# PC CONNECTION INC (CNXN) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from PC CONNECTION INC's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1050377/000155837022003574/cnxn-20211231x10k.htm Accession: 0001558370-22-003574 Filing date: 2022-03-14 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CNXN/ All MD&A years: /company/CNXN/mda/ Next year: /company/CNXN/mda/fy2022/ (FY 2022) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ​ The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote understanding of the results of operations and financial conditions. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section discusses the results of operations for the year ended December 31, 2021 and year-to-year comparison between the year ended December 31, 2021 and the year ended December 31, 2020. Discussion of the year ended December 31, 2020 and the year-to-year comparison between the year ended December 31, 2020 and the year ended December 31, 2019 can be found in Part II, Item 7 “Management’s Discussions and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020. Our MD&A also includes the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See “Cautionary Note Concerning Forward-Looking Statements” and “Item 1A. Risk Factors.” ​ OVERVIEW ​ We are a Fortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology. Our dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center, or TIDC, with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of incountry suppliers in over 150 countries. ​ The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, or SMBs, enterprise, and public sector markets. ​ Financial results for each of our segments are included in the financial statements attached hereto. We generate sales through (i)outbound telemarketing and field sales contacts by sales representatives focused on the business, educational, healthcare, 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 Systems, Dell, Dell-EMC, Hewlett-Packard Inc., Hewlett-Packard Enterprise, Lenovo, Microsoft, 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, typically the same day the order is received. ​ As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers—manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have, on multiple occasions, sold or attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers’ ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking comprehensive IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our Technical Solutions Group, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical 26 Table of Contents certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment. ​ The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general, and administrative, or SG&A, expenses while making major investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels. ​ To support future growth, we are expanding our IT solutions business, which requires the addition of highly-skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted. ​ 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 development to meet these new demands. ​ Our investments in IT infrastructure are designed to enable us to operate more efficiently and provide our customers enhanced functionality. ​ EFFECTS OF COVID-19 ​ As the effects of the COVID-19 pandemic continue to evolve, it is difficult to predict and forecast the impact it might have on our business and results of operations in the future. However, global supply chain disruptions have limited our ability to acquire products in a timely manner and we anticipate these global supply chain challenges will persistent through the first half of 2022. In response to the delays we are experiencing in acquiring products, we increased our inventory levels during the year ended December 31, 2021 to allay some of our customers’ concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. Relatedly, we also experienced an increase in our backlog as supply global supply chain challenges delayed our ability to fulfil customer orders. We continue to monitor the effects on our customers, suppliers, and the economy as a whole and will continue to adjust our business practices, as necessary, to respond to the changing demand for, and supply of, our products. ​ 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: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,"],["\u200b","\u200b","\u200b","2021","\u200b","\u200b","2020","","\u200b","2019","\u200b"],["Net sales (in millions)","\u200b","$","2,892.6","\u200b","$","2,590.3","\u200b","$","2,820.0","\u200b"],["Gross margin","\u200b","\u200b","16.1","%","\u200b","16.2","%","\u200b","16.0","%"],["Selling, general and administrative expenses","\u200b","","12.7","\u200b","","13.3","\u200b","","12.0","\u200b"],["Income from operations","\u200b","","3.3","\u200b","","2.8","\u200b","","4.0","\u200b"]] [[/GREPCENT_TABLE]] ​ Net sales of $2,892.6 million in 2021 reflected an increase of $302.3 million compared to 2020, which was driven by higher net sales across all of our business segments. The increase in net sales was primarily driven by the growing hybrid work trend resulting in higher demand for mobility products. Additionally, we saw revenue growth in our manufacturing and healthcare vertical markets compared to 2020. Gross profit increased year-over-year by $45.8 million, primarily due to the increase of net sales. SG&A expenses increased year-over-year by $22.3 million, driven primarily by increased personnel cost of $21.2 million associated with the increased variable compensation due to the 27 Table of Contents higher levels of gross profit and increased employee benefit costs. Operating income increased year-over-year both in dollars and as a percentage of net sales by $24.4 million and 50 basis points, respectively, primarily as a result of the increase in net sales. ​ Sales Distribution ​ The following table sets forth our percentage of net sales by sales segment and product mix: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,"],["\u200b","\u200b","2021","","2020","","2019"],["Sales Segment","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Enterprise Solutions","\u200b","43","%","43","%","42","%"],["Business Solutions","\u200b","38","","37","","38","\u200b"],["Public Sector Solutions","\u200b","19","","20","","20","\u200b"],["Total","\u200b","100","%","100","%","100","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Product Mix","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Notebooks/Mobility","\u200b","38","%","32","%","29","%"],["Desktops","\u200b","9","\u200b","10","\u200b","12","\u200b"],["Software","\u200b","10","\u200b","11","\u200b","12","\u200b"],["Servers/Storage","\u200b","7","\u200b","8","\u200b","8","\u200b"],["Net/Com Product","\u200b","7","","8","","8","\u200b"],["Displays and sound","\u200b","10","","8","","9","\u200b"],["Accessories","\u200b","12","","14","","13","\u200b"],["Other Hardware/Services","\u200b","7","","9","","9","\u200b"],["Total","\u200b","100","%","100","%","100","%"]] [[/GREPCENT_TABLE]] ​ Gross Profit Margins ​ The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three years:   ​ ​ ​ ​ ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,"],["\u200b","\u200b","2021","","2020","","2019"],["Sales Segment","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Enterprise Solutions","\u200b","14.5","%","14.5","%","14.4","%"],["Business Solutions","\u200b","19.2","","19.4","","19.1","\u200b"],["Public Sector Solutions","\u200b","13.3","","13.8","","13.6","\u200b"],["Total Company","\u200b","16.1","%","16.2","%","16.0","%"]] [[/GREPCENT_TABLE]] ​ Cost of Sales ​ Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances. ​ 28 Table of Contents Operating Expenses ​ The following table reflects our most significant operating expenses for the last three years (in millions of dollars): ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,"],["($ in millions)","\u200b","2021","","2020","","2019"],["Personnel costs","\u200b","$","277.8","\u200b","$","256.6","\u200b","$","257.8","\u200b"],["Advertising","\u200b","","15.8","\u200b","","14.0","\u200b","","19.4","\u200b"],["Service contracts/subscriptions","\u200b","\u200b","17.3","\u200b","","15.0","\u200b","","12.9","\u200b"],["Professional fees","\u200b","","16.4","\u200b","","19.4","\u200b","","10.6","\u200b"],["Depreciation and amortization","\u200b","","12.2","\u200b","","13.6","\u200b","","13.3","\u200b"],["Facilities operations","\u200b","","8.3","\u200b","","8.5","\u200b","","8.5","\u200b"],["Credit card fees","\u200b","","7.0","\u200b","","6.8","\u200b","","6.6","\u200b"],["Other","\u200b","","13.3","\u200b","","11.8","\u200b","","9.5","\u200b"],["Total SG&A expense","\u200b","$","368.1","\u200b","$","345.7","\u200b","$","338.6","\u200b"],["As a percentage of net sales","\u200b","\u200b","12.7","%","\u200b","13.3","%","\u200b","12.0","%"]] [[/GREPCENT_TABLE]] ​ Restructuring and other charges ​ There were no restructuring related costs incurred for the year ended December 31, 2021. In the years ended December 31 2020 and 2019, we undertook actions across the business to lower our cost structure and align our business in an effort to improve our ability to execute our strategy. In connection with these restructuring initiatives, we incurred restructuring and related costs of $1.0 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively. ​ YEAR-OVER-YEAR COMPARISONS ​ Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 ​ Net sales increased by 11.7% to $2,892.6 million in 2021 from $2,590.3 million in 2020. Changes in net sales and gross profit by operating segment are shown in the following table (dollars in millions): ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,","\u200b","\u200b"],["\u200b","\u200b","2021","\u200b","2020","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","","% of","","\u200b","\u200b","","% of","","%"],["\u200b","\u200b","Amount","\u200b","Net Sales","\u200b","Amount","\u200b","Net Sales","\u200b","Change"],["Net Sales:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Enterprise Solutions","\u200b","$","1,249.5","\u200b","43.2","%","$","1,115.6","\u200b","43.1","%","12.0","%"],["Business Solutions","\u200b","","1,098.5","","38.0","\u200b","","966.0","","37.3","","13.7","\u200b"],["Public Sector Solutions","\u200b","","544.6","","18.8","\u200b","","508.7","","19.6","","7.1","\u200b"],["Total","\u200b","$","2,892.6","\u200b","100.0","%","$","2,590.3","\u200b","100.0","%","11.7","%"],["Gross Profit:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Enterprise Solutions","\u200b","$","180.6","\u200b","14.5","%","$","161.7","\u200b","14.5","%","11.7","%"],["Business Solutions","\u200b","","211.4","","19.2","\u200b","","187.0","","19.4","","13.0","\u200b"],["Public Sector Solutions","\u200b","","72.6","","13.3","\u200b","","70.1","","13.8","","3.5","\u200b"],["Total","\u200b","$","464.6","\u200b","16.1","%","$","418.8","\u200b","16.2","%","10.9","%"]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Net sales of $1,249.5 million for the Enterprise Solutions segment reflect an increase of $133.9 million, or 12.0%, year-over-year as a result of our customers\u2019 needs for mobility products to support their work-from-anywhere initiatives. Net sales of notebooks/mobility, displays and sound, and desktops increased year-over-year by $125.4 million, $47.3 million, and $11.5 million, respectively. These increases were partially offset by decreases in accessories, other hardware/services, net/com products, and servers/storage of $22.3 million, $11.9 million, $9.8 million, and $10.1 million, respectively."]] [[/GREPCENT_TABLE]] 29 Table of Contents ​ [[GREPCENT_TABLE]] [["\u25cf","Net sales of $1,098.5 million for the Business Solutions segment reflect an increase of $132.5 million, or 13.7% year-over-year. The increase in net sales was primarily driven by strong growth in our customers\u2019 needs for mobility products to support their work-from-anywhere initiatives. We experienced increases in notebooks/mobility, other hardware/services, displays and sound, net/com products and accessories of $107.0 million, $10.8 million, $13.7 million, $6.5 million and $1.6 million, respectively. Those increases were partially offset by the decrease of net sales of $4.6 million and $2.0 million in software and desktops sales, respectively."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Net sales of $544.6 million for the Public Sector Solutions segment increased by $35.9 million, or 7.1%, compared with the same period a year ago. The increase was primarily driven by an increase of sales in state, local government and educational institutions, partially offset by the decrease of sales to Federal Governments. Net sales of notebooks/mobility products, desktops, and displays and sounds products increased by $38.1 million, $9.2 million and $7.7 million, respectively, compared with the prior year, which was partially offset by the decrease of net sales in net/com products and servers/storage of $13.6 million, and $5.6 million, respectively."]] [[/GREPCENT_TABLE]] ​ Gross profit for 2021 increased year-over-year in dollars but gross margin slightly decreased, as explained below: ​ [[GREPCENT_TABLE]] [["\u25cf","Gross profit for the Enterprise Solutions segment increased $18.9 million, or 11.7% year-over-year. This increase is primarily due to the 12.0% increase in net sales. The gross margin was flat compared with the prior year."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Gross profit for the Business Solutions segment increased $24.4 million, or 13.0% year-over-year. This increase is as a result of a 13.7% increase in net sales. However, gross margin decreased year-over-year by 20 basis points, primarily due to a change of product mix."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Gross profit for the Public Sector Solutions segment increased by $2.5 million, or 3.5% year-over-year, primarily as a result of higher net sales in the current period. Gross margin decreased by 50 basis points based on changes in product mix."]] [[/GREPCENT_TABLE]] ​ SG&A in 2021 increased in dollars but decreased as a percentage of net sales compared to the prior year. SG&A expenses attributable to our three operating segments and the remaining unallocated Headquarters/Other group expenses are summarized below (dollars in millions): ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,","\u200b","\u200b"],["\u200b","\u200b","2021","\u200b","2020","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","","% of Net","","\u200b","\u200b","","% of Net","","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Amount","\u200b","Sales","\u200b","Amount","\u200b","Sales","\u200b","Change"],["Enterprise Solutions","\u200b","$","106.0","","8.5","%","$","102.2","","9.2","%","3.7","%"],["Business Solutions","\u200b","\u200b","167.6","\u200b","15.3","\u200b","\u200b","154.5","\u200b","16.0","\u200b","8.5","\u200b"],["Public Sector Solutions","\u200b","","77.5","","14.2","\u200b","","72.8","","14.3","","6.5","\u200b"],["Headquarters/Other, unallocated","\u200b","","17.0","\u200b","\u200b","\u200b","","16.2","\u200b","\u200b","","4.9","\u200b"],["Total","\u200b","$","368.1","\u200b","12.7","%","$","345.7","\u200b","13.3","%","6.5","%"]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","SG&A expenses for the Enterprise Solutions segment increased in dollars but decreased as a percentage of net sales. The year-over-year change in SG&A dollars was primarily attributable to a $2.3 million increase in the use of Headquarter services, primarily due to the higher personnel costs associated with the higher levels of gross profit and the increased employee benefit costs. This year-over-year increase is also driven by a $1.9 million increase in personnel cost. SG&A expenses as a percentage of net sales were 8.5% for the Enterprise Solutions segment for the year ended December 31, 2021, which reflects a decrease of 70 basis points. This decrease year-over-year was largely due to the higher net sales in 2021."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","SG&A expenses for the Business Solutions segment increased in dollars but decreased as a percentage of net sales. The year-over-year increase in SG&A dollars was primarily driven by the increased Headquarter services of $7.1"]] [[/GREPCENT_TABLE]] 30 Table of Contents [[GREPCENT_TABLE]] [["","million, including the higher variable compensation expenses resulting from the higher gross profit for the year ended December 31, 2021. The year-over-year increase in SG&A was also attributable to increased personnel costs and advertising costs in the amount of $4.1 million and $1.7 million respectively. SG&A expenses as a percentage of net sales were 15.3% for the Business Solutions segment for the year ended December 31, 2021 compared to 16.0% for 2020, which reflects a decrease of 70 basis points year-over-year, largely resulting from higher net sales compared with the prior year."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","SG&A expenses for the Public Sector Solutions segment increased in dollars but decreased as a percentage of net sales. The increase in SG&A dollars year-over-year is primarily attributable to an increase in the usage of Headquarter services of $3.5 million, which included an increase in variable compensation expenses associated with the higher gross profit for the year ended December 31, 2021. Increased personnel costs of $0.2 million as well as the increased bad debt expense of $0.5 million also contributed to the year-over-year SG&A increase. SG&A expenses as a percentage of net sales were 14.2 % for the Public Sector Solutions segment for the year ended December 31, 2021, which reflects a decrease of 10 basis points. This decrease year-over-year is primarily attributable to higher net sales compared with the same period a year ago."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","SG&A expenses for the Headquarters/Other group increased by $0.8 million primarily due to an increase in unallocated executive oversight costs year-over-year. This increase was primarily driven by the increased variable compensation costs resulting from the higher gross profit during the current year."]] [[/GREPCENT_TABLE]] ​ Income from operations for the year ended December 31, 2021 increased to $96.5 million, compared to $72.1 million for the same period in the prior year, primarily due to the increases in net sales and gross profit, along with an increase in SG&A expense year-over-year. Income from operations as a percentage of net sales increased to 3.3% for the year ended December 31, 2021, compared to 2.8% of net sales for the same period in the prior year, primarily due to the increase in net sales and lower SG&A expenses as a percentage of net sales year-over-year. Income taxes. Our effective tax rate was 27.6% for the year-ended December 31, 2021, compared to 23.8% for the year ended December 31, 2020. Our provision for income taxes for the year ended December 31, 2021 was $26.6 million, which included $0.3 million of discrete items mainly related to research and development tax credits recognized in the year ended December 31, 2021. Our provision for income taxes for the year ended December 31, 2020 was $17.4 million, which included $2.9 million of discrete items mainly related to research and development tax credits recognized in the year ended December 31, 2020. The non-taxable life insurance gain reduced our effective tax rate by 0.3% for the year ended December 31, 2020. Net income increased by $14.1 million to $69.9 million for the year ended December 31, 2021, from $55.8 million in the prior year, which resulted from the increase in operating income in the current year. ​ LIQUIDITY AND CAPITAL RESOURCES ​ Liquidity Overview ​ 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 and beyond. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality. ​ 31 Table of Contents We expect to meet our cash requirements for 2022 and beyond through a combination of cash on hand, cash generated from operations, and borrowings on our bank line of credit, as follows: ​ [[GREPCENT_TABLE]] [["\u25cf","Cash on Hand. At December 31, 2021, we had $108.3 million in cash and cash equivalents."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and managing net changes in inventories and receivables with changes in payables to generate a positive cash flow."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Credit Facilities. As of December 31, 2021, no borrowings were outstanding against our $50.0 million bank line of credit, which is available until March 31, 2025. Accordingly, our entire line of credit was available for borrowing at December 31, 2021. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below. As of December 31, 2021, we are in compliance with all of our financial covenants."]] [[/GREPCENT_TABLE]] ​ Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While we do not anticipate needing any additional sources of financing to fund our operations at this time, if demand for IT products declines, our cash flows from operations may be substantially affected. See also related risks listed under “Item 1A. Risk Factors.” ​ Summary Sources and Uses of Cash ​ The following table summarizes our sources and uses of cash over the last three years (in millions of dollars): ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years Ended December 31,"],["\u200b","\u200b","2021","","2020","","2019"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by operating activities","\u200b","$","57.8","\u200b","$","36.1","\u200b","$","36.6","\u200b"],["Net cash used in investing activities","\u200b","","(8.7)","\u200b","","(11.0)","\u200b","","(25.7)","\u200b"],["Net cash used in financing activities","\u200b","","(36.4)","\u200b","","(19.5)","\u200b","","(12.5)","\u200b"],["Increase (decrease) in cash and cash equivalents","\u200b","$","12.7","\u200b","$","5.6","\u200b","$","(1.6)","\u200b"]] [[/GREPCENT_TABLE]] ​ Cash provided by operating activities was $57.8 million for the year ended December 31, 2021. Cash flow provided by operations during the year ended December 31, 2021, resulted primarily from net income, adding back other non-cash charges and increases in accounts payable and accrued expenses, which increased by $32.5 million for the year ended December 31, 2021, and was driven primarily by the timing of payments. These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in inventory of $65.7 million for the year ended December 31, 2021, primarily driven by the increase of inventory purchases for customer requested future rollouts and concerns associated with the global supply chain challenges caused by the COVID-19 pandemic. Operating cash flow for the year ended December 31, 2020 resulted primarily from cash provided by net income prior to non-cash charges of $55.8 million and increases in account payables and accrued expenses of $43.1 million primarily due to the timing of payments. Those inflow of cash from operating activities were partially offset by increases in account receivable of $63.6 million for the year ended December 31, 2020. ​ 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: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,"],["(in days)","\u200b","2021","\u200b","2020"],["Days of sales outstanding (DSO)(1)","\u200b","\u200b","65","\u200b","\u200b","75"],["Days of supply in inventory (DIO)(2)","\u200b","\u200b","28","\u200b","\u200b","23"],["Days of purchases outstanding (DPO)(3)","\u200b","\u200b","(38)","\u200b","\u200b","(44)"]] [[/GREPCENT_TABLE]] 32 Table of Contents [[GREPCENT_TABLE]] [["Cash conversion cycle","\u200b","\u200b","55","\u200b","\u200b","54"]] [[/GREPCENT_TABLE]] ​ (1) Represents the rolling three-month average of the balance of accounts receivable, net at the end of the period, divided by average daily net sales for the same three-month period. Also incorporates components of other miscellaneous receivables. ​ (2) Represents the rolling three-month average of the balance of merchandise inventory at the end of the period divided by average daily cost of sales for the same three-month period. ​ (3) Represents the rolling three-month average of the combined balance of accounts payable-trade, excluding cash overdrafts, and accounts payable-inventory financing at the end of the period divided by average daily cost of sales for the same three-month period. ​ ​ The cash conversion cycle was 55 days at December 31, 2021, which is increased in comparison to the cash conversion cycle 54 days at December 31, 2020. ​ Cash used in investing activities for the year ended December 31, 2021 consisted of $10.3 million of purchases of property and equipment. These expenditures were primarily for computer equipment and capitalized internally-developed software in connection with investments in our IT infrastructure. Cash used for capital expenditures for the year ended December 31, 2021 was partially offset by $1.5 million of cash proceeds from life insurance. Cash used in investing activities for the prior year consisted of $11.0 million purchases of property and equipment. ​ Cash used in financing activities increased for the year ended December 31, 2021 compared to the prior year and consisted primarily of $34.6 million in special dividend payments. In the prior year period, financing activities consisted primarily of a $8.4 million payment of a special $0.32 per share dividend and $10.2 million for the purchase of treasury shares. ​ Debt Instruments, Contractual Agreements, and Related Covenants ​ Below is a summary of certain provisions of our credit facilities 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 our obligations, commitments, and contingencies, see our consolidated financial statements and the accompanying notes included in this annual report. ​ Bank Line of Credit. Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable. Our borrowing capacity is up to $50.0 million at the greatest of (i) the prime rate (3.25% at December 31, 2021), (ii) the federal funds effective rate plus 0.50% per annum and (iii) the one-month London Interbank Offered Rate, or LIBOR, plus 1.00% per annum, provided that the rate shall at no time be less than 0% per annum. In addition, we have the option to increase the facility by an additional $30.0 million to meet additional borrowing requirements. Our credit facility is subject to certain covenant requirements which are described below under “Factors Affecting Sources of Liquidity.” We did not have any borrowings under the credit facility at December 31, 2021. ​ In December of 2021, we entered into an amendment to our credit facility to, among other things, extend the maturity date to March 31, 2025, at which time any amounts outstanding become due. See “Part II – Item 9b. Other Information – Third Amendment to Third Amended and Restated Credit and Security Agreement” for additional information. ​ 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. At December 31, 2021, the entire $50.0 million facility was available for borrowing. ​ 33 Table of Contents Operating Leases. We lease facilities from our principal stockholders and facilities from third parties under non-cancelable operating leases. Certain leases require us to pay real estate taxes, insurance, and common area maintenance charges. ​ Factors Affecting Sources of Liquidity ​ Internally Generated Funds. The key factors affecting our internally generated funds are our ability to manage costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels. ​ Bank Line of Credit. Our bank line of credit extends until March 2025 and is collateralized by our accounts receivable. As of December 31, 2021, 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: ​ [[GREPCENT_TABLE]] [["\u25cf","The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated Adjusted EBITDA for the trailing four quarters) must not be more than 2.0 to 1.0. We don\u2019t have any outstanding borrowings under the credit facility during the fourth quarter of 2021, and accordingly, the funded debt ratio did not limit potential borrowings as of December 31, 2021. Future decreases in our consolidated Adjusted EBITDA, however, could limit our potential borrowings under the credit facility."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u25cf","Minimum Consolidated Net Worth must be at least $346.7 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended December 31, 2016. Such amount was calculated at December 31, 2021 as $516.8 million, whereas our actual consolidated stockholders\u2019 equity at this date was $682.5 million."]] [[/GREPCENT_TABLE]] ​ Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets. 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 ​ A critical accounting policy has been defined as one that is both important to the portrayal of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Further, “critical accounting policies” are those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. ​ We believe that our accounting policies described below meet the definition of critical accounting policies and estimates. ​ Revenue Recognition ​ Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In most instances, when several performance obligations are aggregated into one single transaction, these performance obligations are fulfilled at the same point in time. We account for an arrangement when it has approval and commitment from both parties, the rights are identified, the contract has commercial substance, and collectability of consideration is probable. We generally obtain oral or written purchase authorizations from our customers for a specified amount of product at a specified price, which constitutes an arrangement. Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently 34 Table of Contents remitted to governmental authorities. We generally invoice for our products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements. Nature of Products and Services IT products typically represent a distinct performance obligation, and revenue is recognized at the point in time when control is transferred to the customer which is generally upon delivery to the customer. We recognize revenue as the principal in the transaction with the customer (i.e., on a gross basis), as we control the product prior to delivery to the customer and derive the economic benefits from the sales transaction given our control over customer pricing. We do not recognize revenue for goods that remain in our physical possession before the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from the products, the goods are ready for physical transfer to and identified as belonging to the customer, and when we have no ability to use the product or to direct it to another customer. Licenses for on-premise software provide the customer with a right to take possession of the software. Customers may purchase perpetual licenses or enter into subscriptions to the licensed software. We are the principal in these transactions and recognize revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable. For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services. We do not have control over the delivery of these performance obligations, and accordingly we are the agent in these transactions. We recognize revenue for security software net of the related cost of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement. Cloud products allow customers to use hosted software over the contractual period without taking possession of the software and are provided on a subscription basis. We do not exercise control over these products or services and therefore are an agent in these transactions. We recognize revenue for cloud products net of the related costs of sales at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements. We use our own engineering personnel to assist in projects involving the design and installation of systems and networks, and we also engage third-party service providers to perform warranty maintenance, implementations, asset disposal, and other services. Service revenue is recognized in general over time as we perform the underlying services and satisfy our performance obligations. We evaluate such engagements to determine whether we are the principal or the agent in each transaction. For those transactions in which we do not control the service, we act as an agent and recognize the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement. Similarly, we recognize revenue from agency sales transactions on a net sales basis. In agency sales transactions, we facilitate product sales by equipment and software manufacturers directly to our customers and receive agency, or referral, fees for such transactions. We do not take title to the products or assume any maintenance or return obligations in these transactions; title is passed directly from the supplier to our customer. Amounts recognized on a net basis included in net sales for such third-party services and agency sales transactions were $50.0 million, $47.8 million, and $51.0 million for the years ended December 31, 2021, 2020, and 2019, respectively. Certain software sales include on-premise licenses that are combined with software maintenance. Software maintenance conveys rights to updates, bug fixes and help desk support, and other support services transferred over the underlying contract period. On-premise licenses are considered distinct performance obligations when sold with the software maintenance, as we sell these items separately. We recognize revenue related to the software maintenance as the agent in these transactions because we do not have control over the on-going software maintenance service. Revenue allocated to software maintenance is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangements. 35 Table of Contents Certain of our larger customers are offered the opportunity by vendors to purchase software licenses and maintenance under enterprise agreements, or EAs. Under EAs, customers are considered to be compliant with applicable license requirements for the ensuing year, regardless of changes to their employee base. Customers are charged an annual true-up fee for changes in the number of users over the year. With most EAs, our vendors will transfer the license and bill the customer directly, paying resellers, such as us, an agency fee or commission on these sales. We record these agency fees as a component of net sales as earned and there is no corresponding cost of sales amount. In certain instances, we invoice the customer directly under an EA and account for the individual items sold based on the nature of each item. Our vendors typically dictate how the EA will be sold to the customer. We also offer extended service plans, or ESP, on IT products, both as part of the initial arrangement and separately from the IT products. We recognize revenue related to ESP as the agent in the transaction because we do not have control over the on-going ESP service and do not provide any service after the sale. Revenue allocated to ESP is recognized at the point in time when our vendor and customer accept the terms and conditions in the sales arrangement. All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales. Costs related to shipping and handling billing are classified as cost of sales. Sales are reported net of sales, use, or other transaction taxes that are collected from customers and remitted to taxing authorities. Critical Accounting Estimates Our contracts with customers often include promises to transfer multiple products or services to a customer. Determining whether we are the agent or the principal and whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We estimate the standalone selling price, or SSP, for each distinct performance obligation when a single arrangement contains multiple performance obligations and the fulfillment occurs at different points of times. We maximize the use of observable inputs in the determination of the estimate for SSP for the items that we do not sell separately, including on-premise licenses sold with software maintenance, and IT products sold with ESP. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We provide our customers with a limited thirty-day right of return, which is generally limited to defective merchandise, and gives rise to variable consideration. Revenue is recognized based on the most likely amount to which we are expected to be entitled. The estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty is resolved. We make estimates of product returns based on significant historical experience. We record our sales return reserve as a reduction of revenues and either as reduction of accounts receivable or, for customers who have already paid, as accrued expenses and as a reduction of cost of sales and an associated right of return asset. At December 31, 2021, we recorded sales reserves of $4.2 million and $0.2 million as components of accounts receivable and accrued expenses, respectively. At December 31, 2020, we recorded sales reserves of $4.0 million and $0.3 million as components of accounts receivable and accrued expenses, respectively. We regularly evaluate the adequacy of our estimates for product returns. Future market conditions and product transitions may require us to take action to change such programs and related estimates. When the variables used to estimate these reserves change, or if actual results differ significantly from the estimates, we would be required to increase or reduce revenue to reflect the impact. ​ Accounts Receivable ​ We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and customers’ current creditworthiness. Our allowance for credit losses is generally computed by (1) applying specific percentage reserves on accounts that are past due, and (2) specifically reserving for customers known to be in financial difficulty. Therefore, if the financial condition of certain of our customers were to deteriorate, or if we noted there was a 36 Table of Contents lengthening of the timing of the settlement of receivables that was symptomatic of a general deterioration in the ability of our customers to pay, we would have to increase our allowance for credit losses. This would negatively impact our earnings. Our cash flows would be impacted to the extent that receivables could not be collected. For example, during the year ended December 31, 2021, we experienced delays in collecting amounts owed to us, and in some cases, we may be unable to collect amounts owed to us altogether. As a result of these delays and other considerations, we recorded bad debt expenses for reserve for credit losses for $3.3 million for the year ended December 31, 2021. During the year ended December 31, 2020, we recorded $3.3 million bad debt expenses for reserve for credit losses. ​ In addition to accounts receivable from customers, we record receivables from our vendors/suppliers for cooperative advertising, price protection, supplier reimbursements, rebates, and other similar arrangements. A portion of such receivables is estimated based on information available from our vendors at discrete points in time. While such estimates have historically approximated actual cash received, a change in estimates could give rise to a reduction in the receivable. This could negatively impact our earnings and our cash flows. ​ Our trade receivables are charged off in the period in which they are deemed uncollectible. Recoveries of trade receivables previously charged are recorded when received. Write offs of customer and vendor receivables totaled $3.9 million in 2021 and $0.1 million in 2020. ​ Considerable estimate is used in assessing the ultimate realization of customer receivables and vendor/supplier receivables, including reviewing the financial stability of a customer, vendor information, and gauging current market conditions. If our evaluations are incorrect, we may incur additional charges in the future on our consolidated statements of income. ​ Inventories ​ Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or net realizable value, whichever is lower. Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete, slow moving, and non-saleable inventory, based primarily on management’s forecast of customer demand for those products in inventory. ​ Estimate is used to determine the quarterly inventory allowance provision. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors. The IT industry is characterized by rapid technological change and new product development that could result in increased obsolescence of inventory on hand. Increased obsolescence or decreased customer demand beyond management’s expectations could require additional provisions, which could negatively impact our earnings. We recorded obsolescence charges of $2.7 million, $1.7 million, and $3.4 million for the years ended 2021, 2020 and 2019, respectively. Historically, there have been no unusual charges precipitated by specific technological or forecast issues. ​ Value of Goodwill and Long-Lived Assets, Including Intangibles ​ We carry a variety of long-lived assets on our consolidated balance sheet, which are all currently classified as held for use. These include property and equipment, identifiable intangibles, an internet domain name, which is an indefinite-lived intangible asset not subject to amortization, and goodwill. An impairment review is undertaken on (1) an annual basis for goodwill and an indefinite-lived intangible; and (2) on an event-driven basis for all long-lived assets when facts and circumstances suggest that cash flows from such assets may be diminished. We have historically reviewed the carrying value of all these assets based partly on our projections of cash flows. Any impairment charge that is recorded negatively impacts our earnings. ​ Our Enterprise Solutions and Business Solutions segments hold $66.2 million and $7.4 million of goodwill, respectively. We test goodwill for impairment each year and more frequently if potential impairment indicators arise. In 2021 and 2020, we performed a “step 0” qualitative analysis. ASC 350—Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit 37 Table of Contents is less than its carrying amount, including goodwill. This analysis allows the Company to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a more detailed quantitative analysis would be necessary. Factors considered when performing the impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in the Company’s stock price and market capitalization, and other relevant entity-specific events. Based on the qualitative analysis, the Company determined goodwill was not impaired for the years ended December 31, 2021 and 2020. While we believe that our conclusions are reasonable, different assumptions could materially affect our valuations and result in impairment charges against the carrying values of those remaining assets in our Enterprise Solutions and Business Solutions segments. However, at December 31, 2021, a 10 percent decline in projected cash flows or 10 percent increase in the discount rate would not result in an impairment. ​ Please see Note 3, “Goodwill and Other Intangible Assets” to the Consolidated Financial Statements included in Item 8 of Part II of this report for a discussion of the significant assumptions used in our annual impairment test analysis. ​ RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS ​ Recently issued financial accounting standards are detailed in Note 1, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. ​ ​