenses of $7.9 million, resulting from investments in solutions sales personnel and incremental variable compensation associated with higher gross profits, a $3.3 million increase in usage of Headquarter services, and a $0.3 million increase in credit card fees.

SG&A expenses as a percentage of net sales was 8.6% for the Enterprise Solutions segment, which reflects a decrease of 30 basis points resulting from the factors described above, but offset by an increase of 109 basis points related to the adoption of ASC 606.

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

The year-over-year increase in SG&A dollars was primarily driven by a $7.7 million increase in usage of Headquarter services related to our investments in technical and engineering support provided to this segment, and a $1.6 million increase in advertising expenses driven by increased vendor funding for marketing, advertising, and training campaigns directed towards driving sales.

These increases were partially offset by a net $1.1 million decrease in personnel-related expenses, which was driven by a decrease of approximately $3.8 million related to the reallocation of certain personnel-related expenses in 2018 to the Headquarters/Other group and partially offset by increases in variable compensation associated with higher gross profits.

SG&A expenses as a percentage of net sales was 14.1% for the Business Solutions segment, which reflects an increase of 26 basis points resulting from the factors described above and an increase of 201 basis points related to the adoption of ASC 606.

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

The dollar increase resulted primarily from greater usage of Headquarter services of $3.0 million, which was partially offset by decreases in personnel-related expenses of $0.3 million primarily due to the reallocation of certain personnel-related expenses in 2018 to the Headquarters/Other group and lower credit card fee expenses of $0.1 million.

SG&A expenses as a percentage of net sales was 13.2% for the Public Sector Solutions segment, which reflects an increase of 143 basis points resulting from the factors described above and an increase of 145 basis points related to the adoption of ASC 606.

SG&A expenses for the Headquarters/Other group increased year-over-year, which was driven primarily by the reallocation of certain personnel-related expenses to the Headquarters/Other group from the Business Solutions and Public Sector Solutions segments.

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 in the table above represent the remaining unallocated costs.

Income from operations increased by $8.2 million to $85.7 million in 2018 compared to 2017.

Income from operations as a percentage of net sales was 3.2% in 2018 compared to 2.7% in 2017.

The increase in operating income resulted primarily from gross profits increasing at a higher rate than SG&A costs.

The increase in operating income as a percentage of net sales resulted primarily from the increase in gross margin.

Income taxes.

Our effective tax rate was 27.1% for the year-ended December 31, 2018, compared to 29.3% for the year-ended December 31, 2017.

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.

Net income increased by $9.7 million to $64.6 million in 2018, from $54.9 million in 2017, which resulted from the increase in operating income combined with a lower effective tax rate in 2018.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Overview

Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit.

We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, repurchases of common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.

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.

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

We expect to meet our cash requirements for 2020 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, 2019, we had $90.1 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, 2019, 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, 2019.

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,

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

(Decrease) increase in cash and cash equivalents

Cash provided by operating activities decreased $50.2 million in 2019.

Cash flow provided by operations in the year resulted primarily from net income before depreciation and amortization and an increase to accounts payable, partially offset by increases in accounts receivable and inventory.

Accounts payable increased by $34.0 million year-over-year.

Accounts receivable increased by $101.9 million year-over-year, primarily as a result of increased sales and the timing of product shipments.

Days sales outstanding increased to 63 days at December 31, 2019, compared to 52 days at December 31, 2018.

Inventory increased from the prior year by $5.5 million, which was the result of 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 December 31, 2019 compared to December 31, 2018.

Inventory turns, which measures the number of times inventory was sold and replaced during the year, decreased to 18 in 2019 compared to 21 in 2018.

Operating cash flow in 2018 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable and an increase in accounts payable, partially offset by an increase in inventory.

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.

At December 31, 2019, we had $235.6 million in 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.

Cash used in investing activities increased $4.4 million in 2019 compared to 2018.

Cash used in investing activities represented $25.7 million in 2019, primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure.

Cash used to purchase property and equipment, less proceeds from the sale of equipment, amounted to $21.2 million 2018, compared to $11.8 million in 2017.

Cash used in financing activities decreased $11.3 million in 2019 compared to 2018.

Financing uses of cash in 2019 included a $8.5 million payment of a special $0.32 per share dividend declared in December 2018 and paid in January 2019, and $4.5 million for the purchase of treasure shares.

These outflows were partially offset by $1.3 million for the issuance of stock under the employee stock purchase plan.

Financing uses of cash in 2018 included a $9.1 million payment of a special $0.34 per share dividend declared in December 2017 and paid in January 2018, and $15.4 million for the purchase of treasure shares.

These outflows were partially offset by $1.2 million for the issuance of stock under the employee stock purchase plan.

Financing uses of cash in 2017 included dividends of $9.0 million declared in December 2016 and paid in January 2017, and were partially offset by $1.2 million for the issuance of stock under the employee stock purchase plan and $1.8 million for the exercise of stock options.

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”

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 (4.75% at December 31, 2019).

The one-month LIBOR rate at December 31, 2019 was 1.76%.

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, 2019.

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, 2019, the entire $50.0 million facility was available for borrowing.

Contractual Obligations.

The following table sets forth information with respect to our long-term obligations payable in cash as of December 31, 2019 (in thousands):

Payments Due By Period

Contractual Obligations:

Operating lease obligations (1)

Excluding taxes, insurance, and common area maintenance charges.

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, 2019, 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 2019 were immaterial, and accordingly, the funded

debt ratio did not limit potential borrowings as of December 31, 2019.

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, 2016.

Such amount was calculated at December 31, 2019, as $454.0 million, whereas our actual consolidated stockholders’

equity at this date was $597.3 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.

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 meet the definition of “critical accounting policies.”

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time.

We account for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable.

We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes an arrangement.

Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.

Nature of Products and Services

Information technology (“IT”) products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which is generally upon delivery to the customer.

We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing.

We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer.

Licenses for on-premise software provide the customer with a right to take possession of the software.

Customers may purchase perpetual licenses or enter into subscriptions to the licensed software.

We are the principal in these transactions and recognize revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable.

For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services.

We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions.

We recognize revenue for security software net of the related cost of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis.

We do not exercise control over these products or services and therefore are an agent in these transactions.

We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

Amounts recognized on a net basis included in net sales for such software sales transactions were $521.7 million and $396.7 million for the years ended December 31, 2019 and 2018, respectively.

Prior to the adoption of ASC 606, a substantial portion of our software sales were recognized on a gross basis.

We use our own engineering personnel to assist 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 disposal, and other services.

Service revenue is recognized in general over time as we perform the underlying services and satisfy our performance obligations.

We evaluate such engagements to determine whether we are the principal or the agent in each transaction.

For those transactions in which we do not control the service, we act as an agent and recognize the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.

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 $51.0 million, $46.8 million, and $38.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Certain software sales include on-premise licenses that are combined with software maintenance.

Software maintenance conveys rights to updates, bug fixes and help desk support, and other support services transferred over the underlying contract period.

On-premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these items separately.

We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service.

Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements.

Certain of our larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under enterprise agreements (“EAs”).

Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base.

Customers are charged an annual true-up fee for changes in the number of users over the year.

With most EAs, our vendors will transfer the license and bill the customer directly, paying resellers, such as us, an agency fee or commission on these sales.

We record these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount.

In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature of each item.

Our vendors typically dictate how the EA will be sold to the customer.

We also offer extended service plans (“ESP”) on IT products, both as part of the initial arrangement and separately from the IT products.

We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service and do not provide any service after the sale.

Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

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 included in net sales.

Costs related to shipping and handling billing 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.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products or services to a customer.

Determining whether we are the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

We estimate the standalone selling price (“SSP”) for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times.

We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

We provide our customers with a limited thirty-day right of return, which is generally limited to defective merchandise, and gives rise to variable consideration.

Revenue is recognized based on the most likely amount to which we are expected to be entitled.

The estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty is resolved.

We make estimates of product returns based on significant historical experience.

We record our sales return reserve as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses and as a reduction of cost of sales and an associated right of return asset.

At December 31, 2019, we recorded sales reserves of $3.5 million and $0.1 million as components of accounts receivable and accrued expenses, respectively.

At December 31, 2018, we recorded sales reserves of $3.4 million and $0.2 million as components of accounts receivable and accrued expenses, respectively.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and customers’

current creditworthiness.

Our allowance is generally computed by (1) applying specific percentage reserves on accounts that are past due, and (2) specifically reserving for customers known to be in financial difficulty.

Therefore, if the financial condition of certain of our customers were to deteriorate, or if we noted there was a lengthening of the timing of the settlement of receivables that was symptomatic of a general deterioration in the ability of our customers to pay, we would have to increase our allowance for doubtful accounts.

This would negatively impact our earnings.

Our cash flows would be impacted to the extent that receivables could not be collected.

In addition to accounts receivable from customers, we record receivables from our vendors/suppliers for cooperative advertising, price protection, supplier reimbursements, rebates, and other similar arrangements.

A portion of such receivables is estimated based on information available from our vendors at discrete points in time.

While such estimates have historically approximated actual cash received, a change in estimates could give rise to a reduction in the receivable.

This could negatively impact our earnings and our cash flows.

Considerable judgment is used in assessing the ultimate realization of customer receivables and vendor/supplier receivables, including reviewing the financial stability of a customer, vendor information, and gauging current market conditions.

If our evaluations are incorrect, we may incur additional charges in the future on our consolidated statements of income.

Our trade receivables are charged off in the period in which they are deemed uncollectible.

Recoveries of trade receivables previously charged are recorded when received.

Write offs of customer and vendor receivables totaled $0.9 million in 2019 and $1.3 million in 2018.

Vendor Consideration

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.

We also receive vendor co-op advertising funding for our marketing activities 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.

Vendor consideration that cannot be associated with a specific program funded by an individual vendor 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 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 (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 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 $3.4 million and $7.0 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, which are all currently classified as held for use.

These include property and equipment, identifiable intangibles, an internet domain name, which is an indefinite-lived intangible asset not subject to amortization, 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.

For 2018 and 2017, using both income and market valuation approaches, we performed a two-step quantitative test to compare the fair value of our reporting units with their respective carrying values, including goodwill.

If the fair values were determined to be less than the carrying values, the second step would be performed to measure the amounts, if any, of the impairment.

In 2019, rather than perform the two-step quantitative analysis, the Company performed a qualitative “Step 0”

analysis, which allows us to consider qualitative factors that might impact the carrying amount of our goodwill to determine whether a more detailed quantitative analysis would be necessary.

Factors considered when performing the “Step 0”

impairment assessment included our performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in our stock price and market capitalization, and other relevant entity-specific events.

Our Enterprise Solutions and Business Solutions segments hold $66.2 million and $7.4 million of goodwill, respectively.

We concluded that there were no indications that the carrying values of the two reporting units and the domain name exceeded their respective fair values, and accordingly, an impairment was not identified in the annual test.

While we believe that our conclusions are reasonable, different assumptions 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 annual impairment test 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.

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.

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-K

Item 5. Market for Registrant’s Common Equity