What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 121 added, 114 removed, 204 unchanged (54% of the section changed)

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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.

These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products.

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We operate through three sales segments:

(a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through our MoreDirect subsidiary, and (c) the Public Sector Solutions segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.

(a) the Business Solutions segment, which serves small- to medium-sized businesses, through our PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves medium-to-large corporations, through our MoreDirect subsidiary, and (c) the Public Sector Solutions segment, which serves federal, state, and local governmental and educational institutions, through our GovConnection subsidiary.

We generate sales through (i) outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media.

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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.

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, especially in the current economic environment, 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 have expanded, and expect to continue to expand, our IT solutions business, which requires the addition of highly-skilled service engineers.

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 continue to expand our IT solutions business, which requires 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.

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The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net sales (in millions)

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Income from operations

Net sales of $704.2 million for the second quarter of 2021 reflected an increase of $154.2 million compared to the second quarter of 2020, which was driven by higher net sales across all of our business segments.

Net sales of $751.4 million for the third quarter of 2021 reflected an increase of $98.6 million compared to the third quarter of 2020, which was driven by higher net sales in both our Enterprise Solutions and Business Solutions segments.

The increase in net sales was primarily driven by our ability to meet the continued demand from our customers due to the growing hybrid work environment.

The increase in net sales was also due to lower sales of the same quarter a year ago primarily because of the impact of the COVID-19 pandemic.

In addition, we saw manufacturing revenue growth of $27.0 million or 24.4% and healthcare revenue growth of $14.3 million or 9.8% year-over-year.

The increase in net sales was also due to lower sales of the same quarter a year ago primarily due to the impact of the COVID-19 pandemic.

Gross profit increased year-over-year by $12.9 million, primarily due to the increase of higher margin sales and the increase in total net sales.

SG&A expenses increased year-over-year by $15.1 million, driven primarily by increased personnel cost of $13.4 million associated with higher variable compensation due to the higher gross profit and higher health care costs, an increase in service contracts of $0.9 million, an increase in advertising expenses of $0.5 million, and increased credit card fees of $0.4 million.

Operating income in the second quarter of 2021 increased year-over-year both in dollars and as a percentage of net sales by $13.2 million and 145 basis points, respectively, primarily as a result of the increase in net sales.

SG&A expenses increased year-over-year by $6.6 million, driven primarily by increased personnel cost of $5.7 million associated with higher variable compensation due to the higher gross profit.

The higher SG&A expenses were also attributable to an increase in marketing expenses of $1.8 million, an increase in service contracts of $0.2 million, and an increase in credit card fees of $0.6 million.

Those increases were partially offset by the lower professional fees of $2.1 million.

Operating income in the third quarter of 2021 increased year-over-year both in dollars and as a percentage of net sales by $6.3 million and 40 basis points, respectively, primarily as a result of the increase in net sales.

Net Sales Distribution

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

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The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

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The following table reflects our SG&A expenses for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

($ in millions)

Personnel costs

Facilities operations

Service contracts/subscriptions

Professional fees

Credit card fees

Depreciation and amortization

Credit card fees

Facilities operations

Total SG&A expense

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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 June 30, 2021 and the three ended June 30, 2020;

and changes between the six months ended June 30, 2021 and the six months ended June 30, 2020.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Unless context otherwise requires, such references refer to changes between the three months ended September 30, 2021 and the three months ended September 30, 2020 and changes between the nine months ended September 30, 2021 and the nine months ended September 30, 2020.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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

Three Months Ended June 30,

Three Months Ended September 30,

Enterprise Solutions

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Public Sector Solutions

Net sales increased in the second quarter of 2021 compared to the second quarter of 2020, as explained below:

Net sales increased in the third quarter of 2021 compared to the third quarter of 2020, as explained below:

● Net sales of $309.7 million for the Enterprise Solutions segment reflect an increase of $49.9 million, or 19.2%, year-over-year.

We experienced increases in net sales of notebooks/mobility, desktops, accessory products, displays and sound, servers/storage, and other hardware/services of $14.7 million, $11.9 million, $11.6 million, $10.8 million, $4.1 million, and $4.5 million respectively.

These increases were primarily driven by the increased demand from customers in the healthcare and manufacturing industries as organizations continue to invest in technology to implement automation and data security.

We experienced increases in net sales of notebooks/mobility and displays and sound of $53.9 million and $17.0 million, respectively.

Those increases were partially offset by the decreases in net sales of servers/storage, other hardware/services, and net/com products of $11.3 million, $5.8 million and $4.1 million, respectively.

We believe these increases were primarily driven by the increased demand from customers in the healthcare and manufacturing industries as organizations continue to invest in technology to implement automation and data security.

● Net sales of $281.4 million for the Business Solutions segment reflect an increase of $50.4 million, or 21.8%, year-over-year.

The increase in net sales was also driven by strong growth in cloud-based and security software

We experienced increases in net sales of notebooks/mobility products of $34.8 million, software products of $8.9 million, accessories products of $8.0 million, net/com products of $7.6 million, displays and sound products of $6.6 million, and other hardware/services products of $6.8 million.

● Net sales of $129.7 million for the Public Sector Solutions segment reflect an increase of $17.5 million, or 15.6%, compared with the same period a year ago.

The increase was primarily driven by an increase of sales to state, local govement and educational institutions.

Net sales of notebooks/mobility products, software products and displays and sound products increased by $12.2 million, $3.5 million and $3.1 million, respectively, compared with the same quarter of prior year.

Gross profit for the second quarter of 2021increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained below:

We experienced increases in net sales of notebooks/mobility products of $37.2 million as a result of shift to work-from-anywhere strategy.

The net sales of servers/storage, displays and sound products and desktops also increased by $5.6 million, $5.2 million and $2.2 million, respectively.

● Net sales of $160.3 million for the Public Sector Solutions segment reflect a decrease of $1.7 million, or 1.0%, compared with the same period a year ago.

Sales to state and local government and educational institutions increased by 2.5%, compared to the prior year quarter, while sales to the federal government decreased by 15.8% primarily due to the timing of customer rollouts.

Net sales of software products and net/com products decreased by $8.0 million and $7.2 million, respectively, compared with the same quarter of the prior year.

Those decreases were partially offset by the increases in net sales of notebooks/mobility and other hardware/services of $10.4 million and $2.9 million, respectively.

Gross profit for the third quarter of 2021increased year-over-year in dollars but decreased as a percentage of net sales (gross margin), as explained below:

● Gross profit for the Enterprise Solutions segment increased primarily as a result of the 19.2% increase in net sales year-over-year.

The gross margin increase of 20 basis points was due to the change in product mix and an increase in cloud solutions and security software.

The gross margin was flat in comparison to the same period of the prior year.

● Gross profit for the Business Solutions segment increased year-over-year primarily due to a 21.8% increase in net sales.

Gross margin percentage decreased by approximately 80 basis points, primarily due to changes in product mix.

● Gross profit for the Public Sector Solutions segment increased as a result of a 15.6% increase in net sales.

Gross margin percentage increased by 100 basis points year-over-year due to a shift in product mix and an increase in cloud-based and security software.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the second quarter of 2021 compared to the prior year quarter.

● Gross profit for the Public Sector Solutions segment decreased as a result of a 1.0% decrease in net sales.

Gross margin percentage decreased by 140 basis points year-over-year due to a shift in product mix and a decrease in software sales recorded on a net basis.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the third 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 (dollars in millions):

Three Months Ended June 30,

Three Months Ended September 30,

Enterprise Solutions

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

The year-over-year change in SG&A dollars was attributable to increased personnel costs of $2.1 million, driven primarily by higher variable compensation expense associated with higher gross profit, along with a $1.0 million increase in the use of Headquarter services.

SG&A expenses as a percentage of net sales were 8.6% for the Enterprise Solutions segment in the second quarter of 2021, which reflects a decrease of 100 basis points.

The year-over-year change in SG&A dollars was attributable to increased personnel costs of $1.9 million, driven primarily by higher variable compensation expense associated with higher gross profit, along with a $0.7 million increase in bad debt expense.

SG&A expenses as a percentage of net sales were 8.6% for the Enterprise Solutions segment in the third quarter of 2021, which reflects a decrease of 50 basis points.

This decrease is a result of higher sales in the quarter compared with the same period a year ago.

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

The year-over-year change in SG&A dollars was driven primarily by high personnel costs of $3.5 million compared to the same period last year, primarily due to the higher variable compensation expense associated with higher gross profit.

This year-over-year increase in SG&A expenses was also attributable to a $3.2 million increase in the use of Headquarter services.

SG&A expenses as a percentage of net sales were 16.0% for the Business Solutions segment in the second quarter of 2021, which reflects a decrease of 260 basis points and is a result of higher sales in the quarter compared with the same period a year ago.

The year-over-year change in SG&A dollars was driven primarily by higher advertising costs of $1.5 million compared to the same period last year, primarily due to increased marketing activities.

This year-over-year increase in SG&A expenses was also attributable to a $1.2 million increase in the use of Headquarter services as well as a $0.4 million increase in bad debt expense.

Additionally, personnel costs increased by $0.8 million compared to the same period last year, primarily due to the higher variable compensation expense associated with higher gross profit.

SG&A expenses as a percentage of net sales were 14.9% for the Business Solutions segment in the third quarter of 2021, which reflects a decrease of 150 basis points and is a result of higher sales in the quarter compared with the same period a year ago.

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

The increase is primarily driven by an increase in the use of Headquarter services of $0.6 million.

year-over-year increase was also attributable to the higher variable compensation of $1.7 million associated with higher gross profit.

SG&A expenses as a percentage of net sales was 15.5% for the Public Sector Solutions segment in the second quarter of 2021, which reflects an increase of 110 basis points and is a result of net sales growing at a lower rate than operating expenses when compared with the same period a year ago.

● SG&A expenses for the Headquarters/Other group increased by $1.1 million primarily due to an increase in unallocated executive oversight costs year-over-year.

This increase was primarily driven by the increased variable compensation costs resulting from the higher gross profit.

The year-over-year increase was partially offset by lower personnel costs.

SG&A expenses as a percentage of net sales was 12.3% for the Public Sector Solutions segment in the third quarter of 2021, which reflects an increase of 20 basis points and was due to the higher headquarter costs allocation.

● SG&A expenses for the Headquarters/Other group decreased by $0.5 million.

This decrease was primarily due to a decrease in unallocated executive oversight costs year-over-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.

Income from operations for the second quarter of 2021 increased to $23.8 million, compared to $10.6 million for the second quarter of 2020, primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales was 3.4% for the second quarter of 2021, compared to 1.9% of net sales for the prior year quarter, primarily driven by higher net sales as well as lower SG&A expenses as a percentage of net sales.

Our provision for income taxes in the three months ended June 30, 2021 was $6.5 million, compared to $3.0 million for the second quarter of 2020.

Net income for the second quarter of 2021 increased to $17.3 million, compared to $7.6 million for the second quarter of 2020, primarily due to higher net sales and gross profit.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Income from operations for the third quarter of 2021 increased to $27.3 million, compared to $21.1 million for the third quarter of 2020, primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales was 3.6% for the third quarter of 2021, compared to 3.2% for the prior year quarter, primarily driven by higher net sales as well as lower SG&A expenses as a percentage of net sales.

Our provision for income taxes in the three months ended September 30, 2021 was $7.3 million, which included $0.3 million of discrete items mainly related to R&D tax credits.

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 2021 increased to $20.0 million, compared to $16.9 million for the third quarter of 2020, primarily due to higher net sales and gross profit.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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

Six Months Ended June 30,

Nine Months Ended September 30,

Enterprise Solutions

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Public Sector Solutions

Net sales increased for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, as explained below:

● Net sales of $572.5 million for the Enterprise Solutions segment reflect a decrease of $7.7 million, or 1.3%, year-over-year as a result of the supply chain constraints experienced 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.

Net sales of accessories, other hardware/services, net/com products, and software decreased year-over-year by $35.5 million, $7.5 million, $3.7 million, and $2.4 million, respectively.

These decreases were partially offset by increases in notebooks/mobility, displays and sound, desktops, and servers/storage of $17.6 million, $10.7 million, $8.0 million, and $5.0 million, respectively.

Net sales increased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, as explained below:

● Net sales of $882.2 million for the Enterprise Solutions segment reflect an increase of $42.3 million, or 5.0%, year-over-year as a result of the improvement in our ability to navigate the ongoing supply chain constrains on behalf of our customers.

Net sales of notebooks/mobility, displays and sound, and desktops increased year-over-year by $71.5 million, $27.6 million, and $9.1 million, respectively.

These increases were partially offset by decreases in accessories, other hardware/services, net/com products, servers/storage, and software of $32.8 million, $13.3 million, $7.8 million, $6.2 million, and $5.9 million, respectively.

● Net sales of $795.0 million for the Business Solutions segment reflect an increase of $94.1 million, or 13.4% year-over-year.

The increase in net sales was primarily driven by strong growth in cloud-based and security software net salses.

We experienced increases in notebooks/mobility, accessories, and other hardware/services of $37.6 million, $5.8 million, and $7.1 million, respectively.

Those increases were partially offset by the decrease of net sales of $7.8 million in servers/storage products.

The increase in net sales was primarily driven by strong growth in cloud-based and security software net sales.

We experienced increases in notebooks/mobility, other hardware/services, displays and sound, net/com products and accessories of $74.5 million, $8.8 million, $7.6 million, $6.9 million and $6.8 million, respectively.

Those increases were partially offset by the decrease of net sales of $3.8 million in desktops.

● Net sales of $415.2 million for the Public Sector Solutions segment increased by $41.4 million, or 11.1%, 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 state, local govement and educational institutions.

Net sales of notebooks/mobility products and displays and sound products increased by $40.2 million, and $5.6 million, respectively, compared with the prior year, which was partially offset by the decrease of net sales in desktop products of $3.2 million.

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

● Gross profit for the Enterprise Solutions segment increased year-over-year, primarily due to sales of higher margin products.

The increase in gross margin in the first half of 2021 of 40 basis points was primarily driven by fluctuations in customer and a change of product mix.

The increase was primarily driven by the timing of a large project rollout to the federal government and an increase of sales in state, local government and educational institutions.

Net sales of notebooks/mobility products and other hardware/services products increased by $50.6 million and $6.8 million, respectively, compared with the prior year, which was partially offset by the decrease of net sales in net/com products, software and servers/storage of $6.8 million, $4.6 million, and $4.4 million, respectively.

Gross profit for the nine months ended September 30, 2021 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained below:

● Gross profit for the Enterprise Solutions segment increased year-over-year, primarily as a result of the 5.0% increase in net sales year-over-year.

The increase in gross margin in for the nine months ended September 30, 2021 of 20 basis points, compared to the prior year period, was primarily driven by a change of product mix.

● Gross profit for the Business Solutions segment increased as a result of a 13.4% increase in net sales.

Gross margin increased year-over-year by 10 basis points, resulting from higher invoice selling margins and a greater percentage of our software sales in the current period.

● Gross profit for the Public Sector Solutions segment increased by $4.7 million year-over-year, primarily as a result of increased net sales in the first half of 2021.

Gross margin decreased by 40 basis points based on changes in customer mix, which included decreased sales of higher-margin products.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Gross margin decreased year-over-year by 10 basis points, resulting from a change of product mix.

● Gross profit for the Public Sector Solutions segment increased by $2.4 million year-over-year, primarily as a result of increased net sales.

Gross margin decreased by 80 basis points based on changes in product mix, which included decreased sales of higher-margin products.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Enterprise Solutions

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Headquarters/Other, unallocated

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

The year-over-year change in SG&A dollars was primarily attributable to a $1.5 million decrease in personnel costs due to the reduced headcount compared to the same period of last year.

The use of Headquarter services also increased by $1.6 million, primarily due to the higher variable compensation resulting from the higher gross profit of the first half of 2021.

These increases were partially offset by a decrease of $0.9 million in bad debt expense.

SG&A expenses as a percentage of net sales was 9.0% for the Enterprise Solutions segment in the first half of 2021, which reflects a decrease of 10 basis points.

This decrease year-over-year is primarily attributable to decreased spending compared with the same period a year ago .

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

The year-over-year change in SG&A dollars was primarily attributable to a $2.1 million increase in the use of Headquarter services, primarily due to the higher variable compensation resulting from the higher gross profit of the nine months ended September 30, 2021.

These increases were partially offset by a decrease of $0.3 million in bad debt expenses as well as a decrease of $0.2 million in depreciation and amortization expenses.

SG&A expenses as a percentage of net sales were 8.8% for the Enterprise Solutions segment for the nine months ended September 30, 2021, which reflects a decrease of 30 basis points.

This decrease year-over-year was due to the higher net sales for the nine months ended September 30, 2021.

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

The year-over-year increase in SG&A dollars was primarily driven by the increased Headquarter services of $5.1 million, including the higher variable compensation expenses resulting from the higher gross profit of

the current year.

The year-over-year increase in SG&A was also attributable to the increased personnel costs in the amount of $2.3 million which was offset by lower bad debt expense of $2.3 million.

The higher bad debt expense in the prior year was primarily due to the higher expected credit lossess from customers who had been significantly impacted by the COVID-19 pandemic.

SG&A expenses as a percentage of net sales was 15.9% for the Business Solutions segment in the first half of 2021 compared to 16.4% in the first half of 2020, which reflects an decrease of 50 basis points year-over-year, resulting from higher net sales compared with the same period a year ago.

The year-over-year increase in SG&A dollars was primarily driven by the increased Headquarter services of $6.3 million, including the higher variable compensation expenses resulting from the higher gross profit of for the nine months ended September 30, 2021.

The year-over-year increase in SG&A was also attributable to the increased personnel costs and advertising costs in the amount of $3.1 million and $1.3 million respectively.

Those increases were partially offset by lower bad debt expense of $2.0 million.

Higher bad debt expense in the prior year was primarily due to the higher expected credit losses from customers who had been significantly impacted by the COVID-19 pandemic.

SG&A expenses as a percentage of net sales were 15.6% for the Business Solutions segment for the nine months ended September 30, 2021 compared to 16.4% for the same period in 2020, which reflects a decrease of 80 basis points year-over-year, resulting from higher net sales 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 in SG&A dollars year-over-year is attributable to an increase in the usage of Headquarter services of $2.5 million, which included an increase in variable compensation expenses associated with the higher gross profit in the current year .

The increased personnel costs of $1.4 million as well as the increased bad debt expense of $0.5 million also contributed to the year-over-year SG&A increase.

SG&A expenses as a percentage of net sales was 15.1% for the Public Sector Solutions segment in the first half of 2021, which reflects a decrease of 90 basis points.

The increase in SG&A dollars year-over-year is attributable to an increase in the usage of Headquarter services of $3.1 million, which included an increase in variable compensation expenses associated with the higher gross profit for the nine months ended September 30, 2021 .

Increased personnel costs of $0.7 million as well as the increased bad debt expense of $0.2 million also contributed to the year-over-year SG&A increase.

SG&A expenses as a percentage of net sales were 14.0 % for the Public Sector Solutions segment for the nine months ended September 30, 2021, which reflects a decrease of 30 basis points.

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

● SG&A expenses for the Headquarters/Other group increased by $0.5 million primarily due to an increase in unallocated executive oversight costs year-over-year.

This increase was primarily driven by the increased variable compensation costs resulting from the higher gross profit.

Income from operations for the six months ended June 30, 2021 increased to $37.9 million, compared to $31.2 million for the six months ended June 30, 2020 primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales increased to 2.8% for the first half of 2021, compared to 2.5% of net sales for the prior year, primarily due to the increase in net sales and the decrease in SG&A expenses as a percentage of net sales year-over-year.

Our effective tax rate was 27.5% for the six months ended June 30, 2021, compared to 28.1% for the six months ended June 30, 2020.

We expect our corporate income tax rate for 2021 to range from 26% to 28%.

Net income for the six months ended June 30, 2021 increased to $27.5 million, compared to $22.5 million for the six months ended June 30, 2020, primarily due to higher net sales and gross profit, combined with a lower operating expenses as a percentage of net sales in the first half of 2021, as compared to the first half of 2020.

This increase was primarily driven by the increased variable compensation costs resulting from the higher gross profit during the current year.

Income from operations for the nine months ended September 30, 2021 increased to $65.2 million, compared to $52.3 million for the nine months ended September 30, 2020 primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales increased to 3.1% for the nine month ended September 30, 2021, compared to 2.7% of net sales for the prior year, primarily due to the increase in net sales and the decrease in SG&A expenses as a percentage of net sales year-over-year.

Our provision for income taxes in the nine months ended September 30, 2021 was $17.7 million, which included $0.3 million of discrete items mainly related to R&D tax credits recognized in the third quarter.

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 of 2020.

Net income for the nine months ended September 30, 2021 increased to $47.5 million, compared to $39.5 million for the nine months ended September 30, 2020, primarily due to higher net sales and gross profit, combined with a lower operating expenses as a percentage of net sales in 2021, as compared to the same period of 2020.

Liquidity and Capital Resources

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● Cash on Hand .

At June 30, 2021, we had $115.7 million in cash and cash equivalents.

At September 30, 2021, we had $89.7 million in cash and cash equivalents.

● Cash Generated from Operations .

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● Credit Facility.

As of June 30, 2021, we had no borrowings under our $50.0 million credit facility, which is available until February 10, 2022.

As of September 30, 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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

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 $31.8 million in the six months ended June 30, 2021.

Cash flow provided by operations in the six months ended June 30, 2021 resulted primarily from net income before depreciation and amortization and a decrease in accounts receivable, which decreased by $26.8 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 increases in inventory of $26.2 million in the current year, primarily driven by the increase of inventory purchases due to the anticipated shortage of certain products.

Accounts payable also decreased by $9.1 million from prior year end which led to offset the positive cash flow from operations.

Operating cash flow in the six months ended June 30, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, an increase in accounts payable, and partially offset by increases in inventory.

(Decrease) increase in cash and cash equivalents

Cash provided by operating activities was $8.8 million in the nine months ended September 30, 2021.

Cash flow provided by operations during the nine months ended September 30, 2021, resulted primarily from net income, other non-cash charges adding back and a decrease in accounts receivable, which decreased by $22.4 million for the nine months ended September 30, 2021, 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 increases in inventory of $34.5 million for the nine months ended September 30, 2021, primarily driven by the increase of inventory purchases for customer requested future rollouts.

Accounts payable also decreased by $50.0 million from prior year period which led to offset the positive cash flow from operations.

Operating cash flow in the nine months ended September 30, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, an increase in accounts payable, and partially offset by increases in inventory.

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:

September 30,

Days of sales outstanding (DSO) (1)

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(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 56 days at June 30, 2021, compared to 52 days at June 30, 2020.

The increase is primarily due to the 9 days decrease of DPO and the 2 days increase of DSO, and partially offset by the 7 day decrease of DIO.

The cash conversion cycle increased to 60 days at September 30, 2021, compared to 48 days at September 30, 2020.

The increase is primarily due to the 16-day decrease of DPO and the 3-day increase of DIO, and partially offset by the 7 day decrease of DSO.

The lower DPO was driven by mixing vendors with shorter payment terms in comparison to the prior year.

The decrease of DIO was due to the higher cost of sales, which led to a favorable impact on DIO.

Cash used in investing activities in the six months ended June 30, 2021 represented $4.6 million of purchases of property and equipment.

The decrease of DSO was primarily due to lower accounts receivable balance for the quarter ended September 30, 2021 compared to the same period of prior year.

Cash used in investing activities in the nine months ended September 30, 2021 represented $7.1 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 $8.2 million in purchases of property and equipment.

Cash used for capital expenditures for the six months ended June 30, 2021 was partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in financing activities in the six months ended June 30, 2021 consisted primarily of an $8.4 million payment of a special $0.32 per share dividend.

In the prior year, we made similar investments of $9.6 million in purchases of property and equipment.

Cash used for capital expenditures for the nine months ended September 30, 2021 was partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in financing activities in the nine months ended September 30, 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.

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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 .

For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q .

Credit facility .

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Our borrowing capacity is up to $50.0 million.

Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at June 30, 2021).

The one-month LIBOR rate at June 30, 2021 was 0.10%.

The one-month LIBOR rate at September 30, 2021 was 0.08%.

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

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At June 30, 2021, $50.0 million was available for borrowing under the facility.

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” At September 30, 2021, $50.0 million was available for borrowing under the facility.

Off-Balance Sheet Arrangements.

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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 three months ended June 30, 2021 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of June 30, 2021.

● Our funded debt ratio (defined as the average outstanding advances under the credit facility 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 three months ended September 30, 2021 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 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 $495.6 million at June 30 , 2021, whereas our consolidated stockholders’ equity at that date was $665.6 million.

Such amount was calculated as $505.6 million at September 30 , 2021, whereas our consolidated stockholders’ equity at that date was $686.2 million.

Capital Markets.

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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

PC CONNECTION, INC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis