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Item 7. Management’s Discussion and Analysis

2022-03-14 compared with 2021-03-16 · 131 added, 177 removed, 230 unchanged (57% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated.

See “Item 1A.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote understanding of the results of operations and financial conditions.

MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

This section discusses the results of operations for the year ended December 31, 2021 and year-to-year comparison between the year ended December 31, 2021 and the year ended December 31, 2020.

Discussion of the year ended December 31, 2020 and the year-to-year comparison between the year ended December 31, 2020 and the year ended December 31, 2019 can be found in Part II, Item 7 “Management’s Discussions and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

Our MD&A also includes the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated.

See “Cautionary Note Concerning Forward-Looking Statements” and “Item 1A.

Risk Factors.”

We are a national provider of a wide range of information technology, or IT, solutions.

We help our customers design, enable, manage, and service their IT environments.

We provide IT products, including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers.

We also offer services involving design, configuration, and implementation of IT solutions.

We are a Fortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology.

Our dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services.

We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers.

Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center, or TIDC, with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions.

Our team also provides a comprehensive portfolio of managed services and professional services.

These services are performed by our personnel and by third-party providers.

We operate through three sales segments, which serve primarily:

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

We generate sales primarily through outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets, our websites, and direct responses from customers responding to our advertising media.

We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient.

Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of incountry suppliers in over 150 countries.

The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, or SMBs, enterprise, and public sector markets.

Financial results for each of our segments are included in the financial statements attached hereto.

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

We offer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, and VMware, and we partner with more than 2,500 suppliers.

We are able to leverage our state-of-the art logistic capabilities to rapidly ship product to customers, typically the same day the order is received.

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software.

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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.

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Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers.

If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.

If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.

Market conditions and technology advances significantly affect the demand for our products and services.

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EFFECTS OF COVID-19

In December 2019, a novel coronavirus disease was reported, and in January 2020, the World Health Organization, or 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 COVID-19 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 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.

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 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.

However, global supply chain disruptions have limited our ability to acquire products in a timely manner and we anticipate these global supply chain challenges will persistent through the first half of 2022.

In response to the delays we are experiencing in acquiring products, we increased our inventory levels during the year ended December 31, 2021 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic.

Relatedly, we also experienced an increase in our backlog as supply global supply chain challenges delayed our ability to fulfil customer orders.

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

RESULTS OF OPERATIONS

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Income from operations

Net sales of $2,590.3 million in 2020 reflected an decrease of $229.7 million compared to 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.

Gross profit dollars decreased year-over-year by $32.5 million, primarily due to the decreased net sales.

SG&A expenses increased by $7.1 million, primarily driven by the increased professional service fees of $8.8 million resulting from the implementation of our new ERP system.

These increases were partially offset by the lower personnel costs of $1.0 million associated with reduced headcount and lower variable compensation.

Operating income in 2020 decreased year-over-year both in dollars and as a percentage of net sales by $39.9 million and 120 basis points, respectively, primarily as a result of the decrease in net sales.

Net sales of $2,892.6 million in 2021 reflected an increase of $302.3 million compared to 2020, which was driven by higher net sales across all of our business segments.

The increase in net sales was primarily driven by the growing hybrid work trend resulting in higher demand for mobility products.

Additionally, we saw revenue growth in our manufacturing and healthcare vertical markets compared to 2020.

Gross profit increased year-over-year by $45.8 million, primarily due to the increase of net sales.

SG&A expenses increased year-over-year by $22.3 million, driven primarily by increased personnel cost of $21.2 million associated with the increased variable compensation due to the

higher levels of gross profit and increased employee benefit costs.

Operating income increased year-over-year both in dollars and as a percentage of net sales by $24.4 million and 50 basis points, respectively, primarily as a result of the increase in net sales.

Sales Distribution

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Years Ended December 31,

($ in millions)

Personnel costs

Facilities operations

Service contracts/subscriptions

Professional fees

Credit card fees

Depreciation and amortization

Facilities operations

Credit card fees

Total SG&A expense

As a percentage of net sales

Personnel costs decreased in 2020 compared to 2019 primarily due to decreased variable compensation associated with lower gross profit.

Depreciation and amortization increased in 2020 compared to 2019 primarily due to our new ERP system placed in service in 2020.

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

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

Restructuring and other charges

In each of the years ended December 31 2020, 2019, and 2018, we undertook a wide range of actions across the Company to lower our cost structure and align our business in an effort to improve our ability to execute our strategy.

In connection with these restructuring initiatives, we incurred restructuring and related costs of $1.0 million, $0.7 million, and $1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, we have no further restructuring plans.

There were no restructuring related costs incurred for the year ended December 31, 2021.

In the years ended December 31 2020 and 2019, we undertook actions across the 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 related costs of $1.0 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively.

YEAR-OVER-YEAR COMPARISONS

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net sales decreased by 8.1% to $2,590.3 million in 2020 from $2,820.0 million in 2019.

Net sales increased by 11.7% to $2,892.6 million in 2021 from $2,590.3 million in 2020.

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

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Public Sector Solutions

● Net sales of $1,115.6 million for the Enterprise Solutions segment reflect a decrease of $78.2 million, or 6.6% compared to the prior year, as customers and business partners faced the challenges of the decline in macroeconomic conditions resulting from the COVID-19 pandemic.

Net sales of displays and sound, notebook/mobility, desktop, software products and accessories decreased year-over-year by $26.9 million, $19.1 million, $25.6 million, $18 million and $10.2 million, respectively.

These decreases were partially offset by increases in net/com and server/storage products of $24.0 million and $3.7 million, respectively, primarily as a result of the timing of large project rollouts.

● Net sales of $966.0 million for the Business Solutions segment reflect a decrease of $94.0 million, or 8.9% 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 a majority of our product lines, including decreases in desktop, software, net/com, and other hardware/services of $37.5 million, $21.6 million, $19.2 million, and $17.0 million, respectively.

These decreases were partially offset by increases in notebook/mobility and accessories products of $1.8 million and $14.5 million, respectively, primarily as a result of entities shifting to work from home due to the COVID-19 pandemic.

● Net sales of $508.7 million for the Public Sector Solutions segment decreased by $57.5 million, or 10.2%, compared with the same period of prior year.

We experienced decreases year-over-year in other hardware and services of $28.8 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, server/storage, and software products also decreased by $27.2 million, $17.6 million, and $12.2 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 $37.0 million, primarily driven by orders from educational institutions preparing for and implementing remote learning capabilities.

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

● Gross profit for the Enterprise Solutions segment decreased primarily due to the 6.6% decrease in net sales.

The decrease in gross margin of 10 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 8.9% decrease in net sales.

However, gross margin increased year-over-year by 30 basis point, 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 $6.8 million year-over-year, primarily as a result of lower net sales in the current period.

Gross margin improved by 20 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 (“SG&A”) in 2020 increased in dollars, and slightly increased as a percentage of net sales compared to the prior year.

● Net sales of $1,249.5 million for the Enterprise Solutions segment reflect an increase of $133.9 million, or 12.0%, year-over-year as a result of our customers’ needs for mobility products to support their work-from-anywhere initiatives.

Net sales of notebooks/mobility, displays and sound, and desktops increased year-over-year by $125.4 million, $47.3 million, and $11.5 million, respectively.

These increases were partially offset by decreases in accessories, other hardware/services, net/com products, and servers/storage of $22.3 million, $11.9 million, $9.8 million, and $10.1 million, respectively.

● Net sales of $1,098.5 million for the Business Solutions segment reflect an increase of $132.5 million, or 13.7% year-over-year.

The increase in net sales was primarily driven by strong growth in our customers’ needs for mobility products to support their work-from-anywhere initiatives.

We experienced increases in notebooks/mobility, other hardware/services, displays and sound, net/com products and accessories of $107.0 million, $10.8 million, $13.7 million, $6.5 million and $1.6 million, respectively.

Those increases were partially offset by the decrease of net sales of $4.6 million and $2.0 million in software and desktops sales, respectively.

● Net sales of $544.6 million for the Public Sector Solutions segment increased by $35.9 million, or 7.1%, compared with the same period a year ago.

The increase was primarily driven by an increase of sales in state, local government and educational institutions, partially offset by the decrease of sales to Federal Governments.

Net sales of notebooks/mobility products, desktops, and displays and sounds products increased by $38.1 million, $9.2 million and $7.7 million, respectively, compared with the prior year, which was partially offset by the decrease of net sales in net/com products and servers/storage of $13.6 million, and $5.6 million, respectively.

Gross profit for 2021 increased year-over-year in dollars but gross margin slightly decreased, as explained below:

● Gross profit for the Enterprise Solutions segment increased $18.9 million, or 11.7% year-over-year.

This increase is primarily due to the 12.0% increase in net sales.

The gross margin was flat compared with the prior year.

● Gross profit for the Business Solutions segment increased $24.4 million, or 13.0% year-over-year.

This increase is as a result of a 13.7% increase in net sales.

However, gross margin decreased year-over-year by 20 basis points, primarily due to a change of product mix.

● Gross profit for the Public Sector Solutions segment increased by $2.5 million, or 3.5% year-over-year, primarily as a result of higher net sales in the current period.

Gross margin decreased by 50 basis points based on changes in product mix.

SG&A in 2021 increased in dollars but decreased as a percentage of net sales compared to the prior year.

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

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Headquarters/Other, unallocated

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

The year-over-year change in SG&A dollars was primarily attributable to a $3.2 million decrease in personnel costs, driven mostly by lower variable compensation expense associated with lower gross profit, along with a $1.5 million decrease in product marketing and advertising expense.

These changes were partially offset by an increase in the use of Headquarter services of $2.1 million, which included increased contractor and consulting fees associated with the deployment of our new ERP system.

SG&A expenses as a percentage of net sales was 9.2% for the Enterprise Solutions segment for the year ended December 31, 2020, which reflects an increase of 50 basis points.

This is primarily attributable to lower net sales compared with the same period a year ago, rather than any individually significant drivers of this change .

● 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 $6.5 million increase in the use of Headquarter services, driven, in part, by an increase in contractor and consulting fees associated with the deployment of our new ERP system.

Bad debt expense also increased by $2.3 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 $3.3 million, $0.3 million, and $0.1 million, respectively.

SG&A expenses as a percentage of net sales was 16.0% for the Business Solutions segment for the year ended December 31, 2020 compared to 12.3% in the prior year, which reflects an increase of 200 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 primarily driven by an increase in the usage of Headquarter services of $3.2 million, which included an increase in contractor and consulting fees associated with the deployment of our new ERP system.

SG&A expenses as a percentage of net sales was 14.3% for the Public Sector Solutions segment for the year ended December 31, 2020, which reflects an increase of 200 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 $8.9 million increase in contractor and consulting fees associated with the deployment of our new ERP system and an increase of $2.1 million in service contracts.

Personnel costs also increased by $2.4 million year-over-year.

These increases were partially offset by a reduction in the allocation of Headquarter services of $11.8 million in the current period.

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

Most of the operating costs associated with such corporate Headquarters services are charged to the segments based on their estimated usage of the underlying services.

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

Restructuring and other charges incurred in 2020, 2019, and 2018 were as follows:

Years Ended December 31,

Employee separations

Lease termination costs

Total restructuring and other charges

The restructuring and other charges recorded in 2020 were related to a reduction in workforce across our business segments, and included cash severance payments and other related termination benefits.

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

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

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

Income from operations for the year ended December 31, 2020 decreased to $72.1 million, compared to $112.0 million for the same period in the prior year, 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 2.8% for the year ended December 31, 2020, compared to 4.0% 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.

● 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 $2.3 million increase in the use of Headquarter services, primarily due to the higher personnel costs associated with the higher levels of gross profit and the increased employee benefit costs.

This year-over-year increase is also driven by a $1.9 million increase in personnel cost.

SG&A expenses as a percentage of net sales were 8.5% for the Enterprise Solutions segment for the year ended December 31, 2021, which reflects a decrease of 70 basis points.

This decrease year-over-year was largely due to the higher net sales in 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 $7.1

million, including the higher variable compensation expenses resulting from the higher gross profit for the year ended December 31, 2021.

The year-over-year increase in SG&A was also attributable to increased personnel costs and advertising costs in the amount of $4.1 million and $1.7 million respectively.

SG&A expenses as a percentage of net sales were 15.3% for the Business Solutions segment for the year ended December 31, 2021 compared to 16.0% for 2020, which reflects a decrease of 70 basis points year-over-year, largely resulting from higher net sales compared with the prior year.

● 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 primarily attributable to an increase in the usage of Headquarter services of $3.5 million, which included an increase in variable compensation expenses associated with the higher gross profit for the year ended December 31, 2021.

Increased personnel costs of $0.2 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 were 14.2 % for the Public Sector Solutions segment for the year ended December 31, 2021, which reflects a decrease of 10 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 $0.8 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 during the current year.

Income from operations for the year ended December 31, 2021 increased to $96.5 million, compared to $72.1 million for the same period in the prior year, primarily due to the increases 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 increased to 3.3% for the year ended December 31, 2021, compared to 2.8% of net sales for the same period in the prior year, primarily due to the increase in net sales and lower SG&A expenses as a percentage of net sales year-over-year.

Income taxes.

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Our provision for income taxes for the year ended December 31, 2021 was $26.6 million, which included $0.3 million of discrete items mainly related to research and development tax credits recognized in the year ended December 31, 2021.

Our provision for income taxes for the year ended December 31, 2020 was $17.4 million, which included $2.9 million of discrete items mainly related to research and development tax credits recognized in the year ended December 31, 2020.

The non-taxable life insurance gain reduced our effective tax rate by 0.3% for the year ended December 31, 2020.

Net income decreased by $26.3 million to $55.8 million in 2020, from $82.1 million in 2019, which resulted from the decrease in operating income in the current year.

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

Discusion of the the year ended December 31, 2019 and the year-to-year comparison between the year ended December 31, 2019 and the year ended December 31, 2018 can be found in Part II, Item 7 “Management’s Discussions and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.

Net income increased by $14.1 million to $69.9 million for the year ended December 31, 2021, from $55.8 million in the prior year, which resulted from the increase in operating income in the current year.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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 2021 through a combination of cash on hand, cash generated from operations, and borrowings on our bank line of credit, as follows:

We expect to meet our cash requirements for 2022 and beyond through a combination of cash on hand, cash generated from operations, and borrowings on our bank line of credit, as follows:

● Cash on Hand .

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● Credit Facilities .

As of December 31, 2020, no borrowings were outstanding against our $50.0 million bank line of credit, which is available until February 10, 2022.

As of December 31, 2021, no borrowings were outstanding against our $50.0 million bank line of credit, which is available until March 31, 2025.

Accordingly, our entire line of credit was available for borrowing at December 31, 2021.

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Increase (decrease) in cash and cash equivalents

Cash provided by operating activities decreased $0.5 million in 2020.

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

Accounts payable increased by $32.5 million year-over-year.

Accounts receivable increased by $63.7 million year-over-year, primarily as a result of the timing of payments and product shipments.

Days sales outstanding increased to 75 days at December 31, 2020, compared to 63 days at December 31, 2019.

Inventory increased from the prior year by $16.2 million, which was the result of higher levels of inventory on-hand related to future backlog and an increase in shipments in transit but not received by our customers as of December 31, 2020 compared to December 31, 2019.

Inventory days, which measures the number days it takes for inventory to turn into sales, increased to 23 in 2020 compared to 19 in 2019.

Operating cash flow in 2019 resulted primarily from net income before depreciation and amortization and an increase in accounts payable, partially offset by increases in accounts receivable and inventory.

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

At December 31, 2020, we had $266.8 million in accounts payable.

Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered.

This balance will be financed by cash flows from operations or short-term borrowings under the line of credit.

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

As a result of these delays and other considerations, we recorded bad debt expenses for credit losses for $3.3 million for the year ended December 31, 2020.

Cash provided by operating activities was $57.8 million for the year ended December 31, 2021.

Cash flow provided by operations during the year ended December 31, 2021, resulted primarily from net income, adding back other non-cash charges and increases in accounts payable and accrued expenses, which increased by $32.5 million for the year ended December 31, 2021, and was driven primarily by the timing of payments.

These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in inventory of $65.7 million for the year ended December 31, 2021, primarily driven by the increase of inventory purchases for customer requested future rollouts and concerns associated with the global supply chain challenges caused by the COVID-19 pandemic.

Operating cash flow for the year ended December 31, 2020 resulted primarily from cash provided by net income prior to non-cash charges of $55.8 million and increases in account payables and accrued expenses of $43.1 million primarily due to the timing of payments.

Those inflow of cash from operating activities were partially offset by increases in account receivable of $63.6 million for the year ended December 31, 2020.

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.

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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 54 days at December 31, 2020, compared to 46 days at December 31, 2019.

The increase is primarily due to 12 days increase DSO and 4 days increase DIO, and partially offset by the 8 days increase of DPO.

Cash used in investing activities decreased $14.7 million in 2020 compared to 2019.

Cash used in investing activities represented $11.0 million in 2020, primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure.

Cash used to purchase property and equipment, less proceeds from the sale of equipment, amounted to $25.7 million in 2019, compared to $21.2 million in 2018.

Cash used in financing activities increased $7.0 million in 2020 compared to 2019.

Financing uses of cash in 2020 included a $8.4 million payment of a special $0.32 per share dividend declared in December 2019 and paid in January 2020, $1.4 million tax payments related to net shares settlement of equity awards and $10.2 million for the purchase of treasury shares.

These outflows were partially offset by $0.5 million for the issuance of stock under the employee stock purchase plan.

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

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

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

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

The cash conversion cycle was 55 days at December 31, 2021, which is increased in comparison to the cash conversion cycle 54 days at December 31, 2020.

Cash used in investing activities for the year ended December 31, 2021 consisted of $10.3 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.

Cash used for capital expenditures for the year ended December 31, 2021 was partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in investing activities for the prior year consisted of $11.0 million purchases of property and equipment.

Cash used in financing activities increased for the year ended December 31, 2021 compared to the prior year and consisted primarily of $34.6 million in special dividend payments.

In the prior year period, financing activities consisted primarily of a $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

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Bank Line of Credit.

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

Our borrowing capacity is up to $50.0 million at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% at December 31, 2020).

The one-month LIBOR rate at December 31, 2020 was 0.14%.

Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable.

Our borrowing capacity is up to $50.0 million at the greatest of (i) the prime rate (3.25% at December 31, 2021), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, or LIBOR, plus 1.00% per annum, provided that the rate shall at no time be less than 0% per annum.

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

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” We did not have any borrowings under the credit facility at December 31, 2021.

In December of 2021, we entered into an amendment to our credit facility to, among other things, extend the maturity date to March 31, 2025, at which time any amounts outstanding become due.

See “Part II – Item 9b.

Other Information – Third Amendment to Third Amended and Restated Credit and Security Agreement” for additional information.

Cash receipts are automatically applied against any outstanding borrowings.

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At December 31, 2021, the entire $50.0 million facility was available for borrowing.

Contractual Obligations.

The following table sets forth information with respect to our long-term obligations payable in cash as of December 31, 2020 (in thousands):

Payments Due By Period

Contractual Obligations:

Operating lease obligations (1)

(1) Excluding taxes, insurance, and common area maintenance charges.

Operating Leases.

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Certain leases require us to pay real estate taxes, insurance, and common area maintenance charges.

Off-Balance Sheet Arrangements.

We do not have any other off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Factors Affecting Sources of Liquidity

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Bank Line of Credit.

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

Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable.

As of December 31, 2021, the entire $50.0 million facility was available for borrowing.

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Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.

In addition, market volatility, inflation and interest rate fluctuations may increase our cost of financing or restrict our access to potential sources of future liquidity.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Further, “critical accounting policies” are those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.

We believe that our accounting policies described below meet the definition of critical accounting policies.

We believe that our accounting policies described below meet the definition of critical accounting policies and estimates.

Revenue Recognition

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

We generally obtain oral or written purchase authorizations from our

customers for a specified amount of product at a specified price, which constitutes an arrangement.

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

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

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

remitted to governmental authorities.

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

Nature of Products and Services

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

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

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

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

Amounts recognized on a net basis included in net sales for such software sales transactions were $565.7 million and $521.7 million for the years ended December 31, 2020 and 2019, respectively.

Prior to the adoption of Accounting Standards Codifications (ASC) 606 – Revenue from Contracts with Customers (“ASC 606”), a substantial portion of our software sales were recognized on a gross basis.

We use our own engineering personnel to assist in projects involving the design and installation of systems and networks, and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services.

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

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

underlying contract period.

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

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

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Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities.

Significant Judgments

Critical Accounting Estimates

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

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At December 31, 2020, we recorded sales reserves of $4.0 million and $0.3 million as components of accounts receivable and accrued expenses, respectively.

We regularly evaluate the adequacy of our estimates for product returns.

Future market conditions and product transitions may require us to take action to change such programs and related estimates.

When the variables used to estimate these reserves change, or if actual results differ significantly from the estimates, we would be required to increase or reduce revenue to reflect the impact.

Accounts Receivable

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

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

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

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

Therefore, if the financial condition of certain of our customers were to deteriorate, or if we noted there was a

lengthening of the timing of the settlement of receivables that was symptomatic of a general deterioration in the ability of our customers to pay, we would have to increase our allowance for credit losses.

This would negatively impact our earnings.

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For example, during the year ended December 31, 2021, we experienced delays in collecting amounts owed to us, and in some cases, we may be unable to collect amounts owed to us altogether.

As a result of these delays and other considerations, we recorded bad debt expenses for credit losses for $3.3 million for the year ended December 31, 2020.

As a result of these delays and other considerations, we recorded bad debt expenses for reserve for credit losses for $3.3 million for the year ended December 31, 2021.

During the year ended December 31, 2020, we recorded $3.3 million bad debt expenses for reserve for credit losses.

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

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This could negatively impact our earnings and our cash flows.

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

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

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

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Write offs of customer and vendor receivables totaled $3.9 million in 2021 and $0.1 million in 2020.

Vendor Consideration

We receive allowances from merchandise vendors for price protections, discounts, product rebates, and other programs.

These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales.

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

Vendors have the ability to place advertisements in the catalogs or fund other advertising activities for which we receive advertising allowances.

These vendor allowances, to the extent that they represent specific reimbursements of incremental and identifiable costs, are offset against SG&A expense on the consolidated statements of income.

Vendor consideration that cannot be associated with a specific program funded by an individual vendor or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales.

Our vendor partners generally consolidate their funding of advertising and other marketing programs, and as a result, we classify substantially all vendor allowances as a reduction of cost of inventory purchases rather than a reduction of advertising expense.

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

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

Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or net realizable value, whichever is lower.

Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete, slow moving, and non-saleable inventory, based primarily on management’s forecast of customer demand for those products in inventory.

Estimate is used to determine the quarterly inventory allowance provision.

Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.

The IT industry is characterized by rapid technological change and new product development that could result in increased obsolescence of inventory on hand.

Increased obsolescence or decreased customer demand beyond management’s expectations could require additional provisions, which could negatively impact our earnings.

We recorded obsolescence charges of $1.7 million, $3.4 million, and $3.6 million for the year ended 2020, 2019 and 2018, respectively.

We recorded obsolescence charges of $2.7 million, $1.7 million, and $3.4 million for the years ended 2021, 2020 and 2019, respectively.

Historically, there have been no unusual charges precipitated by specific technological or forecast issues.

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and (2) on an event-driven basis for all long-lived assets when facts and circumstances suggest that cash flows from such assets may be diminished.

We have historically reviewed the

carrying value of all these assets based partly on our projections of anticipated cash flows.

These projections are, in part, dependent upon anticipated market conditions, operational performance, and legal status.

We have historically reviewed the carrying value of all these assets based partly on our projections of cash flows.

Any impairment charge that is recorded negatively impacts our earnings.

Cash flows are generally not impacted by an impairment charge.

In 2020, the Company assessed the goodwill impairment both qualitatively and quantitatively.

The qualitative assessment includes considerations of macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flow, changes in the Company’s stock price and market capitalization, and other relevant entity-specific events.

The Company used a discounted cash flow methodology to determine the fair value of each reporting unit.

Internal forecasts were used to estimate the future year cash flow and long-term growth rates was estimated based on the most recent views of each reporting unit.

Discount rate used in the model reflects the risk and uncertainty associated with the respective businesses.

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

We test goodwill for impairment each year and more frequently if potential impairment indicators arise.

Although the fair value of our Business Solutions and Enterprise Solutions reporting units substantially exceeded their carrying value at our annual impairment test, should the financial performance of a reporting unit not meet expectations due to the economy or otherwise, we would likely adjust downward expected future operating results and cash flows.

In 2021 and 2020, we performed a “step 0” qualitative analysis.

ASC 350—Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit

is less than its carrying amount, including goodwill.

This analysis allows the Company to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a more detailed quantitative analysis would be necessary.

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

Based on the qualitative analysis, the Company determined goodwill was not impaired for the years ended December 31, 2021 and 2020.

While we believe that our conclusions are reasonable, different assumptions could materially affect our valuations and result in impairment charges against the carrying values of those remaining assets in our Enterprise Solutions and Business Solutions segments.

However, at December 31, 2021, a 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment.

Please see Note 3, “Goodwill and Other Intangible Assets” to the Consolidated Financial Statements included in Item 8 of Part II of this report for a discussion of the significant assumptions used in our annual impairment test analysis.

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Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

We have historically offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate.

We do not expect inflation to have a significant impact on our business in the foreseeable future.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis