What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-09 · 117 added, 215 removed, 135 unchanged (71% of the section changed)

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AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

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Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.

Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished.

The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

• we have experienced variability in sales and may not be able to maintain profitable operations;

• substantial competition could reduce our market share and may negatively affect our business;

• we face and will continue to face significant price competition, which could result in a reduction of our profit margins;

• the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;

• instability in economic conditions and government spending may adversely affect our business and reduce our operating results;

• the loss of any of our major vendors could have a material adverse effect on our business;

• virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;

• the methods of distributing IT products are changing, and such changes may negatively impact us and our business;

• we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;

• we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;

• we may experience a reduction in the incentive programs offered to us by our vendors;

• should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;

• we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;

• we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;

• we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;

• cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.

• we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.

• the failure to comply with our public sector contracts could result in, among other things, fines or liabilities;

• we are controlled by one principal stockholder

These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles.

Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic.

We cannot assure investors that our assumptions and expectations will prove to have been correct.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.

These statements involve known and unknown risks, uncertainties and other factors, 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.

These statements involve known and unknown risks, uncertainties and other factors, 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 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.

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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 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

In December 2019, a novel coronavirus disease was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern.

On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries.

On March 11, 2020, the WHO characterized COVID-19 as a global pandemic.

National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home.

Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country.

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.

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.

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.

For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers.

Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.

In addition, the COVID-19 pandemic has caused, and may continue to cause, material disruptions to the business and operations of our customers.

Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations.

In our opinion, customers who operate within the hospitality, airline, and retail industries are likely to be most adversely affected.

We have experienced, and may continue to experience, decreases in orders as a result of the pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future.

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 nine months ended September 30, 2020.

In the year 2021, the COVID-19 pandemic continued to cause material disruptions to the business and operations of our customers.

We have experienced, and may continue to experience, decreases in orders as a result of the COVID-19 pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future.

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.

However, we continue to monitor the effects on our customers, suppliers, and the economy as a whole and will adjust our business practices, as necessary, to respond to the changing demand for, and supply of, our products.

See the important information in Item 1A.

Risk Factors below, under the caption “The spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows.”

RESULTS OF OPERATIONS

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Three Months Ended

Nine Months Ended

September 30,

($ in millions)

Net sales (in millions)

Selling, general and administrative expenses

Income from operations

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 of $636.9 million for the first quarter of 2021 reflected a decrease of $75.0 million compared to the first quarter of 2020, which was driven by lower net sales in our Enterprise Solutions and Business Solutions Segments.

The decrease was partially offset by growth in our Public Sector Solutions segment.

The decrease in net sales was primarily due to the supply chain constraints in the first quarter of 2021 and strong comparative results in the same quarter a year ago.

Gross profit decreased year-over-year by $12.6 million, primarily due to the increase of lower margin sales and the decline in total net sales.

SG&A expenses decreased year-over-year by $6.1 million, driven primarily by decreased personnel cost of $4.6 million associated with reduced headcount and lower variable compensation, a decrease in bad debt expenses of $2.9 million and a decrease in advertising expenses of $1.3 million, which were partially offset by an increase in professional fees of $2.1 million.

Operating income in the first quarter of 2021 decreased year-over-year both in dollars and as a percentage of net sales by $6.5 million and 68 basis points, respectively, primarily as a result of the decrease in net sales.

Net Sales Distribution

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Three Months Ended

Nine Months Ended

September 30,

Sales Segment

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Servers/Storage

Net/Com Products

Net/Com Product

Displays and sound

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Three Months Ended

Nine Months Ended

September 30,

Sales Segment

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Public Sector Solutions

Total Company

Operating Expenses

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Three Months Ended

Nine Months Ended

September 30,

($ in millions)

Personnel costs

Facilities operations

Service contracts/subscriptions

Professional fees

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Total SG&A expense

Percentage of net sales

(1) Operating expenses were separated into additional categories in 2020.

Certain prior-year balances have been classified to conform with the new presentation.

Restructuring and other charges

In the second quarter of 2020, we undertook a number of actions across our business 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 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 and other liabilities at September 30, 2020.

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

As a percentage of net sales

Year-Over-Year Comparisons

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

In this section and elsewhere in this Quarterly Report on Form 10-Q we refer to changes in year-over-year results.

Unless context otherwise requires, such references refer to changes between the three months ended March 31, 2021 and the three months ended March 31, 2020.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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

Three Months Ended September 30,

($ in millions)

Three Months Ended March 31,

Enterprise Solutions

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Public Sector Solutions

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

Net sales decreased in the first quarter of 2021 compared to the first quarter of 2020, as explained below:

● Net sales of $265.3 million for the Enterprise Solutions segment reflect a decrease of $68.1 million, or 20.4%, 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 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.

We experienced decreases in net sales across the majority of our product offerings primarily as a result of the supply chain constraints in the first quarter of 2021.

The decrease in net sales was also due to the higher net sales in the first quarter of 2020 as a result of a shift to work-from-home strategy because of the outbreak of COVID-19 pandemic in the first quarter of 2020.

We experienced decreases in net sales of accessory products, other hardware/services, net/com products, and desktops products of $47.1 million, $12.0 million, $5.1 million, and $3.9 million respectively.

● Net sales of $246.3 million for the Business Solutions segment reflect a decrease of $32.5 million, or 11.7%, 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 $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.

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.

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.

The decrease was a result of the stronger net sales in the same period of prior year.

The decrease in net sales was also driven by the supply chain constraints in the first quarter of 2021.

We experienced a decrease in net sales of desktop products of $12.1 million, software products of $9.2 million, server/storage products of $5.3 million, and display and sound products of $4.2 million.

● Net sales of $125.3 million for the Public Sector Solutions segment reflect an increase of $25.6 million, or 25.7%, compared with the same period a year ago.

The increase was primarily driven by a large project rollout to the federal government and an increase of sales in K-12 customers.

Net sales of notebooks/mobility products increased by $28.0 million compared with the prior year, which was partially offset by the decrease of net sales in servers/storage products of $5.1 million.

Gross profit for the first quarter of 2021decreased year-over-year in dollars, but stayed relatively flat 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 20.4% decrease in net sales year-over-year, fluctuations in customer, and hardware product mix.

The change in customer and hardware product mix also explains the increase in gross margin of 20 basis points in the current quarter.

● Gross profit for the Business Solutions segment decreased year-over-year primarily due to a 11.7% decrease in net sales.

Gross margin percentage increased by approximately 40 basis points, primarily due to an increase in cloud-based and security software sales, which are recognized on a net basis.

● Gross profit for the Public Sector Solutions segment increased as a result of a 25.7% increase in net sales.

Gross margin percentage decreased by 200 basis points year-over-year due to a shift in product mix, which included increased sales of lower-margin products.

Selling, general and administrative expenses decreased in dollars but increased as a percentage of net sales in the first quarter of 2021 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 September 30,

($ in millions)

Three Months Ended March 31,

Enterprise Solutions

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Headquarters/Other, unallocated

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

● 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 attributable to decreased personnel costs of $3.5 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 $0.8 million.

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 as a percentage of net sales were 9.4% for the Enterprise Solutions segment in the first quarter of 2021, which reflects an increase of 60 basis points.

There were no individual significant drivers of this change year-over-year, but primarily it is a result of lower net sales compared with the same period a year ago.

● 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 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 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.

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.

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):

Nine Months Ended September 30,

($ in millions)

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

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 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 2020 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 $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 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 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 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 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):

Nine Months Ended September 30,

($ in millions)

Enterprise Solutions

Business Solutions

Public Sector Solutions

Headquarters/Other, unallocated

● 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 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 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 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 year-over-year change in SG&A dollars was driven primarily by lower bad debt expenses of $2.3 million compared to the same period last year.

This is as a result of higher bad debt expenses recorded in the prior year as a reaction to the COVID-19 pandemic.

SG&A expenses as a percentage of net sales were 15.8% for the Business Solutions segment in the first quarter of 2021, which reflects an increase of 100 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 but decreased as a percentage of net sales.

The increase is primarily driven by an increase in the use of Headquarter services of $0.9 million.

SG&A expenses as a percentage of net sales was 14.7% for the Public Sector Solutions segment in the first quarter of 2021, which reflects a decrease of 310 basis points.

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

● SG&A expenses for the Headquarters/Other group were relatively flat in comparison to the same period of prior year.

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.

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 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 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.

Income from operations for the first quarter of 2021 decreased to $14.1 million, compared to $20.7 million for the first quarter of 2020, primarily due to the decreases in net sales and gross profit.

Income from operations as a percentage of net sales was 2.2% for the first quarter of 2021, compared to 2.9% of net sales for the prior year quarter, primarily driven by higher SG&A expenses as a percentage of net sales.

Our provision for income taxes in the three months ended March 31, 2021 was $3.9 million, compared to $5.8 million for the first quarter of 2020.

Net income for the first quarter of 2021 decreased to $10.2 million, compared to $14.9 million for the first quarter of 2020, primarily due to lower net sales and gross profit.

Liquidity and Capital Resources

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

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

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, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of businesses.

Market conditions impact and help determine our strategic use of funds.

We believe that funds generated from operations, together with available credit under our bank line of credit, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months.

We believe that funds generated from operations, together with available credit under our credit facility, 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 the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our bank line of credit, as follows:

We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our credit facility, as follows:

● Cash on Hand .

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

At March 31, 2021, we had $92.3 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 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.

A number of customers across affected industries have requested various payment term concessions from us.

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

We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and payables to generate a positive cash flow.

● Credit Facility.

As of March 31, 2021, we had no borrowings under our $50.0 million credit facility, which is available until February 10, 2022.

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, or our customers continue to be materially adversely affected by the COVID-19 pandemic, our cash flows from operations may be substantially affected.

See also related risks listed below under “Item 1A.

“Risk Factors”.

Summary of Sources and Uses of Cash

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

Nine Months Ended

($ in millions)

Three Months Ended

Net cash provided by operating activities

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Net cash used in financing activities

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.

(Decrease) increase in cash and cash equivalents

Cash provided by operating activities was $6.0 million in the three months ended March 31, 2021.

Cash flow provided by operations in the three months ended March 31, 2021 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, which decreased by $54.9 million in the current year and was driven primarily by the timing of collections.

These factors that contributed to the positive inflow of cash from operating activities were partially offset by decreases in accounts payable of $60.9 million in the current year, primarily due to the timing of payments.

Operating cash flow in the three months ended March 31, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, and partially offset by increases in inventory and decreases in accounts payable and other accrued expenses.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average.

Components of our cash conversion cycle are as follows:

Three Months Ended

Days of sales outstanding (DSO) (1)

Days of supply in inventory (DIO) (2)

Days of purchases outstanding (DPO) (3)

Cash conversion cycle

(1) Represents the rolling three-month average of the balance of accounts receivable, net at the end of the period, divided by average daily net sales for the same three-month period.

Also incorporates components of other miscellaneous receivables.

(2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period.

(3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period.

The cash conversion cycle increased to 63 days at March 31, 2021, compared to 46 days at March 31, 2020.

The increase is primarily due to the 16 day increase of DSO and the 3 day increase of DIO, and partially offset by the 2 days increase of DPO.

The increase in DSO was primarily due to payment terms extended to our customers in the prior year.

Cash used in investing activities in the three months ended March 31, 2021 represented $2.4 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.

In the prior year, we made similar investments with $4.6 million in purchases of property and equipment.

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 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.

Cash used for capital expenditures for the first quarter of 2021 was partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in financing activities in the three months ended March 31, 2021 consisted primarily of an $8.4 million payment of a special $0.32 per share dividend.

In the prior year period, financing activities primarily represented an $8.4 million payment of a special $0.32 per share dividend and $10.2 million for the purchase of treasury shares.

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit facilities and other contractual obligations.

For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors

Affecting Sources of Liquidity” below.

Below is a summary of certain provisions of our credit facility and other contractual obligations.

For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors Affecting Sources of Liquidity” below.

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

Bank Line of Credit .

Our bank line of credit extends until February 2022 and is collateralized by our accounts receivable.

Credit facility .

Our credit facility extends until February 2022 and is collateralized by our accounts receivable.

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 September 30, 2020).

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

The one-month LIBOR rate at March 31, 2021 was 0.11%.

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 September 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 March 31, 2021, $50.0 million was available for borrowing under the facility.

Off-Balance Sheet Arrangements.

We do not have any 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, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Obligations.

The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2019 have not materially changed since the report was filed.

Factors Affecting Sources of Liquidity

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The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.

These factors may also be adversely impacted by the COVID-19 pandemic.

Credit Facility.

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Our credit facility does not include restrictions on future dividend payments.

Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing funds under this line of credit.

Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing funds under this credit facility.

This credit facility contains two financial covenants:

● 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 nine months ended September 30, 2020 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 2020.

Our outstanding borrowings under the credit facility during the three months ended March 31, 2021 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2021.

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

Such amount was calculated as $487.0 million at March 31, 2021, whereas our consolidated stockholders’ equity at that date was $647.5 million.

Capital Markets.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis