What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 111 added, 169 removed, 156 unchanged (64% of the section changed)

12 unchanged sentences

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

● disruptions impacting the global supply chain, including those attributable to the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine;

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

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We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

We are a leading solutions 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, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers.

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

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

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 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 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.

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 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.

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.

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

We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users.

However, certain manufacturers have, on multiple occasions, attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role.

However, certain manufacturers have, on multiple occasions, sold or attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to and, in some cases, eliminate our role.

We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs.

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By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers.

Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects.

Through the formation of our TSG, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects.

Such service offerings carry higher margins than traditional product sales.

Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher

gross margins.

Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins.

We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

The primary challenges we continue to face in effectively managing our business are:

(1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.

To support future growth, we continue to expand our IT solutions business, which requires highly skilled service engineers.

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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 persist through the foreseeable future.

In response to the delays we are experiencing in acquiring products, we increased our inventory levels during the quarter ended March 31, 2022 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic.

We also experienced an increase in our backlog as global supply chain challenges delayed our ability to fill 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

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net sales (in millions)

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Income from operations

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.

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.

Net sales of $788.3 million for the first quarter of 2022 reflected an increase of $151.5 million compared to the first quarter of 2021, which was driven by higher net sales across all three of our business segments.

The increase in net sales was primarily driven by our ability to meet the continued demand from our customers.

In addition, we saw revenue growth across all our vertical markets.

Gross profit increased year-over-year by $27.8 million, primarily due to the changes in product mix and increases in total net sales.

SG&A expenses increased year-over-year by $11.8 million, driven primarily by increased personnel cost of $9.3 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.

The higher SG&A expenses were also attributable to an increase in marketing expenses of $1.2 million.

Operating income in the first quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $16.0 million and 160 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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Sales Segment

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

($ in millions)

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Depreciation and amortization

Credit card fees

Facilities operations

Credit card fees

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 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

Unless context otherwise requires, such references refer to changes between the three months ended March 31, 2022 and the three months ended March 31, 2021.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

Three Months Ended September 30,

Three Months Ended March 31,

Enterprise Solutions

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Public Sector Solutions

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

Net sales increased in the first quarter of 2022 compared to the first quarter of 2021, as explained below:

● Net sales of $335.4 million for the Enterprise Solutions segment reflect an increase of $70.1 million, or 26.4%, year-over-year.

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.

Our mobility and desktop products experienced increases in net sales of $39.1 million and $14.5 million, respectively, associated with our customers’ hybrid work initiatives.

We also saw increases in net sales of displays and sound and accessories of $13.7 million and $4.1 million, respectively.

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

● Net sales of $320.4 million for the Business Solutions segment reflect an increase of $74.1 million, or 30.1%, 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 $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:

The increase in net sales was primarily driven by strong demand for work-from-anywhere solutions.

We experienced increases in net sales of notebooks/mobility products of $36.0 million as a result of

the shift to the hybrid work environment.

The net sales of displays and sound products, software, and accessories also increased by $13.1 million, $7.7 million, and $6.4 million, respectively.

● Net sales of $132.5 million for the Public Sector Solutions segment reflect an increase of $7.2 million, or 5.8%, compared with the same period a year ago.

Sales to state and local government and educational institutions increased by 14.4%, compared to the prior year quarter, while sales to the federal government decreased by 15.4%.

Net sales of desktops products and servers/storage products increased by $10.1 million and $3.0 million, respectively, compared with the same quarter of the prior year.

Those increases were partially offset by the decreases in net sales of other hardware/services and net/com products of $3.0 million and $2.3 million, respectively.

Gross profit for the first quarter of 2022 increased year-over-year in dollars and also 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 26.4% increase in net sales year-over-year.

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

The gross margin increased by 44 basis points due to changes in product mix as compared to the prior year.

● Gross profit for the Business Solutions segment increased year-over-year primarily due to a 30.1% 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 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.

Gross margin percentage increased by 16 basis points, primarily due to changes in product mix as compared to the prior year.

● Gross profit for the Public Sector Solutions segment increased as a result of a 5.8% increase in net sales.

Gross margin percentage increased by 56 basis points year-over-year due to a shift in both customer and product mix as compared to the prior year.

Selling, general and administrative expenses in the first quarter of 2022 increased in dollars but decreased as a percentage of net sales compared to the first quarter of 2021.

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 September 30,

Three Months Ended March 31,

Enterprise Solutions

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Headquarters/Other, unallocated

● 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 $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 Enterprise Solutions segment increased in dollars as well as a percentage of net sales.

The year-over-year change in SG&A dollars was primarily attributable to the higher allocation use of Headquarter services.

SG&A expenses as a percentage of net sales were 10.3% for the Enterprise Solutions segment in the first quarter of 2022, which reflects an increase of 90 basis points.

● 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 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.

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.

The year-over-year change in SG&A dollars was driven primarily by a $2.1 million increase in personnel cost, primarily due to an increase in variable compensation expense associated with higher gross profit.

This year-over-year increase in SG&A expenses was also attributable to higher advertising costs of $1.2 million compared to the same period last year.

Those increases were partially offset by a $1.7 million decrease in the allocation use of Headquarter services.

SG&A expenses as a percentage of net sales were 13.0% for the Business Solutions segment in the first quarter of 2022, which reflects a decrease of 280 basis points and was primarily due to higher sales in the quarter compared with the same period a year ago .

● SG&A expenses for the Public Sector Solutions segment was the same amount in dollars but decreased as a percentage of net sales.

SG&A expenses as a percentage of net sales was 13.9% for the Public Sector Solutions

segment in the first quarter of 2022, which reflects a decrease of 80 basis points and was primarily due to higher sales in the quarter compared with the same period a year ago.

● SG&A expenses for the Headquarters/Other group decreased by $0.4 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.

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.

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

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

Income from operations for the third quarter of 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):

Nine Months Ended September 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

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 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 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 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):

Nine Months Ended September 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Headquarters/Other, unallocated

● 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 $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 $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 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.

Income from operations for the first quarter of 2022 increased to $30.1 million, compared to $14.1 million for the first quarter of 2021, primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales was 3.8% for the first quarter of 2022, compared to 2.2% for the prior year quarter, primarily driven by higher net sales as well as lower SG&A expenses as a percentage of net sales.

Income taxes.

Our provision for income taxes in the first quarter of 2022 was $8.3 million, compared to $3.9 million for the first quarter of 2021, primarily due to the increases of operating income.

Our effective tax rate was 27.7% for the quarter ended March 31, 2022, compared to 27.8% for the quarter ended March 31, 2021.

Net income for the first quarter of 2022 increased to $21.8 million, compared to $10.2 million for the first quarter of 2021, primarily due to higher net sales and gross profit.

Liquidity and Capital Resources

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

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

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

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

● Cash on Hand .

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

● Cash and Cash Equivalents .

At March 31, 2022, we had $67.4 million in cash and cash equivalents.

● Cash Generated from Operations .

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

● Credit Facility.

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

● Credit Facilities.

As of March 31, 2022, we had no borrowings were outstanding against our $50.0 million credit facility, which is available until March 31, 2025.

The credit facility can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the administrative agent.

Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

As of March 31, 2022, we were in compliance with all covenants under the credit facility.

Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required.

While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, or our customers continue to be materially adversely affected by the COVID-19 pandemic, our cash flows from operations may be substantially affected.

While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, or our customers are materially adversely impacted by the developing macroeconomic trends characterized by inflation and increased interest rates, our cash flows from operations may be substantially affected.

Summary of Sources and Uses of Cash

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

Nine Months Ended September 30,

Net cash provided by operating activities

Three Months Ended March 31,

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

(Decrease) increase in cash and cash equivalents

Cash provided by operating activities 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.

Decrease in cash and cash equivalents

Cash used in operating activities was $38.3 million in the three months ended March 31, 2022.

Cash used in operations during the three months ended March 31, 2022, resulted primarily from (i) a $28.0 million increase in inventory, primarily driven by an increase in advanced inventory purchases for anticipated future customer rollouts;

(ii) a $27.2 million increase in accounts receivable, primarily driven by higher levels of business activity in the quarter compared to the prior year;

and (iii) a $10.5 million decrease in accounts payable compared to the prior period.

Those cash outflow factors were partially offset by (i) net income $21.8 million;

(ii) other non-cash charges adding back in the amount of $5.0 million;

and (iii) an increase in accrued expenses and other liabilities of $5.3 million.

Cash provided by operating activities of $6.0 million for the three months ended March 31, 2021 was primarily due to net income before depreciation and amortization, a $54.9 million decrease in accounts receivable, and a $60.9 million decreases in accounts payable.

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 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 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.

The cash conversion cycle increased slightly to 64 days at March 31, 2022, compared to 63 days at March 31, 2021.

The increase is primarily due to the 8-day increase of DIO, and partially offset by the 5-day decrease of DSO.

The higher DIO was driven by the increased in advanced inventory purchases due to anticipated future customer rollouts.

The decrease of DSO was primarily due to the higher levels of business activity in the first quarter of 2022.

Cash used in investing activities for the three months ended March 31, 2022 represented $2.5 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 of $2.4 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.

Cash used in financing activities for the three months ended March 31, 2022 consisted of $0.2 million payment of payroll taxes on stock-based compensation through shares withheld.

In the prior year period, financing activities primarily represented an $8.4 million payment of a special $0.32 per share dividend.

Debt Instruments, Contractual Agreements, and Related Covenants

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Credit facility.

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

Our borrowing capacity is up to $50.0 million.

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

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 September 30, 2021, $50.0 million was available for borrowing under the facility.

Off-Balance Sheet Arrangements.

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

Our credit facility extends until March 31, 2025 and is collateralized by our accounts receivable.

As of March 31, 2022, our borrowing capacity under the credit facility was up to $50.0 million.

Amounts outstanding under the credit facility accrue interest at the greatest of (i) the prime rate (3.50% at March 31, 2022), (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.

We have the option to increase our borrowing capacity under the credit facility by an additional $30.0 million, provided we meet certain additional borrowing requirements and obtain the consent of the administrative agent.

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” We did not have any amounts outstanding under the credit facility at March 31, 2022.

Factors Affecting Sources of Liquidity

Internally Generated Funds.

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

Cash Generated from Operations.

The key factors affecting our cash generated from operations are our ability to minimize costs, fully achieve our operating efficiencies, timely collect our customer receivables, and manage of our inventory levels.

Credit Facility.

Our credit facility extends until March 31, 2025 and is collateralized by our accounts receivable.

As of March 31, 2022, we did not have any borrowings outstanding under the credit facility.

Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, and other distributions, investments, and liens) with which we and all of our subsidiaries must comply.

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

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

This credit facility contains two financial covenants:

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

This credit facility contains two financial tests:

● 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.

Our outstanding borrowings under the credit facility during the three months ended March 31, 2022 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2022.

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

Such amount was calculated as $527.7 million at March 31 , 2022, whereas our consolidated stockholders’ equity at that date was $705.5 million.

Capital Markets.

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

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

Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our critical accounting policies and estimates have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

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What changed 10-Q

Item 2. Management’s Discussion and Analysis