What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-04 · 151 added, 138 removed, 196 unchanged (60% of the section changed)

Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSI S OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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

● our results of operations depend in part on worldwide economic and geopolitical conditions, which are currently characterized by, among other things, persistent inflation and rising interest rates;

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

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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.

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

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

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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.

Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of in-country 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.

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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.

Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customers’ individual 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.

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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.

During the quarter, we saw pockets of improvement in the supply chain which resulted in a slight decrease in our backlog sequentially although still higher than a year ago.

The overall supply chain remains challenged, and we expect this to continue through at least the balance of the year.

In response to the delays in acquiring products, we increased our inventory levels during the six months ended June 30, 2022 to alleviate some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic.

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.

COVID-19 Update / Recent Developments

The effects of the COVID-19 and its variants as well as the current economic and geopolitical conditions, such as persistent inflation and rising interest rates 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.

As expected, cost inflation has been more significant in 2022 than in 2021, however, the impact of cost inflation has been effectively managed by pricing actions in the current year.

As we were able to successfully manage our inflation, on a consolidated basis our gross profit increased by $64.3 million, or 19.0% for the nine months ended September 30, 2022 compared to the same period a year ago.

However, there is no certainty that we will be able to do so in future periods.

During the quarter, we saw improvement in the supply chain which resulted in a decrease in our backlog compared to the second quarter of 2022, although our backlog remains elevated compared to 2021.

We continue to expect some supply chain challenges, will persist through at least the balance of the year into the first quarter of 2023.

We continue to monitor the effects these issues are having 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 June 30,

Six Months Ended June 30,

Net sales (in millions)

Three Months Ended September 30,

Nine Months Ended September 30,

Net sales (dollars in millions)

Selling, general and administrative expenses

Income from operations

Net sales of $828.5 million for the second quarter of 2022 reflected an increase of $124.3 million, or 17.7% compared to the second quarter of 2021, which was driven by higher net sales across all three of our business segments.

The increase in net sales was primarily due to continued strong demand for workplace solutions driven by a hybrid return to office.

This trend is also driving growth in datacenter and cloud transformation.

Gross profit increased year-over-year by $20.6 million, or 17.7%, to $136.9 million, primarily due to the changes in product mix and increases in total net sales.

Net sales of $775.7 million for the third quarter of 2022 reflected an increase of $24.3 million, or 3.2% compared to the third quarter of 2021, which was primarily driven by a $24.9 million increase in software sales, recognized on a net basis.

As shown in the table in Note 2, the $27.5 million decrease in notebooks/mobility products were offset by general increases in all other product categories excluding software when compared to the same quarter in 2021 resulting in the net increases in software as the primary driver for the increase in net sales.

Gross profit increased year-over-year by $15.9 million, or 13.2%, to $136.6 million as illustrated in the table and discussion on page 17 in this Form 10-Q.

Gross margin increased to 17.6% from 16.1%.

This increase in gross margin is primarily driven by increased net sales of higher margin software and services which are recognized as revenue on a net basis.

In addition, increased net sales in servers/storage and net/com products also contributed to the increase in gross margin.

Selling, general and administrative expenses (“SG&A expenses”) increased year-over-year by $11.5 million, or 12.3%, to $104.9 million.

The increase in SG&A was primarily due to an increase in personnel cost of $6.5 million associated with an investment in incremental headcount focused on building stronger marketing and technical organizations and an increase in variable compensation due to higher levels of gross profit.

The higher SG&A expenses were also attributable to an increase in marketing expenses of $2.4 million.

Operating income in the second quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $11.0 million and 80 basis points, respectively, primarily as a result of the increase in net sales.

The increase in SG&A was primarily driven by $9.8 million increase in personnel cost.

The increased personnel cost was due to an increase in variable compensation as a result of higher levels of gross profit and an investment in incremental headcount focused on building our technical and sales organizations.

SG&A as a percentage of net sales increased to 13.5% compared to 12.4% a year ago.

The increase in SG&A as a percentage of net sales is primarily due to the shift in product mix toward software and services recognized on a net basis.

Operating income in the third quarter of 2022 increased year-over-year both in dollars and as a percentage of net sales by $4.4 million and 50 basis points, respectively, primarily as a result of the increase in gross profit.

Net Sales Distribution

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

($ in millions)

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

Unless context otherwise requires, such references refer to changes between the three months ended June 30, 2022 and the three months ended June 30, 2021;

and changes between the six months ended June 30, 2022 and the six months ended June 30, 2021.

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Unless context otherwise requires, such references refer to changes between the three months ended September 30, 2022

and the three months ended September 30, 2021;

and changes between the nine months ended September 30, 2022 and the nine months ended September 30, 2021.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

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

Three Months Ended June 30,

Three Months Ended September 30,

Enterprise Solutions

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Public Sector Solutions

Net sales increased in the second quarter of 2022 compared to the second quarter of 2021, as explained by the year-over-year changes discussed below:

● Net sales of $348.9 million for the Enterprise Solutions segment reflect an increase of $41.7 million, or 13.6%.

Our mobility and desktop products experienced increases in net sales of $22.9 million and $13.7 million, respectively, associated with our customers’ hybrid work initiatives.

We also saw increases in net sales of accessories and displays and sound of $13.4 million and $8.4 million, respectively.

Those increases were offset by the decreases in net sales of servers/storage of $15.2 million.

Net sales increased in the third quarter of 2022 compared to the third quarter of 2021, as explained by the year-over-year changes discussed below:

● Net sales of $305.5 million for the Enterprise Solutions segment reflect a decrease of $4.2 million, or 1.4%.

The decrease in net sales is primarily due to the shift in product mix to software and services as recognized as revenue on a net basis.

The decrease of net sales is also attributable to a decrease of net sales in notebooks/mobility products of $22.0 million partially offset by increases in net sales of software, servers/storage and other hardware/services products of $14.2 million $3.3 million and $2.6 million, respectively.

● Net sales of $315.8 million for the Business Solutions segment reflect an increase of $34.4 million, or 12.2%.

The increase in net sales was primarily driven by strong demand for work-from-anywhere solutions of notebooks/mobility and desktop products resulting in increased net sales of $28.1 million as a result of the shift

to the hybrid work environment.

The net sales of servers/storage, accessories, software, and displays and sound products also increased by $8.6 million, $8.2 million, $6.5 million, and $5.1 million, respectively.

● Net sales of $151.2 million for the Public Sector Solutions segment reflect an increase of $21.5 million, or 16.5%.

The increase in net sales was primarily driven by strong demand in the K-12 vertical market due to the ECF (Emergency Connectivity Fund).

The increase in net sales is also attributable to the infrastructure stimulus bill allocating funds for technology purchases.

Sales to state and local government and educational institutions increased by 24.8%, compared to the prior year quarter, while sales to the federal government decreased by 18.6%.

Net sales of accessories, displays and sound, desktops products and notebooks/mobility products increased by $6.6 million, $6.5 million, $4.7 million, and $4.7 million, respectively.

Gross profit for the second quarter of 2022 increased year-over-year in dollars while remaining flat as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:

● Gross profit for the Enterprise Solutions segment increased primarily as a result of the 13.6% increase in net sales.

Gross margin decreased by 80 basis points primarily due to changes in product mix as compared to the prior year.

● Gross profit for the Business Solutions segment increased primarily due to a 22.9% increase in net sales.

Gross margin percentage increased by 75 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 16.5% increase in net sales.

Gross margin percentage decreased by 12 basis points primarily due to a shift in both customer and product mix as compared to the prior year.

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

This increase is primarily driven by the increased demand in advanced technologies including software, net/com products and other hardware/services.

Additionally, we also saw strong demand in notebooks/mobility products.

Net sales of notebooks/mobility, software, net/com, and other hardware/services products increased by $10.8 million, $8.2 million, $6.6 million, and $2.5 million, respectively.

● Net sales of $154.4 million for the Public Sector Solutions segment reflect a decrease of $5.9 million, or 3.7%.

Sales to state and local government and educational institutions decreased by $3.4 million, or 2.6%, compared to the prior year quarter, while sales to the federal government decreased by $2.4 million, or 9.1%.

The decrease in net sales is primarily due to the shift in product mix along with a decreased in demand for notebooks/mobility products.

Net sales of other hardware/services products also decreased by $1.5 million as services revenue recognized on a net basis.

Net sales of notebooks/mobility products decreased by $16.2 million compared to the same period of a year ago.

These decreases were partially offset by increases in net sales of displays and sound, accessories, and software products of $5.3 million, $3.5 million, and $2.5 million, respectively.

Gross profit for the third quarter of 2022 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:

● Gross profit for the Enterprise Solutions segment increased despite lower net sales as referenced in the table on

Gross margin increased by 110 basis points primarily due to an increase in sales of higher margin software and services products recognized as revenue on a net basis.

Additionally, gross margin benefited from increased sales of higher margin datacenter solutions including $3.3 million increase in net sales of servers/storage products compared to the same quarter of the prior year.

● Gross profit for the Business Solutions segment increased primarily due to a 12.2% increase in net sales as referenced in the table on page 17.

Gross margin increased by 60 basis points primarily due to an increase in sales of higher margin software and services products recognized as revenue on a net basis, including an $8.2 million and $2.5 million increase in net sales of software and other hardware/services, respectively.

● Gross profit for the Public Sector Solutions segment increased despite lower net sales as referenced in the table on page 17.

Gross margin percentage increased by 360 basis points primarily due to the shift in product mix from lower margin notebooks/mobility products to higher margin software and services products recognized as revenue on a net basis, including a $2.5 million increase in net sales of software, partially offset by a $16.2 million decrease in notebooks/mobility products compared to the same quarter of prior year.

Selling, general and administrative expenses in the third quarter of 2022 increased in dollars as well as a percentage of net sales compared to the third 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 June 30,

Three Months Ended September 30,

Enterprise Solutions

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● 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 due to increased use of shared Headquarter services.

SG&A expenses as a percentage of net sales were 10.1% for the Enterprise Solutions segment in the second quarter of 2022, which reflects an increase of 150 basis points and is a result of net sales growing at a lower rate than operating expenses when compared with the same period a year ago.

The year-over-year change in SG&A dollars was primarily attributable to the higher allocation use of Headquarter services of $8.4 million.

The higher allocation use is mainly due to increased use of shared Headquarter services such as marketing and other overhead costs.

SG&A expenses as a percentage of net sales were 11.7% for the Enterprise Solutions segment in the third quarter of 2022, which reflects an increase of 310 basis points and is primarily due to the increased use of shared Headquarter services along with the shift in product mix toward software and services recognized on a net basis.

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

The year-over-year change in SG&A dollars was driven primarily by a $0.9 million increase in personnel cost, primarily due to an increase in variable compensation expense associated with higher gross profit.

The year-over-year change in SG&A dollars was driven primarily by a $2.4 million increase in personnel cost, primarily due to an increase in variable compensation expense associated with higher gross profit and an incremental headcount.

This year-over-year increase in SG&A expenses was also attributable to higher advertising costs of $0.7 million compared to the same period last year.

Those increases were partially offset by a $1.4 million decreased use of shared Headquarter services.

SG&A expenses as a percentage of net sales were 13.2% for the Business Solutions segment in the second 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 decreased in dollars as well as a percentage of net sales.

The decrease of $0.4 million in SG&A dollars was primarily due to the decreased use of shared Headquarter service of $0.9 million, which was partially offset by the increased advertising costs of $0.6 million.

SG&A expenses as a percentage of net sales was 13.0% for the Public Sector Solutions segment in the second quarter of 2022, which reflects a decrease of 250 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 increased by $0.9 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.

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

The increase of $1.2 million in SG&A dollars was primarily driven by an $1.7 million increase in personnel cost which was attributable to higher variable compensation associated with higher levels of gross profit and an incremental increase in headcount.

This increase was partially offset by the decreased use of shared Headquarter service of $0.5 million.

● SG&A expenses for the Headquarters/Other group decreased by $1.2 million primarily due to a decrease in unallocated Headquarter overhead costs year-over-year of $6.6 million.

This decrease is partially offset by the increased personnel cost of $5.3 million which was attributable to higher variable compensation associated with higher levels of gross profit and an incremental headcount.

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 second quarter of 2022 increased to $34.8 million, compared to $23.8 million for the second quarter of 2021, primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales was 4.2% for the second quarter of 2022, compared to 3.4% 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 from operations for the third quarter of 2022 increased to $31.7 million, compared to $27.3 million for the third quarter of 2021, primarily related to higher sales of software and service products recognized as revenue on a net

Income from operations as a percentage of net sales was 4.1% for the third quarter of 2022, compared to 3.6% for the prior year quarter, primarily driven by $15.9 million, or 13.2% increase in gross profit.

Income taxes.

Our provision for income taxes in the second quarter of 2022 was $9.4 million, compared to $6.5 million for the second quarter of 2021, primarily due to the increases of operating income.

Our effective tax rate was 27.0% for the quarter ended June 30, 2022, compared to 27.3% for the quarter ended June 30, 2021.

Net income for the second quarter of 2022 increased to $25.4 million, compared to $17.3 million for the second quarter of 2021, primarily due to higher net sales and gross profit.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Our provision for income taxes in the third quarter of 2022 was $8.8 million, compared to $7.3 million for the third quarter of 2021, primarily due to the increases of operating income.

Our effective tax rate was 27.6% for the quarter ended September 30, 2022, compared to 26.6% for the quarter ended September 30, 2021.

The increase in our effective tax rate is attributable to $0.3 million R&D tax credits recognized in the prior year quarter.

Net income for the third quarter of 2022 increased to $23.2 million, compared to $20.0 million for the third quarter of 2021, primarily due to the $4.4 million, or 16.1% increase in operating income.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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

Six Months Ended June 30,

Nine Months Ended September 30,

Enterprise Solutions

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Public Sector Solutions

Net sales increased for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, as explained by the year-over-year changes discussed below:

Net sales increased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, as explained by the year-over-year changes discussed below:

● Net sales of $989.8 million for the Enterprise Solutions segment reflect an increase of $107.6 million, or 12.2%.

Our mobility and desktop products experienced increases in net sales of $62.1 million and $28.2 million, respectively, associated with our customers’ hybrid work initiatives.

Our notebooks/mobility and desktop products experienced increases in net sales of $40.1 million and $30.8 million, respectively, associated with our customers’ hybrid work initiatives.

We also saw increases in net sales of displays and sound and accessories of $18.6 million and $20.4 million, respectively.

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● Net sales of $964.6 million for the Business Solutions segment reflect an increase of $169.6 million, or 21.3%.

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 $61.8 million as a result of the shift to the hybrid work environment.

The net sales of displays and sound products, accessories, software, servers/storage, net/com products, and desktops also increased by $18.2 million, $14.6 million, $14.2 million, $10.2 million, $6.3 million, and $5.5 million, respectively.

The increase in net sales was primarily driven by strong demand for work-from-anywhere solutions, including increases in net sales of notebooks/mobility products of $72.6 million.

Net sales of software, displays and sound products, accessories, net/com products, and servers/storage products also increased by $22.4 million, $20.3 million, $18.7 million, $12.9 million, and $11.4 million, respectively.

● Net sales of $438.1 million for the Public Sector Solutions segment reflect an increase of $22.8 million, or 5.5%.

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The increase in net sales is also attributable to the infrastructure stimulus bill allocating funds for technology purchases.

Sales to state and local government and educational institutions increased by 20.0%, compared to the prior year quarter, while sales to the federal government decreased by 16.7%.

Sales to state and local government and educational institutions increased by $35.4 million, or 10.8%, compared to the prior year quarter, while sales to the federal government decreased by $12.6 million, or 14.4%.

Net sales of desktops products, accessories, and displays and sound products increased by $16.7 million, $12.2 million, and $11.2 million, respectively.

Gross profit for the six months ended June 30, 2022 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:

● Gross profit for the Enterprise Solutions segment increased primarily as a result of the 19.5% increase in net sales.

The gross margin decreased by 30 basis points primarily due to changes in product mix as compared to the prior year.

● Gross profit for the Business Solutions segment increased primarily due to a 26.3% increase in net sales.

Gross margin percentage increased by 50 basis points, primarily due to changes in product mix.

● Gross profit for the Public Sector Solutions segment increased as a result of a 11.3% increase in net sales.

Gross margin percentage increased by 20 basis points primarily due to a shift in both customer and product mix.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

These increases were partially offset by the decreases in net sales of notebooks/mobility and other hardware/services products of $11.6 million and $5.6 million, respectively.

Gross profit for the nine months ended September 30, 2022 increased year-over-year in dollars as well as a percentage of net sales (gross margin), as explained by the year-over-year changes discussed below:

● Gross profit for the Enterprise Solutions segment increased primarily as a result of the 12.2% increase in net sales as referenced in the table on page 19.

Gross margin is 14.9% as compared to 14.7% for the prior year, which is relatively flat year-over-year.

● Gross profit for the Business Solutions segment increased primarily due to a 21.3% increase in net sales as referenced in the table on page 19.

Gross margin is 19.8% as compared to 19.3% for the prior year, which reflects an increase of 50 basis points.

This increase is primarily due to the increased sales in higher margin software, net/com and servers/storage products, including an $22.4 million, $12.9 million, and $11.4 million increase in net sales of software, net/com and servers/storage products, respectively

● Gross profit for the Public Sector Solutions segment increased as a result of a 5.5% increase in net sales as referenced in the table on page 20.

Gross margin percentage increased by 140 basis points compared to the prior year period.

This increase of gross margin is primarily due to the decreased net sales of $11.6 million in lower margin notebooks/mobility products.

Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the nine months ended September 30, 2022 compared to the nine months ended September 30, 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):

Six Months Ended June 30,

Nine Months Ended September 30,

Enterprise Solutions

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● 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, primarily due to the increased use of shared Headquarter services.

SG&A expenses as a percentage of net sales were 10.2% for the Enterprise Solutions segment in the first half of 2022, which reflects an increase of 120 basis points and is a result of net sales growing at a lower rate than operating expenses when compared with the same period a year ago .

The year-over-year change in SG&A dollars was primarily attributable to the higher allocation use of Headquarter services, primarily due to the increased use of shared Headquarter services of $24.4 million.

SG&A expenses as a percentage of net sales were 10.7% for the Enterprise Solutions segment for the nine months ended September 30, 2022, which reflects an increase of 190 basis points and is a result of the increased use of shared Headquarter services when compared with the same period a year ago.

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

The year-over-year change in SG&A dollars was driven primarily by (i) a $3.1 million increase in personnel cost, primarily due to an increase in variable compensation expense associated with higher gross profit and (ii) higher advertising costs of $2.8 million.

The year-over-year change in SG&A dollars was driven primarily by (i) a $5.5 million increase in personnel cost, primarily due to an increase in variable compensation expense associated with higher gross profit and an incremental headcount and (ii) higher advertising costs of $3.6 million.

Those increases were partially offset by a $5.3 million decrease in the allocation use of Headquarter services.

SG&A expenses as a percentage of net sales were 13.1% for the Business Solutions segment in the first half of 2022, which reflects a decrease of 280 basis points and was primarily due to higher sales in the first half of 2022 compared with the same period a year ago .

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

The decrease of $0.4 million in SG&A dollars was primarily due to the decreased use of shared Headquarter service of $1.6 million, which was partially offset by the increased personnel costs of $1.0 million.

SG&A expenses as a percentage of net sales was 13.4% for the Public Sector Solutions segment in the first half of 2022, which reflects a decrease of 170 basis points and was primarily due to higher sales in the first half of 2022 compared with the same period a year ago.

● SG&A expenses for the Headquarters/Other group increased by $0.6 million year-over-year 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 six months ended June 30, 2022 increased to $64.9 million, compared to $37.9 million for the six months ended June 30, 2021 primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales increased to 4.0% for the six months ended June 30, 2022, compared to 2.8% 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.

SG&A expenses as a percentage of net sales were 13.3% for the Business Solutions segment for the nine months ended September 30, 2022, which reflects a decrease of 230 basis points and was primarily due to higher sales for the nine months ended September 30, 2022 of 2022 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 of $0.8 million in SG&A dollars was primarily due to the increased personnel costs of $2.8 million, which was partially offset by the decreased use of shared Headquarter service of $2.1 million.

SG&A expenses as a percentage of net sales were 13.5% for the Public Sector Solutions segment for the nine months ended September 30, 2022 of 2022, which was relatively flat compared 14.0% for the same period a year ago.

● SG&A expenses for the Headquarters/Other group decreased by $0.4 million year-over-year primarily due to a decrease in unallocated Headquarter overhead costs year-over-year.

Income from operations for the nine months ended September 30, 2022 increased to $96.6 million, compared to $65.2 million for the nine months ended September 30, 2021 primarily due to the increases in net sales and gross profit.

Income from operations as a percentage of net sales increased to 4.0% for the nine months ended September 30, 2022, compared to 3.1% of net sales for the prior year, primarily due to the increase in net sales of $300.1 million and the decrease of 20 basis points in SG&A expenses as a percentage of net sales year-over-year.

Income taxes.

Our provision for income taxes for the six months ended June 30, 2022 was $17.7 million, compared to $10.4 million for the same period of 2021, primarily due to the increases of operating income.

Our effective tax rate was 27.3% for the six months ended June 30, 2022, compared to 27.5% for the same period of 2021.

Net income for the six months ended June 30, 2022 increased to $47.2 million, compared to $27.5 million for the six months ended June 30, 2021, primarily due to higher net sales and gross profit, combined with lower operating expenses as a percentage of net sales, as compared to the same period of 2021.

Our provision for income taxes for the nine months ended September 30, 2022 was $26.6 million, compared to $17.7 million for the same period of 2021, primarily due to the increases of operating income.

Our effective tax rate was 27.4% for the nine months ended September 30, 2022, which is relatively flat to 27.1% for the same period of 2021.

Net income for the nine months ended September 30, 2022 increased to $70.4 million, compared to $47.5 million for the nine months ended September 30, 2021, primarily due to higher net sales and gross profit, combined with lower operating expenses as a percentage of net sales, as compared to the same period of 2021.

Liquidity and Capital Resources

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● Cash and Cash Equivalents .

At June 30, 2022, we had $94.9 million in cash and cash equivalents.

At September 30, 2022, we had $116.2 million in cash and cash equivalents.

● Cash Generated from Operations .

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● Credit Facility.

As of June 30, 2022, we had no borrowings outstanding under our $50.0 million credit facility, which is available until March 31, 2025.

As of September 30, 2022, we had no borrowings outstanding under 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 June 30, 2022, we were in compliance with all covenants under the credit facility.

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

As of September 30, 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.

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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:

Six Months Ended June 30,

Net cash (used in) provided by operating activities

Cash flows from operating, investing and financing activities for the nine months ended September 30, 2022 and 2021, as reflected in the unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Form 10-Q, are summarized in the following table (dollars in millions):

Nine Months Ended September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

(Decrease) increase in cash and cash equivalents

Cash used in operating activities was $8.4 million in the six months ended June 30, 2022.

Cash used in operations during the six months ended June 30, 2022, resulted primarily from (i) a $16.6 million increase in inventory, primarily driven by an increase in advanced inventory purchases for anticipated future customer rollouts;

(ii) a $38.1 million increase in accounts receivable, primarily driven by increased level of sales in the first six months of 2022 compared to the prior period;

and (iii) a $8.0 million decrease in accounts payable and accrued expenses and other liabilities compared to the prior year period.

Those cash outflow factors were partially offset by net income $47.2 million;

other non-cash charges adding back $10.4 million.

Cash provided by operating activities of $31.8 million for the six months ended June 30, 2021 was primarily due to (i) net income $27.5 million;

(ii) a $26.8 million decrease in accounts receivable;

and (iii) other non-cash charges adding back $9.4 million.

Those cash inflow factors were partially offset by a $26.2 million increase in inventory.

Increase (decrease) in cash and cash equivalents

Cash provided by operating activities are summarized as follows (dollars in millions) :

Nine Months Ended September 30,

Adjustments for the impact of non-cash items

Net income adjusted for the impact of non-cash items

Changes in assets and liabilities:

Accounts receivable

Accounts payable

Net cash provided by operating activities

Net cash provided by operating activities increased by $6.9 million to $15.7 million for the nine months ended September 30, 2022 from $8.8 million during the same period in 2021.

Net income adjusted for non-cash charges accounted for $24.6 million of the increase in operating cash flow offset by $17.8 million related to the changes in current assets and current liabilities.

For the nine-months ended September 30, 2022, our trade accounts receivable grew $50 million from September 30, 2021.

This increase was the result of improved collections partially offset by increased customer billings.

For the comparative nine months period ended September 30, 2021, trade accounts receivable decreased $11.8 million from December 31, 2020 as a result of collections from those customers offered extended payments terms due to the COVID-19 pandemic.

Customer billings increased $400.0 million to $3.2 billion during the trailing 12-month period ended September 30, 2022 compared to $2.8 billion for the trailing 12-month ended September 30, 2021.

While billings increased during these comparative periods, trade accounts receivable as a percentage of net sales fell 1.1% to 18.5% from 19.6% for the trailing 12-months ended on September 30, 2022 and September 30, 2021, respectively, due to improved collections over the comparable 12-month periods.

Additional drivers that impacted cash from operating activities were related to the timing of payments to vendors and inventory purchases.

Inventory also grew $6.8 million during the nine months ended September 30, 2022 as a result of purchases in advance of large project rollouts.

Accounts payable disbursements are dependent on the timing of inventory receipts which were more heavily weighted in the fourth quarter of 2021 than experienced during the nine months ended September 30, 2022.

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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Cash conversion cycle

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

Also incorporates components of other miscellaneous receivables.

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

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

The cash conversion cycle increased slightly to 58 days at June 30, 2022, compared to 56 days at June 30, 2021.

The increase is primarily due to the 3-day increase of DIO, and partially offset by the 4-day decrease of DSO.

(1) Represents the trade receivable at the end of the quarter divided by average daily net sales for the same three-month period.

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

(3) Represents the accounts payable balance at the end of the quarter divided by average daily cost of sales for the same three-month period.

The cash conversion cycle increased slightly to 63 days at September 30, 2022, compared to 60 days at September 30, 2021.

The higher software net sales for the quarter ended September 30, 2022 have an unfavorable impact to DSO and a favorable impact to DPO as the corresponding receivables and payables reflect the gross amounts due from

customers and due to vendors while the corresponding sales and cost of sales are reflected on a net basis.

As such, DSO increased 4 days and DPO increased 6 days as shown in the table above.

The increase of 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 improved collections in the second quarter of 2022.

Cash used in investing activities for the six months ended June 30, 2022 represents $4.6 million of purchases of property and equipment.

Cash used in investing activities for the nine months ended September 30, 2022 represents $7.0 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 $7.1 million in purchases of property and equipment.

Cash used in financing activities for the six months ended June 30, 2022 consisted of $0.4 million payment of payroll taxes on stock-based compensation through shares withheld.

Cash used in financing activities for the nine months ended September 30, 2022 consisted of $0.8 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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Our credit facility extends until March 31, 2025 and is collateralized by our accounts receivable.

As of June 30, 2022, our borrowing capacity under the credit facility was up to $50.0 million.

Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (4.75% at June 30, 2022).

As of September 30, 2022, our borrowing capacity under the credit facility was up to $50.0 million.

Amounts outstanding under this facility bear interest at the one-month LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (6.25% at September 30, 2022).

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 June 30, 2022.

Factors Affecting Sources of Liquidity

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

As of June 30, 2022, we did not have any borrowings outstanding under the credit facility.

As of September 30, 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.

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● 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 as of June 30, 2022 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of June 30, 2022.

Our outstanding borrowings under the credit facility as of September 30, 2022 were zero, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 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 $540.4 million at June 30 , 2022, whereas our consolidated stockholders’ equity at that date was $732.0 million.

Such amount was calculated as $552.0 million at September 30 , 2022, whereas our consolidated stockholders’ equity at that date was $756.1 million.

Capital Markets.

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

PC CONNECTION, INC.

AND SUBSIDIARIES

PART I―FINANCIAL INFORMATION

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis