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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-03-14 · 132 added, 124 removed, 237 unchanged (52% of the section changed)

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Risk Factors.”

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

We are a Fortune 1000 Global Solutions Provider that simplifies the IT customer 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 TSG and state-of-the-art 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.

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.

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

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

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

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 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.

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

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

However, 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 eliminate our role.

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

We believe many of our customers seek out comprehensive and integrated IT solutions, rather than the ability to acquire specific IT products on a one-off basis.

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

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 are expanding our IT solutions business, which requires the addition of 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.

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 gross margin improvements in this competitive environment.

The primary challenges we continue to face in effectively managing our business are (1) increasing our product and service 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 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 are investing in our IT solutions business, which requires the addition of 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 additional 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.

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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.

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

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

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

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

Trends and Key Factors Affecting our Financial Performance

● As the effects of COVID-19 and its variants 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.

The COVID-19 pandemic has, and may continue to cause supply chain disruptions.

Although we saw some improvement in the supply chain during the second half of 2022, we continue to have some supply chain challenges that may continue in the foreseeable future.

● Inflation due to, among other things, the continuing impacts of the COVID-19 pandemic and uncertain economic environment impacts product costs and wages.

The increased product costs and wages due to inflation may adversely affect our business, financial condition and results of operations.

If inflation on products and wages increases beyond our ability to control, we may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting customer demand.

● The Federal Reserve recently increased interest rates, and it is anticipated that interest rates will continue to rise.

Although we don’t have any borrowing under our credit facility, should we need to borrow in the future, we may be exposed to high interest rates.

RESULTS OF OPERATIONS

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Income from operations

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

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

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

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

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

higher levels of gross profit and increased employee benefit costs.

Net sales of $3,125.0 million in 2022 reflected an increase of $232.4 million compared to 2021, which was driven by higher net sales across all of our operating segments as shown in the table on page 32 of this Form 10-K.

The increase in net sales was primarily driven by the growing hybrid work trend resulting in higher demand for notebooks/mobility, desktops, and accessories products.

Sales of all of our other product categories also increased year-over-year, as shown in Note 2 of the Consolidated Financial Statements.

The increase in software sales was primarily due to higher volume of security software and software as a service, which are recognized on a net basis.

The continued trend toward higher sales of security software and software as a service has put downward pressure on net sales, while improving gross margins.

This trend is expected to continue in 2023.

Gross profit increased year-over-year by $61.6 million as shown in the table on page 32 of this Form 10-K, primarily due to the increase of net sales.

Gross margin increased year-over-year by 70 basis points as shown in the above table primarily due to an increase in sales of data center products including networking and servers during 2022, as well as an increase in the amount of software sold recognized on a net basis.

SG&A expenses increased year-over-year by $37.5 million, driven primarily by increased personnel cost of $30.6 million and increased advertising costs of $4.4 million.

The majority of the personnel cost increase is due to the increased cost of labor, higher variable compensation due to the higher levels of gross profit, and increased employee benefit costs.

Operating income increased year-over-year both in dollars and as a percentage of net sales by $24.0 million and 60 basis points, respectively, primarily as a result of the increase in net sales.

Sales Distribution

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

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

Years Ended December 31,

Sales Segment

Operating Segment

Enterprise Solutions

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Other Hardware/Services

Gross Profit Margins

The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three years:

Gross Margins

The following table summarizes our overall gross margins, as a percentage of net sales, for the last three years:

Years Ended December 31,

Sales Segment

Operating Segment

Enterprise Solutions

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Restructuring and other charges

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

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

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

There were no restructuring related costs incurred for the years ended December 31, 2022 and 2021.

In the year ended December 31, 2020, we undertook actions across the business to lower our cost structure and align our business in an effort to improve our ability to execute our strategy.

In connection with these restructuring initiatives, we incurred restructuring and related costs of $1.0 million for the year ended December 31, 2020.

YEAR-OVER-YEAR COMPARISONS

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

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

Year Ended December 31, 2022 Compared to Year En ded December 31, 2021

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

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Public Sector Solutions

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

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

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

Net sales increased by 8.0% to $3,125.0 million in 2022 from $2,892.6 million in 2021, as explained below:

● Net sales of $1,324.4 million for the Enterprise Solutions segment reflect an increase of $74.9 million, or 6.0%, year-over-year as a result of our customers’ needs for notebooks/mobility products to support their work-from-anywhere initiatives.

Net sales of notebooks/mobility, desktops, accessories, and displays and sound increased year-over-year by $33.3 million, $25.0 million, $23.2 million, and $6.7 million, respectively.

These increases were partially offset by decreases in software and servers/storage of $11.2 million and $1.4 million, respectively.

The decrease in software sales was primarily due to an increase in the amount of software sold recognized on a net basis.

● Net sales of $1,245.3 million for the Business Solutions segment reflect an increase of $146.8 million, or 13.4% year-over-year.

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

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

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

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

We experienced increases across all products, most notably in notebooks/mobility, software, displays and sound, accessories, and net/com products of $47.4 million, $27.7 million, $19.3 million, $18.0 million, and $17.0 million, respectively.

● Net sales of $555.3 million for the Public Sector Solutions segment increased by $10.7 million, or 2.0%, compared with the same period a year ago.

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

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

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

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

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

Net sales of accessories, desktops, displays and sound, and servers/storage increased by $14.3 million, $10.8 million, $8.7 million, and $7.5 million, respectively, compared with the prior year.

Those increases were partially offset by decreases in notebooks/mobility, other hardware/services, software, and net/com products of $19.8 million, $5.5 million, $3.5 million, and $1.8 million, respectively.

Gross profit increased by 13.3% to $526.2 million in 2022 and gross margin increased by 70 basis points to 16.8% in 2022, as explained below:

● Gross profit for the Enterprise Solutions segment increased $14.5 million, or 8.0% year-over-year as referenced in the above table.

This increase is primarily due to the 6.0% increase in net sales.

The gross margin was flat compared with the prior year.

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

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

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

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

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

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

Gross margin increased 20 basis points compared to the prior year primarily due to an increase in the amount of software sales recognized on a net basis.

● Gross profit for the Business Solutions segment increased $39.5 million, or 18.7% year-over-year as referenced in the above table.

This increase is primarily a result of a 13.4% increase in net sales.

Gross margin increased year-

over-year by 90 basis points, primarily due to an increase in sales of higher-margin networking and servers/storage products, along with an increase in sales of cloud and security software, which are recognized as revenue on a net basis.

● Gross profit for the Public Sector Solutions segment increased by $7.6 million, or 10.5% year-over-year as referenced in the above table, primarily as a result of higher net sales in the current period.

Gross margin increased by 110 basis points primarily due to an increase in higher-margin servers/storage sales, along with an increase in sales of cloud and security software, which are recognized as revenue on a net basis.

SG&A expense in 2022 increased in dollars and as a percentage of net sales compared to the prior year.

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

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Headquarters/Other, unallocated

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

The year-over-year change in SG&A dollars was primarily attributable to a $2.3 million increase in the use of Headquarter services, primarily due to the higher personnel costs associated with the higher levels of gross profit and the increased employee benefit costs.

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

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

This decrease year-over-year was largely due to the higher net sales in 2021.

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

The year-over-year change in SG&A dollars was primarily attributable to a $33.5 million increase in the use of Headquarter services, which include finance, distribution center, human resources, IT, marketing, and product management.

This year-over-year increase was also driven by a $2.3 million increase in personnel costs.

SG&A expenses as a percentage of net sales were 10.7% for the Enterprise Solutions segment for the year ended December 31, 2022, which reflects an increase of 220 basis points.

This increase year-over-year was largely due to the increase in Headquarter services in 2022.

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

The year-over-year increase in SG&A dollars was primarily driven by the increased Headquarter services of $7.1

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

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

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

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

The increase in SG&A dollars year-over-year is primarily attributable to an increase in the usage of Headquarter services of $3.5 million, which included an increase in variable compensation expenses associated with the higher gross profit for the year ended December 31, 2021.

Increased personnel costs of $0.2 million as well as the increased bad debt expense of $0.5 million also contributed to the year-over-year SG&A increase.

SG&A expenses as a percentage of net sales were 14.2 % for the Public Sector Solutions segment for the year ended December 31, 2021, which reflects a decrease of 10 basis points.

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

● SG&A expenses for the Headquarters/Other group increased by $0.8 million primarily due to an increase in unallocated executive oversight costs year-over-year.

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

Income from operations for the year ended December 31, 2021 increased to $96.5 million, compared to $72.1 million for the same period in the prior year, primarily due to the increases in net sales and gross profit, along with an increase in SG&A expense year-over-year.

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

The year-over-year increase in SG&A dollars was primarily driven by increases in personnel costs and advertising costs of $6.5 million and $3.0 million, respectively.

This increase was partially offset by a decrease in the use of Headquarter services of $6.3 million, primarily due to an increase in services utilized by the Enterprise Solutions segment.

SG&A expenses as a percentage of net sales were 13.8% for the Business Solutions segment for the year ended December 31, 2022 compared to 15.3% for 2021, which reflects a decrease of 150 basis points year-over-year, primarily due to higher net sales in the current year.

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

The increase in SG&A dollars year-over-year is primarily attributable to increases in personnel costs and advertising costs of $3.6 million and $1.1 million, respectively.

This increase was partially offset by a decrease in the use of Headquarter services of $2.4 million, primarily due to an increase in services utilized by the Enterprise Solutions segment.

SG&A expenses as a percentage of net sales were 14.2% for the Public Sector Solutions segment for the year ended December 31, 2022, which is consistent with the prior year.

● SG&A expenses for the Headquarters/Other group decreased by $3.5 million primarily due to an increase in Headquarter services utilized by the Enterprise Solutions segment, as discussed above.

Income from operations for the year ended December 31, 2022 increased to $120.6 million, compared to $96.5 million for the same period in the prior year, primarily due to the increases in net sales and gross profit explained above.

These increases were partially offset by an increase in SG&A expense year-over-year as explained above.

Income from operations as a percentage of net sales increased to 3.9% for the year ended December 31, 2022, compared to 3.3% of

net sales for the same period in the prior year, primarily due to the increases in net sales and gross profit, partially offset by an increase in SG&A expenses as a percentage of net sales year-over-year.

Income taxes.

Our effective tax rate was 26.7% for the year-ended December 31, 2022, compared to 27.6% for the year ended December 31, 2021.

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

The decrease year over year is primarily due to a reduction in state income tax expense resulting from changes in state apportionment factors.

Our provision for income taxes for the year ended December 31, 2022 was $32.4 million.

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

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

Net income increased by $19.3 million to $89.2 million for the year ended December 31, 2022, from $69.9 million in the prior year, primarily due to the increase in net sales and gross profit, partially offset by an increase in SG&A expenses in the current year, as explained above.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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● Cash on Hand .

At December 31, 2021, we had $108.3 million in cash and cash equivalents.

As of December 31, 2022, we had $122.9 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 receivables with changes in payables to generate a positive cash flow.

● Credit Facilities .

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

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

● Bank Line of Credit .

As of December 31, 2022, no borrowings were outstanding under our $50.0 million bank line of credit, which is available until March 2025.

Accordingly, our entire line of credit was available for borrowing as of December 31, 2022.

This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank.

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

As of December 31, 2021, we are in compliance with all of our financial covenants.

As of December 31, 2022, we were in compliance with all of our covenants.

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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Net cash used in financing activities

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents

Cash provided by operating activities was $34.9 million for the year ended December 31, 2022.

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

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

Cash flow provided by operations during the year ended December 31, 2022 resulted primarily from $89.2 million of net income and $19.6 million of other non-cash charges added back to net income, including $12.0 million of depreciation and amortization, for the year ended December 31, 2022.

These factors that contributed to the positive inflow of cash from operating activities were partially offset by an increase in accounts receivable of $6.0 million primarily due to an increase in vendor receivables, as well as decreases in accounts payable and accrued expenses and other liabilities of $49.1 million and $14.7 million, respectively.

The five-day increase in DSO is primarily a function of netted products recorded in accounts receivable on a gross basis, while the revenue is recorded on a net basis.

The decreases in accounts payable and accrued expenses and other liabilities were primarily driven by the timing of payments.

Operating cash flow for the year ended December 31, 2021 resulted primarily from cash provided by net income prior to non-cash charges of $69.9 million and increases in account payables and accrued expenses of $32.5 million, primarily due to the timing of payments.

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

Those inflows of cash from operating activities were partially offset by increases in inventory of $65.7 million for the year ended December 31, 2021.

In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average.

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

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

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

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

The cash conversion cycle was 66 days for the quarter ended December 31, 2022, an increase compared to the cash conversion cycle of 55 days for the quarter ended December 31, 2021, as evidenced in the above cash conversion table.

Cash used in investing activities for the year ended December 31, 2022 consisted of $9.1 million of purchases of property and equipment.

These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure.

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

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

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

In the prior year period, financing activities consisted primarily of a $8.4 million payment of a special $0.32 per share dividend and $10.2 million for the purchase of treasury shares.

Cash used in investing activities for the prior year consisted of $10.3 million of purchases of property and equipment, partially offset by $1.5 million of cash proceeds from life insurance.

Cash used in financing activities decreased for the year ended December 31, 2022 compared to the prior year and consisted primarily of $8.9 million in special dividend payments.

In the prior year period, financing activities consisted primarily of $34.6 million in special dividend payments.

Debt Instruments, Contractual Agreements, and Related Covenants

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

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

Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity”.

We did not have any borrowings outstanding under the credit facility as of December 31, 2022.

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

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Borrowings under the line of credit are classified as current.

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

As of December 31, 2022, the entire $50.0 million facility was available for borrowing.

Operating Leases.

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● The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated Adjusted EBITDA for the trailing four quarters) must not be more than 2.0 to 1.0.

We don’t have any outstanding borrowings under the credit facility during the fourth quarter of 2021, and accordingly, the funded debt ratio did not limit potential borrowings as of December 31, 2021.

Future decreases in our consolidated Adjusted EBITDA, however, could limit our potential borrowings under the credit facility.

● Minimum Consolidated Net Worth must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016.

Such amount was calculated at December 31, 2021 as $516.8 million, whereas our actual consolidated stockholders’ equity at this date was $682.5 million.

We didn’t have any outstanding borrowings under the credit facility during the fourth quarter of 2022, and accordingly, the funded debt ratio did not limit potential borrowings as of December 31, 2022.

Future decreases in our consolidated Adjusted EBITDA, however, could limit our potential borrowings under the line of credit.

● Minimum Consolidated Net Worth must be at least $346.7 million, plus 50% of consolidated net income for each quarter.

Such amount was calculated at December 31, 2022 as $561.4 million, whereas our actual consolidated stockholders’ equity on such date was $766.2 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.

Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the IT 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.

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

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

remitted to governmental authorities.

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

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

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For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services.

We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions.

We do not have control over the delivery of these performance obligations, and accordingly we are the agent in

these transactions.

We recognize revenue for security software net of the related cost of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

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We record these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount.

In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature of each item.

In certain instances, we invoice the customer directly under an EA and accounts for the individual items sold based on the nature of each item.

Our vendors typically dictate how the EA will be sold to the customer.

We also offer extended service plans, or ESP, on IT products, both as part of the initial arrangement and separately from the IT products.

We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service and do not provide any service after the sale.

Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

We also offer extended service plans, or ESPs, on IT products, both as part of the initial arrangement and separately from the IT products.

We recognize revenue related to ESPs as the agent in the transaction because we do not have control over the on-going ESPs service and do not provide any service after the sale.

Revenue allocated to ESPs is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement.

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales.

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We estimate the standalone selling price, or SSP, for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times.

We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

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

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

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

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

This would negatively impact our earnings.

Our cash flows would be impacted to the extent that receivables could not be collected.

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

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

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

As of December 31, 2022, our accounts receivable aging improved from December 31, 2021, reflecting the general improvement in the economic environment from the COVID-19 pandemic in the calendar years ended on December 31, 2021 and 2020, respectively.

We collected a significant amount of these older at-risk invoices during the calendar year ended December 31, 2022.

Though our bad debt expense was $3.3 million for both the twelve months ended December 31, 2022 and 2021, respectively, the related risk on collections is different as of December 31, 2022.

The collection risk assessments as of December 31, 2022 were consistent with the volume of invoices associated with the increased revenue recognized during the twelve months then ended.

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

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Write offs of customer and vendor receivables totaled $2.8 million in 2022 and $3.9 million in 2021.

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

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

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

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

Inventories (all finished goods) are stated at cost (which approximates the first-in, first-out method) or net realizable value, whichever is lower.

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

Estimate is used to determine the quarterly inventory allowance provision.

Estimates are used to determine the quarterly inventory allowance provision.

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

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

Value of Goodwill and Long-Lived Assets, Including Intangibles

Goodwill and Long-Lived Assets, Including Intangibles

We carry a variety of long-lived assets on our consolidated balance sheet, which are all currently classified as held for use.

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In 2022 and 2021, we performed a “step 0” qualitative analysis.

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

is less than its carrying amount, including goodwill.

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

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

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

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

Based on the qualitative analysis, the Company determined goodwill was not impaired as of December 31, 2022 and 2021.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis