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, or the Exchange Act. 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 caption “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.
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 September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net sales
$
724.7
$
693.1
$
2,093.2
$
2,154.2
Gross margin
18.7
%
19.0
%
18.6
%
17.7
%
Selling, general and administrative expenses
14.5
%
14.4
%
15.1
%
14.1
%
Income from operations
4.1
%
4.6
%
3.6
%
3.5
%
Net sales of $724.7 million for the third quarter of 2024 reflected an increase of $31.6 million, or 4.6% compared to the third quarter of 2023. The increase was primarily driven by increases in net sales of notebooks/mobility, desktops, software, accessories, and displays and sound of $37.9 million, $10.8 million, $8.7 million, $8.5 million, and $4.1 million, respectively, as shown in the table in Note 2 “Revenue” in the Notes to our Unaudited Condensed Consolidated Financial Statements. These increases were partially offset by decreases in net sales of advanced technology categories including net/com products, servers/storage, and other hardware/services of $26.3 million, $6.7 million, and $5.6 million, respectively. Gross profit for the third quarter of 2024 increased year-over-year by $3.5 million, or 2.7%, to $135.4 million as illustrated in the table and the discussion beginning on page 19 of this Quarterly Report on Form 10-Q. Gross margin decreased to 18.7% from 19.0% a year ago. The decrease in gross margin was primarily driven by a shift in product mix to lower-margin sales of endpoint devices including 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 18. This decrease was partially offset by an increase in the amount of software sales recognized on a net basis. SG&A expenses increased year-over-year by $5.6 million, or 5.6%, to $105.4 million. SG&A expenses as a percentage of net sales increased to 14.5% compared to 14.4% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to increases in personnel costs related to investments in resources designed to strengthen our sales, technical sales, and services capabilities, advertising, and service contracts/subscriptions as shown in the table on page 18 of this Quarterly Report on Form 10-Q combined with the increase in net sales as discussed above. Operating income for the third quarter of 2024 decreased year-over-year both in dollars and as a percentage of net sales by $2.0 million and 50 basis points, respectively, primarily as a result of the increase in SG&A expenses as discussed above.
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Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Operating Segment
Enterprise Solutions
41
%
40
%
42
%
41
%
Business Solutions
35
39
38
37
Public Sector Solutions
24
21
20
22
Total
100
%
100
%
100
%
100
%
Product Mix
Notebooks/Mobility
36
%
32
%
35
%
34
%
Desktops
11
10
11
9
Software
12
11
11
11
Servers/Storage
6
7
7
7
Net/Com Products
8
12
8
11
Displays and Sound
10
10
10
9
Accessories
11
10
11
11
Other Hardware/Services
6
8
7
8
Total
100
%
100
%
100
%
100
%
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, for the periods indicated:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Operating Segment
Enterprise Solutions
15.6
%
16.0
%
15.4
%
14.7
%
Business Solutions
25.0
23.3
24.1
22.9
Public Sector Solutions
14.9
16.9
15.2
14.5
Total Company
18.7
%
19.0
%
18.6
%
17.7
%
Operating Expe nses
The following table reflects our SG&A expenses for the periods indicated (dollars in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Personnel costs
$
79.9
$
77.5
$
239.5
$
233.5
Advertising
6.2
4.6
18.8
16.5
Service contracts/subscriptions
6.4
5.1
18.1
15.5
Professional fees
3.3
2.6
9.8
9.3
Depreciation and amortization
3.3
3.3
9.8
9.5
Facilities operations
1.9
2.0
5.6
6.2
Credit card fees
1.8
2.1
5.1
5.3
Other
2.6
2.6
8.5
8.3
Total SG&A expense
$
105.4
$
99.8
$
315.2
$
304.1
As a percentage of net sales
14.5
%
14.4
%
15.1
%
14.1
%
Restructuring and Other Charges
During the nine months ended September 30, 2024 and the three and nine months ended September 30, 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other
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charges of $0.4 million for the nine months ended September 30, 2024 compared to restructuring and other charges of less than $0.1 million and $2.7 million for the three and nine months ended September 30, 2023, respectively, which were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. We did not incur any restructuring charges in the three months ended September 30, 2024.
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, 2024 and the three months ended September 30, 2023; and changes between the nine months ended September 30, 2024 and the nine months ended September 30, 2023.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
Three Months Ended September 30,
2024
2023
% of
% of
$
%
Amount
Net Sales
Amount
Net Sales
Change
Change
Net Sales:
Enterprise Solutions
$
297.0
41.0
%
$
276.6
39.9
%
$
20.4
7.4
%
Business Solutions
252.6
34.9
269.0
38.8
(16.4)
(6.1)
Public Sector Solutions
175.1
24.1
147.5
21.3
27.6
18.7
Total
$
724.7
100.0
%
$
693.1
100.0
%
$
31.6
4.6
%
Gross Profit:
Enterprise Solutions
$
46.2
15.6
%
$
44.2
16.0
%
$
2.0
4.4
%
Business Solutions
63.1
25.0
62.7
23.3
0.4
0.7
Public Sector Solutions
26.1
14.9
25.0
16.9
1.1
4.4
Total
$
135.4
18.7
%
$
131.9
19.0
%
$
3.5
2.7
%
Net sales increased for the third quarter of 2024 compared to the third quarter of 2023, as explained by the year-over-year changes discussed below:
● Net sales of $297.0 million for the Enterprise Solutions segment reflect an increase of $20.4 million, or 7.4%. The increase in net sales is primarily due to increases in net sales of displays and sound, desktops, and accessories of $12.1 million, $12.0 million, and $3.5 million, respectively. These increases were partially offset by decreases in net sales of other hardware/services, notebooks/mobility, servers/storage, and net/com products of $4.0 million, $1.4 million, $1.3 million, and $1.2 million, respectively.
● Net sales of $252.6 million for the Business Solutions segment reflect a decrease of $16.4 million, or 6.1%. The decrease in net sales is primarily due to decreases in net sales of net/com products, displays and sound, servers/storage, and other hardware/services of $17.5 million, $3.6 million, $2.8 million, and $1.7 million, respectively. These decreases were partially offset by an increase in net sales of notebooks/mobility of $9.0 million.
● Net sales of $175.1 million for the Public Sector Solutions segment reflect an increase of $27.6 million, or 18.7%. Sales to the federal government increased by $25.6 million, or 97.2%, compared to the prior year quarter, and sales to state and local government and educational institutions increased by $2.0 million, or 1.7%. The increase in sales to the federal government was primarily driven by a few large orders in the current period. The increase in net sales is primarily due to increases in net sales of notebooks/mobility, software, and accessories of $30.4 million, $8.4 million, and $4.4 million, respectively. These increases were partially offset by decreases in net sales of net/com products, displays and sound, servers/storage, and desktops of $7.6 million, $4.4 million, $2.6 million, and $1.1 million, respectively.
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Gross profit and gross margin for the third quarter of 2024 increased year-over-year, as explained by the year-over-year changes discussed below:
● Gross profit for the Enterprise Solutions segment increased by $2.0 million primarily due to the increase in net sales as discussed in the preceding paragraph. Gross margin decreased by 40 basis points primarily due to reduced software agency fees and a shift in product mix to lower-margin sales of devices including displays and sound and desktops as shown in the table in Note 2 “Revenue” in the Notes to the Unaudited Condensed Consolidated Financial Statements .
● 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, as well as changes in customer mix.
● Gross profit for the Public Sector Solutions segment increased by $1.1 million primarily due to the increase in net sales as discussed in the preceding paragraph. Gross margin decreased by 200 basis points primarily due to a few low-margin deals in the current period.
Selling, general and administrative expenses for the third quarter of 2024 increased in dollars but remained substantially the same as a percentage of net sales compared to the third 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 September 30,
2024
2023
% of
% of
Segment Net
Segment Net
$
%
Amount
Sales
Amount
Sales
Change
Change
Enterprise Solutions
$
35.9
12.1
%
$
33.0
11.9
%
$
2.9
8.8
%
Business Solutions
43.1
17.1
41.6
15.5
1.5
3.5
Public Sector Solutions
21.7
12.4
20.9
14.1
0.8
4.1
Headquarters/Other, unallocated
4.7
4.3
0.4
7.5
Total
$
105.4
14.5
%
$
99.8
14.4
%
$
5.6
5.6
%
● SG&A expenses for the Enterprise Solutions segment increased year-over-year in dollars but remained substantially the same 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 of $3.4 million and $0.4 million, respectively, partially offset by decreases in personnel costs, other expenses, and depreciation and amortization of $0.3 million, $0.2 million, and $0.2 million, respectively.
● 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 of $1.4 million and $1.1 million, respectively, partially offset by a decrease in personnel costs of $1.0 million. SG&A expenses as a percentage of net sales were 17.1% for the Business Solutions segment for the third quarter of 2024, which reflects an increase of 160 basis points and is primarily due to the decrease in net sales discussed above .
● SG&A expenses for the Public Sector Solutions segment increased in dollars but decreased as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to increases in use of shared Headquarter services and personnel costs of $0.7 million and $0.3 million, respectively, partially offset by a decrease in credit card fees of $0.2 million. SG&A expenses as a percentage of net sales were 12.4% for the Public Sector Solutions segment for the third quarter of 2024, which reflects a decrease of 170 basis points and is primarily due to the increase in net sales discussed above .
● SG&A expenses for the Headquarters/Other group increased year-over-year by $0.4 million primarily due to increases in personnel costs, service contracts/subscriptions, professional fees, and other expenses of $3.4 million, $1.3 million, $0.8 million, and $0.3 million, respectively, partially offset by an increase in the allocated amounts to the sales segments of $5.5 million. The Headquarters/Other group provides services to the three
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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 were not incurred during the third quarter of 2024. Restructuring and other charges for the third quarter of 2023 were less than $0.1 million. The restructuring and other charges 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 third quarter of 2024 decreased to $30.0 million, compared to $32.0 million for the third quarter of 2023, primarily due to the increase in SG&A expenses, partially offset by the increase in gross profit, as discussed above. Income from operations as a percentage of net sales was 4.1% for the third quarter of 2024, compared to 4.6% for the prior year quarter, primarily due to the increase in net sales, as discussed above.
Interest income, net for the third quarter of 2024 increased to $4.8 million, compared to $2.7 million for the third quarter of 2023, primarily due to an increase in interest income of $2.2 million as a result of higher cash equivalent balances and interest rates on short-term investments.
Other income for the third quarter of 2024 was $1.7 million as a result of a legal settlement received.
Income taxes. Our provision for income taxes for the third quarter of 2024 increased to $9.5 million, compared to $9.1 million for the third quarter of 2023. Our effective tax rate decreased to 26.0% for the quarter ended September 30, 2024, compared to 26.3% for the quarter ended September 30, 2023, primarily due to non-recurring benefits included in the current year.
Net income for the third quarter of 2024 increased to $27.1 million, compared to $25.6 million for the third quarter of 2023, primarily due to a $2.1 million increase in interest income, net and other income of $1.7 million, partially offset by a decrease in income from operations of $2.0 million and an increase in the provision for income taxes of $0.4 million.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Changes in net sales and gross profit by segment are shown in the following table (dollars in millions):
Nine Months Ended September 30,
2024
2023
% of
% of
$
%
Amount
Net Sales
Amount
Net Sales
Change
Change
Net Sales:
Enterprise Solutions
$
878.4
42.0
%
$
877.7
40.7
%
$
0.7
0.1
%
Business Solutions
786.7
37.6
803.2
37.3
(16.5)
(2.0)
Public Sector Solutions
428.1
20.4
473.3
22.0
(45.2)
(9.6)
Total
$
2,093.2
100.0
%
$
2,154.2
100.0
%
$
(61.0)
(2.8)
%
Gross Profit:
Enterprise Solutions
$
135.0
15.4
%
$
129.3
14.7
%
$
5.7
4.4
%
Business Solutions
189.8
24.1
183.9
22.9
5.9
3.2
Public Sector Solutions
65.2
15.2
68.8
14.5
(3.6)
(5.2)
Total
$
390.0
18.6
%
$
382.0
17.7
%
$
8.0
2.1
%
Net sales decreased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, as explained by the year-over-year changes discussed below:
● Net sales of $878.4 million for the Enterprise Solutions segment remained substantially the same year-over-year. Increases in net sales of desktops and displays and sound of $39.0 million and $26.6 million, respectively, were offset by decreases in net sales of notebooks/mobility, other hardware/services, net/com products, software, accessories, and servers/storage of $23.3 million, $13.4 million, $11.4 million, $7.4 million, $5.1 million, and $4.4 million, respectively.
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● Net sales of $786.7 million for the Business Solutions segment reflect a decrease of $16.5 million, or 2.0%. The decrease in net sales is primarily due to decreases in net sales of net/com products, displays and sound, and other hardware/services of $32.7 million, $8.4 million, and $1.8 million, respectively. These decreases were partially offset by increases in net sales of notebooks/mobility, servers/storage, and accessories of $16.0 million, $6.0 million, and $4.5 million, respectively.
● Net sales of $428.1 million for the Public Sector Solutions segment reflect a decrease of $45.2 million, or 9.6%. Sales to the federal government decreased by $22.1 million, or 18.9%, and sales to state and local government and educational institutions decreased by $23.1 million, or 6.5%. The decrease in net sales is primarily due to decreases in net sales of net/com products, desktops, other hardware/services, displays and sound, accessories, and servers/storage of $23.3 million, $11.9 million, $7.8 million, $7.0 million, $6.5 million, and $2.4 million, respectively. These decreases were partially offset by an increase in net sales of notebooks/mobility of $13.1 million.
Gross profit and gross margin for the nine months ended September 30, 2024 increased year-over-year, as explained by the year-over-year changes discussed below:
● Gross profit for the Enterprise Solutions segment increased by $5.7 million primarily due to improved invoice margins in desktops, displays, and notebooks/mobility. Gross margin increased by 70 basis points primarily due to an increase in the amount of software sales recognized on a net basis, as well as improved invoice margins in desktops and notebooks/mobility.
● Gross profit for the Business Solutions segment increased by $5.9 million primarily due to improved invoice margins in software, notebooks/mobility, accessories, and other hardware/services. Gross margin increased by 120 basis points primarily due to an increase in the amount of software sales recognized on a net basis, as well as improved invoice margins in desktops and accessories.
● Gross profit for the Public Sector Solutions segment decreased by $3.6 million primarily due to the decrease in net sales as discussed in the preceding paragraph, partially offset by improved invoice margins in notebooks/mobility, server/storage, and other hardware/services. Gross margin increased by 70 basis points primarily due to improved invoice margins in notebooks/mobility, server/storage, and other hardware/services.
Selling, general and administrative expenses for the nine months ended September 30, 2024 increased both in dollars and as a percentage of net sales compared to the nine months ended September 30, 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):
Nine Months Ended September 30,
2024
2023
% of
% of
Segment Net
Segment Net
$
%
Amount
Sales
Amount
Sales
Change
Change
Enterprise Solutions
$
108.6
12.4
%
$
102.9
11.7
%
$
5.7
5.6
%
Business Solutions
131.8
16.8
127.5
15.9
4.3
3.3
Public Sector Solutions
63.5
14.8
62.9
13.3
0.6
1.0
Headquarters/Other, unallocated
11.3
10.8
0.5
4.9
Total
$
315.2
15.1
%
$
304.1
14.1
%
$
11.1
3.7
%
● 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 $10.2 million, partially offset by decreases in personnel costs and depreciation and amortization of $3.7 million and $0.6 million, respectively. SG&A expenses as a percentage of net sales were 12.4% for the Enterprise Solutions segment for the nine months ended September 30, 2024, which reflects an increase of 70 basis points and is primarily due to the increase in SG&A expenses.
● 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
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use of shared Headquarter services and advertising of $3.8 million and $2.5 million, respectively, partially offset by decreases in personnel costs and other expenses of $1.4 million and $0.6 million, respectively. SG&A expenses as a percentage of net sales were 16.8% for the Business Solutions segment for the nine months ended September 30, 2024, which reflects an increase of 90 basis points and is primarily due to the decrease in net sales discussed above, combined with the increase in SG&A expenses .
● SG&A expenses for the Public Sector 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 $1.9 million, partially offset by decreases in personnel costs, credit card fees, and other expenses of $0.6 million, $0.4 million, and $0.4 million, respectively. SG&A expenses as a percentage of net sales were 14.8% for the Public Sector Solutions segment for the nine months ended September 30, 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 Headquarters/Other group increased year-over-year primarily due to increases in personnel costs, service contracts/subscriptions, depreciation and amortization, and other expenses of $11.6 million, $2.9 million, $1.0 million, and $0.9 million, respectively, partially offset by an increase in the allocated amounts to the sales segments of $15.8 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 for the nine months ended September 30, 2024 were $0.4 million, compared to $2.7 million for the nine months ended September 30, 2023. The restructuring and other charges 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 nine months ended September 30, 2024 decreased to $74.4 million, compared to $75.2 million for the nine months ended September 30, 2023, primarily due to the increase in SG&A expenses, partially offset by the increase in gross profit and decrease in restructuring and other charges, as discussed above. Income from operations as a percentage of net sales was 3.6% for the nine months ended September 30, 2024, compared to 3.5% for the nine months ended September 30, 2023, primarily due to the decrease in net sales discussed above.
Interest income, net for the nine months ended September 30, 2024 increased to $14.1 million, compared to $5.8 million for the nine months ended September 30, 2023, primarily due to an increase in interest income of $8.3 million as a result of higher cash equivalent balances and interest rates on short-term investments.
Other income for the nine months ended September 30, 2024 was $1.7 million as a result of a legal settlement received.
Income taxes. Our provision for income taxes for the nine months ended September 30, 2024 increased to $23.8 million, compared to $21.6 million for the nine months ended September 30, 2023. Our effective tax rate decreased to 26.4% for the nine months ended September 30, 2024, compared to 26.6% for the nine months ended September 30, 2023, primarily due to non-recurring benefits included in the current year.
Net income for the nine months ended September 30, 2024 increased to $66.4 million, compared to $59.5 million for the nine months ended September 30, 2023, primarily due to a $8.3 million increase in interest income, net and other income of $1.7 million, partially offset by a $2.2 million increase in the provision for income taxes.
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.
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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 September 30, 2024, we had $167.5 million in cash and cash equivalents.
● Short-term Investments . As of September 30, 2024, we had $261.6 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 September 30, 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 September 30, 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 September 30, 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 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
$
0.10
April 30, 2024
May 14, 2024
May 29, 2024
$
0.10
July 30, 2024
August 13, 2024
August 30, 2024
On October 30, 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 November 29, 2024 to all stockholders of record as of the close of business on November 12, 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 nine months ended September 30, 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):
Nine Months Ended September 30,
2024
2023
Net cash provided by operating activities
$
148.7
$
185.7
Net cash used in investing activities
(109.7)
(56.1)
Net cash used in financing activities
(16.4)
(12.0)
Increase in cash and cash equivalents
$
22.6
$
117.6
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Cash provided by operating activities was $148.7 million for the nine months ended September 30, 2024. Cash provided by operating activities resulted primarily from $66.4 million of net income, an increase in accounts payable of $29.1 million, and a decrease in accounts receivable of $20.9 million. A decrease in inventory of $10.5 million, an increase in accrued expenses and other liabilities of $9.6 million, and depreciation and amortization and stock-based compensation expense added back to net income of $9.8 million and $6.2 million, respectively, also contributed to the positive inflow of cash for the nine months ended September 30, 2024. These inflows were partially offset by the amortization of discounts on short-term investments of $4.4 million subtracted from net income. The increase in accounts payable and decrease in accounts receivable were primarily driven by the timing of payments. For the nine months ended September 30, 2023, cash provided by operating activities resulted primarily from net income adjusted for non-cash charges of $76.8 million, a decrease in inventory of $66.4 million, an increase in accounts payable of $31.6 million, and a decrease in accounts receivable of $20.9 million, partially offset by an increase in prepaid expenses, income tax receivable, and other current assets of $9.6 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,
(in days)
2024
2023
Days of sales outstanding (DSO) (1)
67
71
Days of supply in inventory (DIO) (2)
18
23
Days of purchases outstanding (DPO) (3)
(45)
(43)
Cash conversion cycle
40
51
(1) Represents the trade receivable at the end of the quarter divided by average daily net sales for the same three-month period.
(2) Represents the inventory balance at the end of the quarter divided by average daily cost of sales for the same three-month period.
(3) Represents the accounts payable balance at the end of the quarter divided by average daily cost of sales for the same three-month period.
The cash conversion cycle decreased to 40 days at September 30, 2024, compared to 51 days at September 30, 2023. The decrease in DSO is consistent with the increase in net sales for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in DIO is consistent with the decrease in inventory for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in DPO is consistent with the increase in accounts payable as of September 30, 2024 compared to September 30, 2023.
Cash used in investing activities for the nine months ended September 30, 2024 consisted of $255.1 million of purchases of U.S. Government treasury securities, $150.6 million of maturities of U.S. Government treasury securities, and $5.2 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, investing activities consisted of $48.7 million of purchases of U.S. Government treasury securities and $7.4 million of purchases of property and equipment.
Cash used in financing activities for the nine months ended September 30, 2024 consisted of $25.2 million of aggregate borrowings and repayments, $7.7 million of treasury purchases, $7.9 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $1.3 million payments of payroll taxes on stock-based compensation through shares withheld. In the prior year period, financing activities primarily consisted of $70.9 million of aggregate borrowings and repayments, $5.4 million of treasury purchases, $6.3 million of dividend payments, $0.5 million of issuances of stock under the Employee Stock Purchase Plan, and $0.9 million payments of payroll taxes on stock-based compensation through shares withheld.
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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 September 30, 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 (8.00% at September 30, 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 September 30, 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 September 30, 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 September 30, 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, 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 at September 30, 2024, and accordingly, the funded debt ratio did not limit potential borrowings as of September 30, 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 $636.2 million at September 30, 2024 , whereas our actual consolidated stockholders’ equity at that date was $897.4 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.
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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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.