Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
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 include statements concerning, among other things, our future financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), liabilities, impairment charges, competition, and the expected 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 and are based on assumptions as of the date of this report. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. 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), the execution of our business plans (including our inventory management, cost structure and 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; and
● 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 our Annual Report on Form 10-K for the year ended December 31, 2023, 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 the other subsequent filings we make with the Securities and Exchange Commission from time to time.
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. 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 except as required by law.
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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.
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OVERVIEW
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 Organization, or TSO, 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. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of in-country suppliers in over 150 countries.
The “Connection®” brand includes Connection Enterprise Solutions, Connection Business Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to enterprise, small- to medium-sized businesses, and public sector markets.
Financial results for each of our segments are included in the financial statements attached hereto. We generate sales through (i) outbound inside sales and field sales contacts by sales representatives focused on the business, educational, healthcare, retail, manufacturing, and government markets, (ii) our websites, and (iii) direct responses from customers responding to our advertising media. We offer a broad selection of over 460,000 products at competitive prices, including products from vendors like Apple, Cisco, Dell Inc., Hewlett-Packard Inc., Hewlett-Packard Enterprise, Intel, Lenovo, Microsoft Corporation, and VMware, and we partner with more than 2,500 suppliers. We are able to leverage our state-of-the art logistic capabilities to rapidly ship product to customers.
As a value-added reseller in the IT supply chain, we do not manufacture IT hardware or software products. We are dependent on our suppliers—manufacturers and distributors that historically have only sold to resellers rather than directly to end users. However, 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, eliminate our role. We believe that the success of these direct sales efforts by manufacturers will depend on their ability to meet our customers’ ongoing demands and provide solutions to meet their needs. We believe 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 our customers’ individual needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our TSO, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and 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 major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we have invested and expect to continue to invest in our IT solutions business, which requires the addition of highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add additional service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.
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Market 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 infrastructure 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.
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 (dollars in millions):
Three Months Ended March 31,
2024
2023
Net sales
$
632.0
$
727.5
Gross margin
18.7
%
16.8
%
Selling, general and administrative expenses
16.6
%
14.2
%
Income from operations
2.1
%
2.5
%
Net sales of $632.0 million for the first quarter of 2024 reflected a decrease of $95.5 million, or 13.1% compared to the first quarter of 2023. The decrease was primarily driven by decreases in sales of notebooks/mobility, software, net/com products, accessories, other hardware/services, and servers/storage of $39.7 million, $20.4 million, $14.7 million, $10.3 million, $8.5 million, and $4.3 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to our Unaudited Condensed Consolidated Financial Statements. These decreases were partially offset by an increase in sales of desktops of $1.6 million. Gross profit for the first quarter of 2024 decreased year-over-year by $4.2 million, or 3.5%, to $118.1 million as illustrated in the table and the discussion beginning on page 19 of this Quarterly Report on Form 10-Q. Gross margin increased to 18.7% from 16.8% a year ago. The increase in gross margin was primarily driven by an increase in the amount of software sales recognized on a net basis. SG&A expenses increased year-over-year by $1.3 million, or 1.3%, to $104.6 million. SG&A expenses as a percentage of net sales increased to 16.6% compared to 14.2% 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 for the first quarter of 2024 decreased year-over-year both in dollars and as a percentage of net sales by $4.7 million and 40 basis points, respectively, primarily as a result of the decrease in gross profit discussed above.
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Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Three Months Ended March 31,
2024
2023
Operating Segment
Enterprise Solutions
45
%
43
%
Business Solutions
40
38
Public Sector Solutions
15
19
Total
100
%
100
%
Product Mix
Notebooks/Mobility
35
%
36
%
Desktops
10
9
Software
10
12
Servers/Storage
7
6
Net/Com Products
7
9
Displays and Sound
10
9
Accessories
13
12
Other Hardware/Services
8
7
Total
100
%
100
%
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
Three Months Ended March 31,
2024
2023
Operating Segment
Enterprise Solutions
15.1
%
13.4
%
Business Solutions
23.6
21.9
Public Sector Solutions
16.0
14.5
Total Company
18.7
%
16.8
%
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated (dollars in millions):
Three Months Ended March 31,
2024
2023
Personnel costs
$
78.5
$
79.2
Advertising
7.4
6.6
Service contracts/subscriptions
6.0
5.2
Professional fees
3.4
3.8
Depreciation and amortization
3.3
3.1
Facilities operations
1.8
2.2
Credit card fees
1.6
1.5
Other
2.6
1.7
Total SG&A expense
$
104.6
$
103.3
As a percentage of net sales
16.6
%
14.2
%
Restructuring and Other Charges
There were no restructuring and other charges recorded for the three months ended March 31, 2024. In the first quarter of 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred
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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. The Company is currently evaluating additional restructuring activities for the second quarter of 2024 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, 2024 and the three months ended March 31, 2023.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
Three Months Ended March 31,
2024
2023
% of
% of
$
%
Amount
Net Sales
Amount
Net Sales
Change
Change
Net Sales:
Enterprise Solutions
$
282.6
44.7
%
$
313.9
43.2
%
$
(31.3)
(10.0)
%
Business Solutions
255.9
40.5
273.1
37.5
(17.2)
(6.3)
Public Sector Solutions
93.5
14.8
140.5
19.3
(47.0)
(33.4)
Total
$
632.0
100.0
%
$
727.5
100.0
%
$
(95.5)
(13.1)
%
Gross Profit:
Enterprise Solutions
$
42.7
15.1
%
$
42.1
13.4
%
$
0.6
1.6
%
Business Solutions
60.4
23.6
59.9
21.9
0.5
0.8
Public Sector Solutions
15.0
16.0
20.3
14.5
(5.3)
(26.3)
Total
$
118.1
18.7
%
$
122.3
16.8
%
$
(4.2)
(3.5)
%
Net sales decreased for the first quarter of 2024 compared to the first quarter of 2023, as explained by the year-over-year changes discussed below:
● Net sales of $282.6 million for the Enterprise Solutions segment reflect a decrease of $31.3 million, or 10.0%. The decrease in net sales is primarily due to decreases in net sales of notebooks/mobility, software, and accessories of $24.1 million, $12.1 million, and $6.1 million, respectively. These decreases were partially offset by increases in net sales of desktops and displays and sound of $7.9 million and $4.5 million, respectively.
● Net sales of $255.9 million for the Business Solutions segment reflect a decrease of $17.2 million, or 6.3%. The decrease in net sales is primarily due to decreases in net sales of net/com products, software, notebooks/mobility, servers/storage, other hardware/services, and displays and sound of $6.5 million, $3.9 million, $2.8 million, $2.7 million, $1.4 million, and $1.1 million, respectively. These decreases were partially offset by an increase in net sales of accessories of $1.6 million.
● Net sales of $93.5 million for the Public Sector Solutions segment reflect a decrease of $47.0 million, or 33.4%. Sales to the federal government decreased by $39.5 million, or 69.1%, compared to the prior year quarter, and sales to state and local government and educational institutions decreased by $7.5 million, or 9.0%. The decrease in net sales is primarily due to decreases in net sales across all product categories, most notably notebooks/mobility, net/com products, other hardware/services, accessories, desktops, and software of $12.9 million, $7.7 million, $6.4 million, $5.9 million, $5.7 million, and $4.4 million, respectively. The decrease is also attributable to two large federal projects that were fulfilled in the first quarter of 2023 that did not repeat.
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Gross profit for the first quarter of 2024 decreased year-over-year, while gross margin for the first quarter of 2024 increased year-over-year, as explained by the year-over-year changes discussed below:
● Gross profit for the Enterprise Solutions segment remained substantially the same year-over-year. Gross margin increased by 170 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 remained substantially the same year-over-year. Gross margin increased by 170 basis points primarily due to an increase in the amount of software sales recognized on a net basis.
● Gross profit for the Public Sector Solutions segment decreased by $5.3 million primarily due to the decrease in net sales as discussed in the preceding paragraph. Gross margin increased by 150 basis points primarily due to an increase in the amount of software sales recognized on a net basis.
Selling, general and administrative expenses for the first quarter of 2024 increased both in dollars and as a percentage of net sales compared to the first quarter of 2023. 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,
2024
2023
% of
% of
Segment Net
Segment Net
$
%
Amount
Sales
Amount
Sales
Change
Change
Enterprise Solutions
$
36.9
13.0
%
$
35.5
11.3
%
$
1.4
3.8
%
Business Solutions
44.6
17.4
43.4
15.9
1.2
2.8
Public Sector Solutions
20.3
21.7
20.3
14.4
—
—
Headquarters/Other, unallocated
2.8
4.1
(1.3)
(31.0)
Total
$
104.6
16.6
%
$
103.3
14.2
%
$
1.3
1.3
%
● SG&A expenses for the Enterprise Solutions segment increased year-over-year both in dollars and as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to an increase in use of shared Headquarter services of $3.2 million, partially offset by a decrease in personnel costs of $1.9 million. SG&A expenses as a percentage of net sales were 13.0% for the Enterprise Solutions segment for the first quarter of 2024, which reflects an increase of 170 basis points and is primarily due to the decrease in net sales discussed above.
● SG&A expenses for the Business Solutions segment increased year-over-year both in dollars and as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to increases in use of shared Headquarter services and advertising costs of $0.8 million and $0.6 million, respectively, partially offset by a decrease in personnel costs of $0.6 million. SG&A expenses as a percentage of net sales were 17.4% for the Business Solutions segment for the first quarter of 2024, which reflects an increase of 150 basis points and is primarily due to the decrease in net sales discussed above .
● SG&A expenses for the Public Sector Solutions segment remained substantially the same 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 a $0.4 million increase in use of shared Headquarter services, partially offset by a $0.5 million decrease in personnel costs. SG&A expenses as a percentage of net sales were 21.7% for the Public Sector Solutions segment for the first quarter of 2024, which reflects an increase of 730 basis points and is primarily due to the decrease in net sales discussed above .
● SG&A expenses for the Headquarters/Other group decreased year-over-year by $1.3 million primarily due to a decrease in unallocated Headquarter overhead costs of $4.4 million, partially offset by increases in personnel costs and service contracts/subscriptions of $2.4 million and $1.0 million, respectively. 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.
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Restructuring and other charges were not incurred in the first quarter of 2024. The charges incurred in the first quarter of 2023 were $0.9 million, which were primarily related to expenses incurred in connection with the involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits.
Income from operations for the first quarter of 2024 decreased to $13.5 million, compared to $18.1 million for the first quarter of 2023, primarily due to the decreases in net sales and gross profit discussed above. Income from operations as a percentage of net sales was 2.1% for the first quarter of 2024, compared to 2.5% for the prior year quarter, primarily due to the decrease in net sales discussed above.
Interest income, net for the first quarter of 2024 increased to $4.6 million, compared to $1.3 million for the first quarter of 2023, primarily due to an increase in interest income of $3.3 million as a result of higher cash equivalent balances and interest rates on short-term investments.
Income taxes. Our provision for income taxes for the first quarter of 2024 decreased to $4.9 million, compared to $5.2 million for the first quarter of 2023. Our effective tax rate increased to 27.0% for the quarter ended March 31, 2024, compared to 26.8% for the quarter ended March 31, 2023, primarily due to changes in state tax rates.
Net income for the first quarter of 2024 decreased to $13.2 million, compared to $14.2 million for the first quarter of 2023, primarily due to a $4.6 million decrease in income from operations, partially offset by a $3.3 million increase in interest income, net.
Liquidity and Capital Resources
Our primary sources of liquidity are internally generated funds from operations, short-term investments, 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, short-term investments, and the available capacity 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 and beyond such twelve calendar month period. 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 and beyond through a combination of cash on hand, short-term investments, cash generated from operations, and borrowings under our credit facility, as follows:
● Cash and Cash Equivalents . As of March 31, 2024, we had $147.6 million in cash and cash equivalents.
● Short-term Investments . As of March 31, 2024, we had $204.4 million in short-term investments.
● 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.
● Credit Facility. As of March 31, 2024, 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 March 31, 2024. 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, 2024, we were in compliance with the covenants of our credit facility.
Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, or our customers are materially adversely impacted
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by the developing macroeconomic trends characterized by inflation and increased interest rates, our cash flows from operations may be substantially affected.
Dividends
A summary of 2024 dividend activity for our common stock is as follows:
Dividend Amount
Declaration Date
Record Date
Payment Date
$
0.10
February 12, 2024
February 27, 2024
March 15, 2024
On May 1, 2024, we announced that our Board of Directors declared a quarterly cash dividend on our common stock of $0.10 per share. The dividend will be paid on May 29, 2024 to all stockholders of record as of the close of business on May 14, 2024. 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, 2024 and 2023, as reflected in our 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 (in millions):
Three Months Ended March 31,
2024
2023
Net cash provided by operating activities
$
57.3
$
19.5
Net cash used in investing activities
(51.6)
(1.9)
Net cash used in financing activities
(3.1)
(5.7)
Increase in cash and cash equivalents
$
2.6
$
11.9
Cash provided by operating activities was $57.3 million for the three months ended March 31, 2024. Cash provided by operating activities resulted primarily from $13.2 million of net income and a $79.3 million decrease in accounts receivable. An increase in accrued expenses and other liabilities of $6.0 million and depreciation and amortization added back to net income of $3.3 million also contributed to the positive inflow of cash for the three months ended March 31, 2024. These inflows were partially offset by a decrease in accounts payable of $45.1 million. The decrease in accounts receivable was primarily driven by the timing of receipts, combined with decreased levels of business activity. The decrease in accounts payable was primarily driven by the timing of payments. For the three months ended March 31, 2023, cash provided by operating activities resulted primarily from net income adjusted for non-cash charges of $19.5 million, 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, partially offset by increases in accounts receivable and prepaid expenses and other current assets of $11.5 million and $6.2 million, respectively.
In order to manage our working capital and operating cash needs, we monitor our cash conversion cycle, defined as days of sales outstanding in accounts receivable plus days of supply in inventory minus days of purchases outstanding in accounts payable, based on a rolling three-month average. Components of our cash conversion cycle are as follows:
March 31,
(in days)
2024
2023
Days of sales outstanding (DSO) (1)
70
71
Days of supply in inventory (DIO) (2)
22
30
Days of purchases outstanding (DPO) (3)
(39)
(36)
Cash conversion cycle
53
65
(1) Represents the trade receivable at the end of the quarter divided by average daily net sales for the same three-month period.
(2) Represents the inventory balance at the end of the quarter divided by average daily cost of sales for the same three-month period.
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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 decreased to 53 days for the quarter ended March 31, 2024, compared to 65 days for the quarter ended March 31, 2023. The decrease in DSO is primarily due to improved collections. The decrease in DIO is consistent with the decrease in inventory for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase in DPO is consistent with the decrease in cost of sales for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023.
Cash used in investing activities for the three months ended March 31, 2024 consisted of $100.0 million of purchases of U.S. Government treasury securities, $50.0 million of maturities of U.S. Government treasury securities, and $1.6 million of purchases of property and equipment. These property and equipment 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 property and equipment investments of $1.9 million.
Cash used in financing activities for the three months ended March 31, 2024 consisted of $8.3 million of aggregate borrowings and repayments, $0.2 million of treasury purchases, $2.6 million of dividend payments, and $0.2 million payments of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily consisted of $3.4 million of treasury purchases, $2.1 million of dividend payments, and $0.2 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 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 .
Credit Facility. Our credit facility extends until March 2025 and is collateralized by our accounts receivable. As of March 31, 2024, 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 (8.50% at March 31, 2024), (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 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, 2024.
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 credit facility are classified as current in our condensed consolidated balance sheets. As of March 31, 2024, 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. See “Item 2. Properties” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding our operating leases.
Factors Affecting Sources of Liquidity
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.
Credit Facility. Our credit facility extends until March 2025 and is collateralized by our accounts receivable. As of March 31, 2024, 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,
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and other distributions, investments, and liens) with which we and all of our subsidiaries must comply. 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 credit facility 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 EBITDA) must not be more than 2.0 to 1.0. Such amount was calculated as 0.0 to 1.0 for the three months ended March 31, 2024, and accordingly, the funded debt ratio did not limit potential borrowings as of March 31, 2024. 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 $609.6 million at March 31, 2024 , whereas our actual consolidated stockholders’ equity at that date was $852.7 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 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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, “Basis of Presentation,” in the Notes to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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