Item 2. Management’s Discussion and Analysis
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSI S OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
● we have experienced variability in sales and may not be able to maintain profitable operations;
● substantial competition could reduce our market share and may negatively affect our business;
● we face and will continue to face significant price competition, which could result in a reduction of our profit margins;
● the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;
● instability in economic conditions and government spending may adversely affect our business and reduce our operating results;
● 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;
● virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;
● the methods of distributing IT products are changing, and such changes may negatively impact us and our business;
● we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;
● we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;
● we may experience a reduction in the incentive programs offered to us by our vendors;
● should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;
● we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;
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● we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;
● we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;
● cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.
● we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.
● the failure to comply with our public sector contracts could result in, among other things, fines or liabilities; and
● we are controlled by one principal stockholder
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. 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.
OVERVIEW
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 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.
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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, 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. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our 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. 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.
To support future growth, we continue to expand our IT solutions business, which requires highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.
Market and economic conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.
Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality.
EFFECTS OF COVID-19
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, 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 March 31,
2022
2021
Net sales (in millions)
$
788.3
$
636.9
Gross margin
16.3
%
15.8
%
Selling, general and administrative expenses
12.5
%
13.6
%
Income from operations
3.8
%
2.2
%
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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 $1.2 million. Operating income in the first quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $16.0 million and 160 basis points, respectively, primarily as a result of the increase in net sales.
Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Three Months Ended March 31,
2022
2021
Sales Segment
Enterprise Solutions
42
%
41
%
Business Solutions
41
39
Public Sector Solutions
17
20
Total
100
%
100
%
Product Mix
Notebooks/Mobility
39
%
37
%
Desktops
11
9
Software
8
9
Servers/Storage
6
7
Net/Com Product
7
8
Displays and sound
11
9
Accessories
12
13
Other Hardware/Services
6
8
Total
100
%
100
%
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
Three Months Ended March 31,
2022
2021
Sales Segment
Enterprise Solutions
14.6
%
14.1
%
Business Solutions
19.4
19.2
Public Sector Solutions
13.1
12.5
Total Company
16.3
%
15.8
%
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Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
Three Months Ended March 31,
($ in millions)
2022
2021
Personnel costs
$
74.1
$
64.8
Advertising
4.6
3.4
Service contracts/subscriptions
4.9
4.6
Professional fees
3.9
4.7
Depreciation and amortization
3.0
3.2
Facilities operations
2.1
2.2
Credit card fees
1.7
1.4
Other
3.9
2.1
Total SG&A expense
$
98.2
$
86.4
As a percentage of net sales
12.5
%
13.6
%
Year-Over-Year Comparisons
In this section and elsewhere in this Quarterly Report on Form 10-Q we refer to changes in year-over-year results. Unless context otherwise requires, such references refer to changes between the three months ended March 31, 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 March 31,
2022
2021
% of
% of
%
Amount
Net Sales
Amount
Net Sales
Change
Net Sales:
Enterprise Solutions
$
335.4
42.5
%
$
265.3
41.4
%
26.4
%
Business Solutions
320.4
40.6
246.3
38.8
30.1
Public Sector Solutions
132.5
16.9
125.3
19.8
5.8
Total
$
788.3
100.0
%
$
636.9
100.0
%
23.8
%
Gross Profit:
Enterprise Solutions
$
48.9
14.6
%
$
37.5
14.1
%
30.3
%
Business Solutions
62.1
19.4
47.4
19.2
31.2
Public Sector Solutions
17.3
13.1
15.6
12.5
10.5
Total
$
128.3
16.3
%
$
100.5
15.8
%
27.6
%
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. 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 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
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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 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 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 March 31,
2022
2021
% of
% of
Segment Net
Segment Net
%
Amount
Sales
Amount
Sales
Change
Enterprise Solutions
$
34.6
10.3
%
$
25.0
9.4
%
38.5
%
Business Solutions
41.5
13.0
38.9
15.8
6.4
Public Sector Solutions
18.4
13.9
18.4
14.7
0.1
Headquarters/Other, unallocated
3.7
4.1
(8.9)
Total
$
98.2
12.5
%
$
86.4
13.6
%
13.6
%
● 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 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
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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. 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 allocation usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs.
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
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our credit facility. We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of businesses. Market conditions impact and help determine our strategic use of funds.
We believe that funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures, and other requirements for the next twelve calendar months and beyond. 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 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 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 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.
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Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods indicated:
Three Months Ended March 31,
2022
2021
Net cash (used in) provided by operating activities
$
(38.3)
$
6.0
Net cash used in investing activities
(2.5)
(0.9)
Net cash used in financing activities
(0.2)
(8.5)
Decrease in cash and cash equivalents
$
(41.0)
$
(3.4)
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:
March 31,
(in days)
2022
2021
Days of sales outstanding (DSO) (1)
69
74
Days of supply in inventory (DIO) (2)
32
24
Days of purchases outstanding (DPO) (3)
(37)
(35)
Cash conversion cycle
64
63
(1) Represents the rolling three-month average of the balance of accounts receivable, net at the end of the period, divided by average daily net sales for the same three-month period. Also incorporates components of other miscellaneous receivables.
(2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period.
(3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period.
The cash conversion cycle increased 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 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.
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Debt Instruments, Contractual Agreements, and Related Covenants
Below is a summary of certain provisions of our credit facility and other contractual obligations. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors Affecting Sources of Liquidity” below. For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q .
Credit facility. 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
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. 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 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 $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 and estimates have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.