What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-04 · 173 added, 111 removed, 160 unchanged (64% of the section changed)

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● 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.

● the rate of innovations in the hardware, software and services we offer as well as 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 have impacted and are expected to continue to impact the level of investment our customers are willing to make in IT products.

Additional factors include those described in our 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.

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RESULTS OF OPERATIONS

The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:

Three Months Ended March 31,

Net sales (dollars in millions)

The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated (dollars in millions):

Three Months Ended June 30,

Six Months Ended June 30,

Selling, general and administrative expenses

Income from operations

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.

Net sales of $733.5 million for the second quarter of 2023 reflected a decrease of $95.0 million, or 11.5% compared to the second quarter of 2022.

The decrease was primarily driven by decreases in sales of notebooks/mobility, accessories, displays and sound, desktops, and software of $57.9 million, $25.0 million, $20.1 million, $19.1 million, and $7.2 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements.

These decreases were partially offset by increases in sales of net/com products and other hardware/services of $24.2 million and $8.0 million, respectively.

Gross profit for the second quarter of 2023 decreased year-over-year by $9.1 million, or 6.7%, to $127.8 million as illustrated in the table and discussion beginning on page 17 of this Quarterly Report on Form 10-Q.

Gross margin increased to 17.4% from 16.5% 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.

The increase in gross margin was primarily driven by increased net sales of higher margin products, such as software and networking solutions, relative to lower margin products, such as notebooks/mobility and desktops.

SG&A expenses decreased year-over-year by $1.1 million, or 1.1%, to $101.0 million.

The decrease in SG&A expenses was primarily driven by a $0.9 million decrease in professional fees.

SG&A expenses as a percentage of net sales increased to 13.8% compared to 12.3% 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.

Operating income in the second quarter of 2023 decreased year-over-year both in dollars and as a percentage of net sales by $9.7 million and 80 basis points, respectively, primarily as a result of the decrease in gross profit.

Net Sales Distribution

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Operating Segment

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Operating Segment

4 unchanged sentences

Operating Expenses

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

Three Months Ended March 31,

($ in millions)

The following table reflects our SG&A expenses for the periods indicated (dollars in millions):

Three Months Ended June 30,

Six Months Ended June 30,

Personnel costs

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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.

In the first and second quarters of 2023, we undertook actions to lower our cost structure.

In connection with these initiatives, we incurred restructuring and other charges for the three and six months ended June 30, 2023 of $1.7 million

and $2.6 million, respectively.

These restructuring charges 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 June 30, 2023.

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

The Company is currently evaluating additional restructuring activities for the third 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 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

Unless context otherwise requires, such references refer to changes between the three months ended June 30, 2023 and the three months ended June 30, 2022;

and changes between the six months ended June 30, 2023 and the six months ended June 30, 2022.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

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

Three Months Ended March 31,

Three Months Ended June 30,

Enterprise Solutions

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Public Sector Solutions

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

● Net sales of $287.1 million for the Enterprise Solutions segment reflect a decrease of $61.8 million, or 17.7%.

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.

The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, desktops, accessories, and displays and sound of $29.8 million, $19.1 million, $16.6 million, and $10.4 million, respectively.

These decreases were partially offset by increases in net sales of servers/storage and other hardware/services of $6.8 million and $6.8 million, respectively.

● Net sales of $261.0 million for the Business Solutions segment reflect a decrease of $67.4 million, or 20.5%.

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.

The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, accessories, displays and sound, servers/storage, software, and desktops of $35.1 million, $9.2 million, $7.3 million, $7.1 million, $5.7 million, and $4.7 million, respectively.

These decreases were partially offset by an increase in net sales of net/com products of $4.2 million.

● Net sales of $185.4 million for the Public Sector Solutions segment reflect an increase of $34.2 million, or 22.6%.

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.

Sales to state and local government and educational institutions increased by $20.6 million, or 15.7%, compared to the prior year quarter, while sales to the federal government increased by $13.6 million, or 67.8%.

The increase in net sales is primarily due to increases in net sales of net/com products, notebooks/mobility, desktops, other hardware/services, software, and servers/storage of $15.6 million, $7.0 million, $4.7 million, $3.6 million, $2.6 million, and $2.4 million, respectively, partially offset by a decrease in net sales of displays and sound of $2.4 million.

Gross profit for the second quarter of 2023 decreased year-over-year, while gross margin for the second 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 discussed in the preceding paragraph.

Gross margin increased by 50 basis points primarily due to an increase in the amount of software sales recognized on a net basis.

● Gross profit for the Business Solutions segment decreased primarily due to the decrease in net sales as discussed in the preceding paragraph.

Gross margin increased by 360 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 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements and the product mix table on page 16 during the second quarter of 2023.

The increase is also attributable to an increase in the amount of software sales recognized on a net basis.

● Gross profit for the Public Sector Solutions segment increased primarily due to the increase in net sales as discussed in the preceding paragraph.

Gross margin decreased by 110 basis points primarily due to an increase in sales of lower-margin notebooks/mobility and desktops as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements and the product mix table on page 16 .

Selling, general and administrative expenses in the second quarter of 2023 decreased in dollars but increased as a percentage of net sales compared to the second 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):

Three Months Ended March 31,

Three Months Ended June 30,

Enterprise Solutions

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Headquarters/Other, unallocated

● 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.

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

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

SG&A expenses as a percentage of net sales were 12.0% for the Enterprise Solutions segment in the second quarter of 2023, which reflects an increase of 190 basis points and is primarily due to the decrease in net sales, as discussed above.

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

The year-over-year change in SG&A dollars was primarily driven by a $1.2 million decrease in advertising costs.

SG&A expenses as a percentage of net sales were 16.3% for the Business Solutions segment in the second quarter of 2023, which reflects an increase of 310 basis points and is primarily due to the decrease in net sales, as discussed above .

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

The increase in SG&A dollars was primarily driven by a $1.8 million increase in personnel costs related to investments in resources to strengthen our sales organization.

SG&A expenses as a percentage of net sales were 11.7% for the Public Sector Solutions segment in the second quarter of 2023, which reflects a decrease of 130 basis points and is primarily due to the increase in net sales, as discussed above .

● SG&A expenses for the Headquarters/Other group decreased year-over-year by $1.7 million primarily due to decreases in personnel costs, professional fees, and other expenses of $1.5 million, $1.0 million, and $0.8 million, respectively.

These decreases were partially offset by an increase in unallocated Headquarter overhead costs year-over-year of $1.1 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.

Restructuring and other charges for the second quarter of 2023 were $1.7 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 second quarter of 2022.

Income from operations for the second quarter of 2023 decreased to $25.1 million, compared to $34.8 million for the second quarter of 2022, primarily due to a decrease in gross profit.

Income from operations as a percentage of net sales was 3.4% for the second quarter of 2023, compared to 4.2% for the prior year quarter, primarily due to a 6.7% decrease in gross profit.

Income taxes.

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.

Our provision for income taxes in the second quarter of 2023 was $7.2 million, compared to $9.4 million for the second quarter of 2022, primarily due to the decrease in operating income.

Our effective tax rate was 26.9% for the quarter ended June 30, 2023, compared to 27.0% for the quarter ended June 30, 2022.

Net income for the second quarter of 2023 decreased to $19.7 million, compared to $25.4 million for the second quarter of 2022, primarily due to the $9.7 million, or 27.9%, decrease in operating income.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

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

Six Months Ended June 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Gross Profit:

Enterprise Solutions

Business Solutions

Public Sector Solutions

Net sales decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, as explained by the year-over-year changes discussed below:

● Net sales of $601.1 million for the Enterprise Solutions segment reflect a decrease of $83.3 million, or 12.2%.

The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, desktops, displays and sound, and accessories of $36.8 million, $33.8 million, $20.8 million, and $17.0 million, respectively.

These decreases were partially offset by increases in net sales of software, other hardware/services, and servers/storage of $14.2 million, $4.2 million, and $4.0 million, respectively.

● Net sales of $534.1 million for the Business Solutions segment reflect a decrease of $114.7 million, or 17.7%.

The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, displays and sound, accessories, desktops, software, and servers/storage of $70.1 million, $17.3 million, $12.7 million, $9.5 million, $6.1 million, and $5.0 million, respectively.

These decreases were partially offset by an increase in net sales of net/com products of $9.8 million.

● Net sales of $325.9 million for the Public Sector Solutions segment reflect an increase of $42.2 million, or 14.9%.

Sales to state and local government and educational institutions increased by $2.1 million, or 0.9%, while sales to the federal government increased by $40.0 million, or 78.8%.

The increase in net sales is

primarily due to increases in net sales of net/com products, other hardware/services, software, servers/storage, and notebooks/mobility of $20.9 million, $9.6 million, $7.2 million, $2.7 million, and $1.9 million, respectively, partially offset by a decrease in displays and sound of $2.6 million.

Gross profit for the six months ended June 30, 2023 decreased year-over-year, while gross margin for the six months ended June 30, 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 discussed in the preceding paragraph.

Gross margin decreased by 40 basis points primarily due to a few low-margin customer contracts, which was partially offset by an increase in the amount of software sales recognized on a net basis, as well as increases in sales of higher-margin net/com products and servers/storage during the six months ended June 30, 2023 as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements and the product mix table on page 16 .

● Gross profit for the Business Solutions segment decreased primarily due to the decrease in net sales as discussed in the preceding paragraph.

Gross margin increased by 300 basis points primarily due to a shift in product mix to higher-margin sales of datacenter products including software, networking, and services as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements and the product mix table on page 16 for the six months ended June 30, 2023.

The increase is also attributable to an increase in the amount of software sales recognized on a net basis.

● Gross profit for the Public Sector Solutions segment increased primarily due to the increase in net sales as discussed in the preceding paragraph.

Gross margin remained consistent year-over-year.

Selling, general and administrative expenses for the six months ended June 30, 2023 increased in dollars as well as a percentage of net sales compared to the six months ended June 30, 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):

Six Months Ended June 30,

Enterprise Solutions

Business Solutions

Public Sector Solutions

Headquarters/Other, unallocated

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

The year-over-year change in SG&A dollars was primarily attributable to an increase in advertising costs of $1.8 million, partially offset by decreases in bad debt expense, personnel costs, and depreciation and amortization, and other expenses of $0.8 million, $0.7 million, and $0.2 million, respectively.

SG&A expenses as a percentage of net sales were 11.6% for the Enterprise Solutions segment for the six months ended June 30, 2023, which reflects an increase of 140 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 primarily driven by a $1.9 million increase in personnel costs related to investments in resources to strengthen our sales organization.

This increase was partially offset by a $0.8 million decrease in advertising costs.

SG&A expenses as a percentage of net sales were 16.1% for the Business Solutions segment for the six months ended June 30, 2023, which reflects an increase of 300 basis points and is primarily due to the decrease in net sales, as discussed above .

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

The increase in SG&A dollars was primarily driven by a $3.1 million increase in personnel costs related to investments in resources to strengthen our sales organization.

The increase in SG&A

dollars is also attributable to an increase in bad debt expense of $0.4 million.

SG&A expenses as a percentage of net sales were 12.9% for the Public Sector Solutions segment for the six months ended June 30, 2023, which reflects a decrease of 50 basis points and is primarily due to the increase in net sales, as discussed above .

● SG&A expenses for the Headquarters/Other group decreased year-over-year by $1.2 million primarily due to decreases in other expenses and professional fees of $1.7 million and $1.1 million, respectively.

These decreases were partially offset by increases in service contracts/subscriptions, personnel costs, and depreciation and amortization of $0.7 million, $0.7 million, and $0.4 million, respectively.

Restructuring and other charges for the six months ended June 30, 2023 were $2.6 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 for the six months ended June 30, 2022.

Income from operations for the six months ended June 30, 2023 decreased to $43.2 million, compared to $64.9 million for the six months ended June 30, 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 3.0% for the six months ended June 30, 2023, compared to 4.0% for the six months ended June 30, 2022, primarily due to a 5.7% decrease in gross profit combined with a 2.0% increase in SG&A expenses.

Income taxes.

Our provision for income taxes six months ended June 30, 2023 was $12.5 million, compared to $17.7 million for the six months ended June 30, 2022, primarily due to the decrease in operating income.

Our effective tax rate was 26.9% for the six months ended June 30, 2023, compared to 27.3% for the six months ended June 30, 2022.

Net income for the six months ended June 30, 2023 decreased to $33.9 million, compared to $47.2 million for the six months ended June 30, 2022, primarily due to the $21.7 million, or 33.5%, 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 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 primary sources of liquidity have historically been internally generated funds from operations and borrowings under our credit facility.

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 our common stock for treasury, dividend payments, and as opportunities arise, possible acquisitions of new businesses.

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

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

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

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

● Cash and Cash Equivalents .

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

At June 30, 2023, we had $244.0 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 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.

● Credit Facility.

As of June 30, 2023, no borrowings were outstanding under our $50.0 million credit facility, which is available until March 31, 2025.

Accordingly, our entire line of credit was available for borrowing as of June 30, 2023.

This maximum borrowing capacity under our credit facility can be increased, at our option, to up 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 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.

As of June 30, 2023, we were in compliance with all of the covenants under our credit facility.

other sources of financing, as may be required.

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

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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.

On August 2, 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 September 1, 2023 to all stockholders of record as of the close of business on August 15, 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 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,

Cash flows from operating, investing and financing activities for the six months ended June 30, 2023 and 2022, as reflected in the Unaudited Condensed Consolidated Statements of Cash Flows included in Item 1 of this Quarterly Report on Form 10-Q, are summarized in the following table (dollars in millions):

Six Months Ended June 30,

Net cash provided by (used in) operating activities

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Increase (decrease) in cash and cash equivalents

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.

Cash provided by operating activities was $135.4 million for the six months ended June 30, 2023.

Cash provided by operating activities resulted primarily from $33.9 million of net income, as well as a decrease in inventory and an increase in accounts payable of $48.9 million and $44.6 million, respectively.

A decrease in accounts receivable of $16.4 million and other non-cash activities added back to income of $11.5 million, including $6.2 million of depreciation and amortization and $3.6 million of stock-based compensation expense, also contributed to the positive inflow of cash for the six months ended June 30, 2023.

These inflows were partially offset by an increase in prepaid expenses, income tax receivable, and other current assets of $13.7 million, as well as a decrease in accrued expenses and other liabilities of $6.4 million.

The decrease in inventory was primarily due to a decrease in the amount of inventory we purchased, combined with the delivery of inventory held associated with the continued fulfillment of orders in backlog during the first six months of 2023.

The increase in accounts payable was primarily driven by the timing of payments and is consistent with the increase in days of purchases outstanding shown below.

For the six months ended June 30, 2022, cash used in operating activities resulted primarily from a $16.6 million increase in inventory, a $38.1 million increase in accounts receivable, and a $8.0 million decrease in accounts payable and accrued expenses and other liabilities.

These cash outflows were partially offset by net income of $47.2 million and non-cash items added back to net income of $10.4 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.

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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 65 days at March 31, 2023, compared to 64 days at March 31, 2022.

The cash conversion cycle decreased to 50 days at June 30, 2023, compared to 58 days at June 30, 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.

The decrease in DIO is consistent with the decrease in inventory for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The increase in DPO is consistent with the decrease in cost of sales for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022.

Cash used in investing activities for the six months ended June 30, 2023 represents $4.8 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 period, we made similar investments of $4.6 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.

Cash used in financing activities for the six months ended June 30, 2023 consisted of $67.9 million of aggregate borrowings and repayments, $5.4 million of treasury purchases, $4.2 million of $0.08 per share dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $0.5 million payments of payroll taxes on stock-based compensation through shares withheld.

In the prior year period, financing activities primarily consisted of $0.4 million payments of payroll taxes on stock-based compensation through shares withheld.

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit facility and other contractual obligations.

For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see “Factors Affecting Sources of Liquidity” below.

For more information about the restrictive covenants in our credit facility, see “Factors Affecting Sources of Liquidity” below.

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

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.

Credit Facility.

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

As of June 30, 2023, our borrowing capacity under the credit facility was up to $50.0 million.

Amounts outstanding under this facility bear interest at the greatest of (i) the prime rate (8.25% at June 30, 2023), (ii) the federal funds effective rate plus 0.50% per annum, and (iii) the daily BSBY 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 credit facility by up to 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.

We did not have any borrowings outstanding under the credit facility as of June 30, 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.

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 credit facility are classified as current in our condensed consolidated balance sheet.

As of June 30, 2023, the entire $50.0 million facility was available for borrowing.

Operating Leases.

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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.

Credit Facility.

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

As of June 30, 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.

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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.

● The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated trailing twelve months 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 June 30, 2023, and accordingly, the funded debt ratio did not limit potential borrowings as of June 30, 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.

Such amount was calculated as $578.4 million at June 30 , 2023, whereas our actual consolidated stockholders’ equity at that date was $794.1 million.

Capital Markets.

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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-Q

Item 2. Management’s Discussion and Analysis