What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-04 · 168 added, 244 removed, 103 unchanged (80% of the section changed)

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry’s rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products.

Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” “seek,” “plan,” “intend,” or similar terms, variations of such terms, or the negative of those terms.

Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished.

The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

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

● 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;

● we face and will continue to face significant price competition, which could result in a reduction of our profit margins;

● the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;

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

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

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

● virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;

● the methods of distributing IT products are changing, and such changes may negatively impact us and our business;

● we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;

● we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;

● we may experience a reduction in the incentive programs offered to us by our vendors;

● should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;

● we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;

● we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;

● we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;

● cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.

● we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.

● the failure to comply with our public sector contracts could result in, among other things, fines or liabilities;

● we are controlled by one principal stockholder

These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles.

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

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

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.

These statements involve known and unknown risks, uncertainties and other factors, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

We therefore caution you against undue reliance on any of these forward-looking statements.

Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in Item 1A.

“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed.

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations.

In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “would,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “anticipates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions.

These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report.

These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including

● substantial competition reducing our market share;

● significant price competition reducing our profit margins;

● the loss of any of our major vendors adversely affecting the number of type of products we may offer;

● virtualization of information technology, or IT, resources and applications, including networks, servers, applications, and data storage disrupting or altering our traditional distribution models;

● service interruptions at third-party shippers negatively impacting our ability to deliver the products we offer to our customers;

● increases in shipping and postage costs reducing our margins and adversely affecting our results of operations;

● loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business;

● cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation;

● macroeconomic factors facing the global economy, including disruptions in the capital markets, economic sanctions and economic slowdowns or recessions, rising inflation and changing interest rates reducing the level of investment our customers are willing to make in IT products.

Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances.

You should not place undue reliance on the forward-looking statements.

Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.

Unless the context otherwise requires, we use the terms “Connection”, the “Company”, “we”, “us”, and “our” in this Quarterly Report on Form 10-Q to refer to PC Connection, Inc.

and its subsidiaries.

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 Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center 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.

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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.

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

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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 successfully, eliminating 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.

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 more of our customers are seeking 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 provide a broader combination of products, services, and advice tailored to customers’ individual needs.

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

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

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

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

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 selling, general and administrative, or SG&A, expenses while making 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.

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

Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.

Virtual delivery of software products and advanced Internet technology providing customers enhanced

functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT development to meet these new demands.

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

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net sales (dollars in millions)

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Income from operations

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 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 of $727.5 million for the first quarter of 2023 reflected a decrease of $60.8 million, or 7.7% compared to the first quarter of 2022.

The decrease was primarily driven by decreases in sales of notebooks/mobility, desktops, and displays and sound of $47.6 million, $23.1 million, and $20.6 million, respectively, as shown in the table in Note 2.

These decreases were partially offset by increases in sales of software and net/com products of $22.5 million and $9.3 million, respectively.

Gross profit decreased year-over-year by $6.0 million, or 4.7%, to $122.3 million as illustrated in the table and discussion beginning on page 15 of this Form 10-Q.

Gross margin increased to 16.8% from 16.3% a year ago.

The increase in gross margin was primarily driven by increased net sales of higher margin software, security, and networking solutions.

SG&A expenses increased year-over-year by $5.1 million, or 5.2%, to $103.3 million.

The increase in SG&A expenses was primarily driven by a $5.1 million increase in personnel cost related to investments in resources to strengthen our sales, technical sales, IT, and services organizations.

SG&A expenses as a percentage of net sales increased to 14.2% compared to 12.5% a year ago.

The increase in SG&A expenses as a percentage of net sales is primarily due to the decrease in net sales, as discussed above.

Operating income in the first quarter of 2023 decreased year-over-year both in dollars and as a percentage of net sales by $12.0 million and 130 basis points, respectively, primarily as a result of the decrease in gross profit combined with the increase in SG&A expenses.

Net Sales Distribution

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

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

Three Months Ended March 31,

Operating Segment

Enterprise Solutions

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Servers/Storage

Net/Com Product

Net/Com Products

Displays and Sound

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

Three Months Ended September 30,

Nine Months Ended September 30,

Sales Segment

Three Months Ended March 31,

Operating Segment

Enterprise Solutions

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

($ in millions)

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As a percentage of net sales

Restructuring and Other Charges

In the first quarter of 2023, we undertook actions to lower our cost structure.

In connection with these initiatives, we incurred restructuring and other charges of $0.9 million in the first quarter of 2023, which were primarily related to an

involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.

These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses and other liabilities as of March 31, 2023.

There were no restructuring and other charges recorded in the first quarter of 2022.

The Company is currently evaluating additional restructuring activities for the second quarter of 2023 and beyond.

Year-Over-Year Comparisons

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

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

Unless context otherwise requires, such references refer to changes between the three months ended March 31, 2023 and the three months ended March 31, 2022.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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

Three Months Ended September 30,

Three Months Ended March 31,

Enterprise Solutions

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Public Sector Solutions

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

Net sales decreased in the first quarter of 2023 compared to the first quarter of 2022, as explained by the year-over-year changes discussed below:

● Net sales of $313.9 million for the Enterprise Solutions segment reflect a decrease of $21.5 million, or 6.4%.

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%.

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 September 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Headquarters/Other, unallocated

● 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 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 $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 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.

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 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):

Nine Months Ended September 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

Net sales increased for the nine months ended September 30, 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 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.

Those increases were offset by the decreases in net sales of servers/storage of $13.7 million.

● 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, 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.

The decrease in net sales is primarily due to decreases in net sales of desktops, displays and sound, notebooks/mobility, servers/storage, other hardware/services, and net/com products of $14.7 million, $10.4 million, $7.0 million, $2.9 million, $2.6 million, and $1.7 million, respectively.

These decreases were partially offset by an increase in net sales of software of $18.2 million.

● Net sales of $273.1 million for the Business Solutions segment reflect a decrease of $47.3 million, or 14.8%.

The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, displays and sound, desktops, and accessories of $35.5 million, $10.0 million, $4.8 million, and $3.5 million, respectively.

These decreases were partially offset by increases in net sales of net/com products and servers/storage of $5.7 million and $2.1 million, respectively.

● Net sales of $140.5 million for the Public Sector Solutions segment reflect an increase of $8.0 million, or 6.0%.

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 $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.

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.

Sales to state and local government and educational institutions decreased by $18.4 million, or 18.1%, compared to the prior year quarter, while sales to the federal government increased by $26.4 million, or 86.0%.

The overall increase in net sales is primarily due to increases in net sales of other hardware/services, net/com products, and software of $6.0 million, $5.3 million, and $4.6 million, respectively, partially offset by decreases in notebooks/mobility and desktops of $5.1 million and $3.6 million, respectively.

Gross profit for the first quarter of 2023 decreased year-over-year, while gross margin for the first quarter of 2023 increased year-over-year, as explained by the year-over-year changes discussed below:

● Gross profit for the Enterprise Solutions segment decreased primarily due to the decrease in net sales as referenced in the above table.

Gross margin decreased by 120 basis points primarily due to a shift in product

mix as shown in the table in Note 2 and the product mix table on page 14 .

The changes in the product mix show that the increase in software sales did not offset the sales declines in higher-margin net/com and servers/storage product categories.

The decrease in gross margin is also attributable to the timing of a few low-margin customer projects during the first quarter of 2023.

● Gross profit for the Business Solutions segment decreased primarily due to the decrease in net sales as referenced in the above table.

Gross margin increased by 250 basis points primarily due to a shift in product mix to higher-margin sales of datacenter products including software, networking, and servers as shown in the table in Note 2 and the product mix table on page 14 during the first quarter of 2023.

● Gross profit for the Public Sector Solutions segment increased primarily due to the increase in net sales as referenced in the above table.

Gross margin increased by 140 basis points primarily due to an increase in sales of higher-margin software, security, services, and networking solutions as shown in the table in Note 2 and the product mix table on page 14 .

Selling, general and administrative expenses in the first quarter of 2023 increased in dollars as well as a percentage of net sales compared to the first quarter of 2022.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Enterprise Solutions

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Headquarters/Other, unallocated

● SG&A expenses for the Enterprise Solutions segment increased in dollars 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 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 $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 13.3% 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.

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

The year-over-year change in SG&A dollars was primarily attributable to increased advertising costs.

SG&A expenses as a percentage of net sales were 11.3% for the Enterprise Solutions segment in the first quarter of 2023, which reflects an increase of 100 basis points and is primarily due to the decrease in net sales, as discussed above.

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

The year-over-year change in SG&A dollars was driven primarily by a $1.4 million increase in personnel cost related to investments in resources to strengthen our sales organization.

The year-over-year increase in SG&A expenses was also attributable to increased advertising costs of $0.5 million and increased use of shared Headquarter services of $0.6 million.

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

The increase of $1.9 million in SG&A dollars was primarily driven by a $1.3 million increase in personnel cost related to investments in resources to strengthen our sales organization.

The year-over-year increase in SG&A expenses was also attributable to increased advertising costs of $0.3 million and increased use of shared Headquarter services of $0.3 million.

● SG&A expenses for the Headquarters/Other group increased year-over-year by $0.4 million primarily due to a $2.2 million increase in personnel cost related to investments in resources to strengthen our IT, technical sales, and product management organizations.

This increase was partially offset by a decrease in unallocated Headquarter overhead costs year-over-year of $1.4 million.

The Headquarters/Other group provides services to the three segments in areas such as finance, distribution center, 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.

Restructuring and other charges incurred in the first quarter of 2023 were $0.9 million, which were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.

There were no such charges incurred in the first quarter of 2022.

Income from operations for the first quarter of 2023 decreased to $18.1 million, compared to $30.1 million for the first quarter of 2022, primarily due to a decrease in gross profit combined with an increase in SG&A expenses.

Income from operations as a percentage of net sales was 2.5% for the first quarter of 2023, compared to 3.8% for the prior year quarter, primarily due to a 4.7% decrease in gross profit combined with a 5.2% increase in SG&A expenses.

Income taxes.

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.

Our provision for income taxes in the first quarter of 2023 was $5.2 million, compared to $8.3 million for the first quarter of 2022, primarily due to the decrease in operating income.

Our effective tax rate was 26.8% for the quarter ended March 31, 2023, compared to 27.7% for the quarter ended March 31, 2022.

The decrease in our effective tax rate is primarily attributable to changes in state apportionment factors.

Net income for the first quarter of 2023 decreased to $14.2 million, compared to $21.8 million for the first quarter of 2022, primarily due to the $12.0 million, or 39.9%, decrease in operating income.

Liquidity and Capital Resources

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

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

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

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

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

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.

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

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

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

● Cash and Cash Equivalents .

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

At March 31, 2023, we had $134.8 million in cash and cash equivalents.

● Cash Generated from Operations .

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

● Credit Facility.

As of September 30, 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.

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 positive cash flow.

● Bank Line of Credit.

As of March 31, 2023, no borrowings were outstanding under 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 as of March 31, 2023.

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 September 30, 2022, we were in compliance with all covenants under the credit facility.

As of March 31, 2023, we were in compliance with all of the covenants under our bank line of credit.

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

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

A summary of 2023 dividend activity for our common stock is as follows:

Dividend Amount

Declaration Date

February 9, 2023

February 21, 2023

March 10, 2023

On May 4, 2023, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.08 per share.

The dividend will be paid on June 2, 2023 to all stockholders of record as of the close of business on May 16, 2023.

The declaration and payment of any future dividends is at the discretion of our Board of Directors and will depend upon our financial position, strategic plans, general business conditions and any other factors deemed relevant by our Board of Directors.

Summary of Sources and Uses of Cash

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

Cash flows from operating, investing and financing activities for the three months ended March 31, 2023 and 2022, 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):

Three Months Ended March 31,

Net cash provided by (used in) operating activities

Net cash used in investing activities

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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.

Cash provided by operating activities was $19.5 million for the three months ended March 31, 2023.

Cash provided by operating activities resulted primarily from $14.2 million of net income and $5.3 million of other non-cash items added back to net income, including $3.1 million of depreciation and amortization and $1.9 million of stock-based compensation expense.

A decrease in inventory of $9.4 million and increases in accounts payable and accrued expenses and other liabilities of $5.9 million and $2.5 million, respectively, also contributed to the positive inflow of cash.

These inflows were partially offset by increases in accounts receivable and prepaid expenses and other current assets of $11.5 million and $6.2 million, respectively.

The decrease in inventory was primarily due to a decrease in the amount of inventory we purchased during the first quarter of 2023.

The increases in accounts payable and accounts receivable were primarily driven by the timing of payments and receipts, respectively.

For the three months ended March 31, 2022, cash used in operating activities resulted primarily from a $28.0 million increase in inventory, a $27.2 million increase in accounts receivable, and a $10.5 million decrease in accounts payable.

These cash outflows were partially offset by net income of $21.8 million, non-cash items added back to net income of $5.0 million, and an increase in accrued expenses and other liabilities of $5.3 million.

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

Components of our cash conversion cycle are as follows:

September 30,

Days of sales outstanding (DSO) (1)

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(3) Represents the 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.

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

The cash conversion cycle increased slightly to 65 days at March 31, 2023, compared to 64 days at March 31, 2022.

The 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 decrease in DIO is consistent with the decrease in inventory for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022.

The decrease in DPO is consistent with the decrease in accounts payable for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022.

Cash used in investing activities for the three months ended March 31, 2023 represents $1.9 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 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.

In the prior year period, we made similar investments of $2.5 million in purchases of property and equipment.

Cash used in financing activities for the three months ended March 31, 2023 consisted of $59.3 million of borrowings and repayments, $3.4 million of treasury purchases, a $2.1 million payment of a special $0.08 per share dividend, and $0.2 million payment of payroll taxes on stock-based compensation through shares withheld.

In the prior year period, financing activities primarily consisted of $0.2 million payment of payroll taxes on stock-based compensation through shares withheld.

Debt Instruments, Contractual Agreements, and Related Covenants

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For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q .

Credit facility.

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

As of 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 September 30, 2022.

Bank Line of Credit.

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

As of March 31, 2023, our borrowing capacity under the bank line of credit was up to $50.0 million.

Amounts outstanding under this facility bear interest at the greatest of (i) the prime rate (8.00% at March 31, 2023), (ii) the federal funds effective rate plus 0.50% per annum, and (iii) the one-month London Interbank Offered Rate, plus 1.00% per annum, provided that the rate shall at no time be less than 0% per annum.

In addition, we have the ability to increase our borrowing capacity under the bank line of credit by an additional $30.0 million provided that 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 borrowings outstanding under the credit facility as of March 31, 2023.

Cash receipts are automatically applied against any outstanding borrowings.

Any excess cash on account may either remain on account to generate earned credits to offset up to 100% of cash management fees, or may be invested in short-term qualified investments.

Borrowings under the line of credit are classified as current.

As of March 31, 2023, the entire $50.0 million facility was available for borrowing.

Operating Leases.

We lease facilities from a related party, which is a company affiliated with us through common ownership, and facilities from third parties under non-cancelable operating leases.

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

Factors Affecting Sources of Liquidity

Cash Generated from Operations.

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

Credit Facility.

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

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

Internally Generated Funds.

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

Bank line of Credit.

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

As of March 31, 2023, the entire $50.0 million facility was available for borrowing.

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

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

This credit facility contains two financial tests:

● Our funded debt ratio (defined as the average outstanding advances under the credit facility for the quarter, divided by our consolidated trailing twelve months Adjusted EBITDA—earnings before interest expense, taxes, depreciation, amortization, and special charges—for the trailing four quarters) must not be more than 2.0 to 1.0.

Our outstanding borrowings under the credit facility 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 $552.0 million at September 30 , 2022, whereas our consolidated stockholders’ equity at that date was $756.1 million.

Any failure to comply with these covenants would constitute a default and could prevent us from borrowing additional funds under this line of credit.

This line of credit contains two financial tests:

● The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated trailing twelve months Adjusted Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges, or Adjusted EBITDA, for the trailing four quarters) must not be more than 2.0 to 1.0.

We did not have any outstanding borrowings under our line of credit as of March 31, 2023, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2023.

Future decreases in our consolidated trailing twelve months Adjusted EBITDA could limit our potential borrowings under the line of credit.

● 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 $568.5 million at March 31 , 2023, whereas our actual consolidated stockholders’ equity at that date was $776.5 million.

Capital Markets.

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

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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What changed 10-Q

Item 2. Management’s Discussion and Analysis