PC CONNECTION, INC. AND RESULTS OF OPERATIONS
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of management including, without limitation, our expectations with regard to the industry's rapid technological change and exposure to inventory obsolescence, availability and allocations of goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "could," "expect," "believe," "estimate," "anticipate," "continue," "seek," "plan," "intend," or similar terms, variations of such terms, or the negative of those terms. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
• we have experienced variability in sales and may not be able to maintain profitable operations;
• substantial competition could reduce our market share and may negatively affect our business;
• we face and will continue to face significant price competition, which could result in a reduction of our profit margins;
• the spread of COVID-19 and the imposition of related public health measures and restrictions have, and may in the future, further materially adversely impact our business, financial condition, results of operations and cash flows;
• instability in economic conditions and government spending may adversely affect our business and reduce our operating results;
• the loss of any of our major vendors could have a material adverse effect on our business;
• virtualization of IT resources and applications, including networks, servers, applications, and data storage may disrupt or alter our traditional distribution models;
• the methods of distributing IT products are changing, and such changes may negatively impact us and our business;
• we depend heavily on third-party shippers to deliver our products to customers and would be adversely affected by a service interruption by these shippers;
• we may experience increases in shipping and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers;
• we may experience a reduction in the incentive programs offered to us by our vendors;
• should our financial performance not meet expectations, we may be required to record a significant charge to earnings for impairment of goodwill and other intangibles;
• we are exposed to inventory obsolescence due to the rapid technological changes occurring in the IT industry;
• we are exposed to accounts receivable risk and if customers fail to timely pay amounts due to us our business, results of operations and/or cash flows could be adversely affected;
• we are dependent on key personnel and, more generally, skilled personnel in all areas of our business and the loss of key persons or the inability to attract, train and retain qualified personnel could adversely impact our business;
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• cyberattacks or the failure to safeguard personal information and our information technology systems could result in liability and harm our reputation, which could adversely affect our business.
• we are exposed to risks from legal proceedings and audits, which may result in substantial costs and expenses or interruption of our normal business operations.
• the failure to comply with our public sector contracts could result in, among other things, fines or liabilities; and
• we are controlled by one principal stockholder
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. We cannot assure investors that our assumptions and expectations will prove to have been correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors, financial condition, and results of operations, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We therefore caution you against undue reliance on any of these forward-looking statements. Important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements include those discussed in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. OVERVIEW We are a leading solutions provider of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by third-party service providers. We operate through three sales segments: (a) the Business Solutions segment, which serves small- to medium-sized businesses, through ourPC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves medium-to-large corporations, through ourMoreDirect subsidiary, and (c) the Public Sector Solutions segment, which serves federal, state, and local governmental and educational institutions, through ourGovConnection subsidiary. 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 seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient. 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, 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 ourTechnical 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 certifications of our service engineers permit us to offer higher-end, more complex products that
generally carry higher
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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 continue to expand our IT solutions business, which
requires highly-skilled service engineers. Although we expect to realize the
ultimate benefit of higher-margin service revenues under this multi-year
initiative, we believe that our cost of services will increase as we add service
engineers. If our service revenues do not grow enough to offset the cost of
these headcount additions, our operating results may be negatively impacted.
Market and economic conditions and technology advances significantly affect the
demand for our products and services. Virtual delivery of software products and
advanced Internet technology providing customers enhanced functionality have
substantially increased customer expectations, requiring us to invest on an
ongoing basis in our own IT development to meet these new demands.
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, we continue to monitor the effects on our customers, suppliers, and the economy as a whole and will adjust our business practices, as necessary, to respond to the changing demand for, and supply
of, our products. RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net sales (in millions) $ 751.4 $ 652.8 $ 2,092.4 $ 1,914.6
Gross margin 16.1 % 16.5 % 16.1 % 16.2 %
Selling, general and administrative expenses 12.4 % 13.3% 13.0 % 13.4 % Income from operations 3.6 % 3.2 % 3.1 % 2.7 % Net sales of$751.4 million for the third quarter of 2021 reflected an increase of$98.6 million compared to the third quarter of 2020, which was driven by higher net sales in both our Enterprise Solutions and Business Solutions segments. The increase in net sales was primarily driven by our ability to meet the continued demand from our customers due to the growing hybrid work environment. In addition, we saw manufacturing revenue growth of$27.0 million or 24.4% and healthcare revenue growth of$14.3 million or 9.8% year-over-year. The increase in net sales was also due to lower sales of the same quarter a year ago primarily due to the impact of the COVID-19 pandemic. Gross profit increased year-over-year by$12.9 million , primarily due to the increase of higher margin sales and the increase in total net sales. SG&A expenses increased year-over-year by$6.6 million , driven primarily by increased personnel cost of$5.7 million associated with higher variable compensation due to the higher gross profit. The higher SG&A expenses were also attributable to an increase in marketing expenses of$1.8 million , an increase in service contracts of$0.2 million , and an increase in credit card fees of$0.6 million . Those increases were partially offset by the lower professional fees of$2.1 million . Operating income in the third quarter of 2021 increased year-over-year both in dollars and as a percentage of net sales by$6.3 million and 40 basis points, respectively, primarily as a result of the increase in net sales. 15 Table of Contents Net Sales Distribution The following table sets forth our percentage of net sales by segment and product mix: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Sales Segment Enterprise Solutions 41 % 40 % 42 % 43 % Business Solutions 38 35 38 37 Public Sector Solutions 21 25 20 20 Total 100 % 100 % 100 % 100 % Product Mix Notebooks/Mobility 40 % 31 % 38 % 31 % Desktops 9 10 9 10 Software 8 12 9 11 Servers/Storage 7 9 7 9 Net/Com Product 7 10 7 8 Displays and sound 10 8 10 8 Accessories 12 13 12 14 Other Hardware/Services 7 7 8 9 Total 100 % 100 % 100 % 100 % Gross Profit Margin The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated: Three Months Ended September 30,
Nine Months Ended
2021 2020 2021 2020
Sales Segment
Enterprise Solutions 14.7 % 14.8 % 14.8 % 14.5 %
Business Solutions 19.4 20.2 19.3 19.4
Public Sector Solutions 12.7 14.1 13.0 13.8
Total Company 16.1 % 16.5 % 16.1 % 16.2 %
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Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2021 2020 2021 2020
Personnel costs $ 70.5 $ 64.8 $ 205.6 $ 191.2
Advertising 4.2 2.4 10.7 9.8Service contracts/subscriptions 4.2 4.0 13.0 10.9 Professional fees 3.8 5.9 13.0 12.5 Depreciation and amortization 2.9 3.8 9.2 10.3 Credit card fees 2.2 1.7 5.3 4.5 Facilities operations 2.1 2.0 6.4 6.4 Other 3.5 2.2 9.1 11.0 Total SG&A expense$ 93.4 $ 86.8 $ 272.3 $ 256.6 As a percentage of net sales 12.4 % 13.3
% 13.0 % 13.4 % 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 endedSeptember 30, 2021 and the three months endedSeptember 30, 2020 and changes between the nine months endedSeptember 30, 2021 and the nine months endedSeptember 30, 2020 .
Three Months Ended
Changes in net sales and gross profit by segment are shown in the following
table (dollars in millions):
Three Months Ended September 30,
2021 2020
% of % of %
Amount Net Sales Amount Net Sales Change
Net Sales :
Enterprise Solutions $ 309.7 41.2 % $ 259.8 39.8 % 19.2 %
Business Solutions 281.4 37.5 231.0 35.4 21.8
Public Sector Solutions 160.3 21.3 162.0 24.8 (1.0)
Total $ 751.4 100.0 % $ 652.8 100.0 % 15.1 %
Gross Profit:
Enterprise Solutions $ 45.7 14.8 % $ 38.4 14.8 % 19.0 %
Business Solutions 54.7 19.4 46.6 20.2 17.4
Public Sector Solutions 20.3 12.7 22.8 14.1 (11.0)
Total $ 120.7 16.1 % $ 107.8 16.5 % 12.0 %
Net sales increased in the third quarter of 2021 compared to the third quarter of 2020, as explained below:
Net sales of
increase of
in net sales of notebooks/mobility and displays and sound of
? decreases in net sales of servers/storage, other hardware/services, and net/com
products of
believe these increases were primarily driven by the increased demand from
customers in the healthcare and manufacturing industries as organizations
continue to invest in technology to implement automation and data security.
Net sales of
? increase of
was also driven by strong growth in cloud-based and security software
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net sales. We experienced increases in net sales of notebooks/mobility products
of
sales of servers/storage, displays and sound products and desktops also increased by$5.6 million ,$5.2 million and$2.2 million , respectively.
Net sales of
decrease of
Sales to state and local government and educational institutions increased by
2.5%, compared to the prior year quarter, while sales to the federal government
? decreased by 15.8% primarily due to the timing of customer rollouts. Net sales
of software products and net/com products decreased by
million, respectively, compared with the same quarter of the prior year. Those
decreases were partially offset by the increases in net sales of notebooks/mobility and other hardware/services of$10.4 million and$2.9 million , respectively.
Gross profit for the third quarter of 2021increased year-over-year in dollars but decreased as a percentage of net sales (gross margin), as explained below:
Gross profit for the Enterprise Solutions segment increased primarily as a
? result of the 19.2% increase in net sales year-over-year. The gross margin was
flat in comparison to the same period of the prior year.
Gross profit for the Business Solutions segment increased year-over-year
? primarily due to a 21.8% increase in net sales. Gross margin percentage
decreased by approximately 80 basis points, primarily due to changes in product
mix.
Gross profit for the Public Sector Solutions segment decreased as a result of a
? 1.0% decrease in net sales. Gross margin percentage decreased by 140 basis
points year-over-year due to a shift in product mix and a decrease in software
sales recorded on a net basis.
Selling, general and administrative expenses increased in dollars but decreased
as a percentage of net sales in the third quarter of 2021 compared to the prior
year quarter. 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,
2021 2020
% of % of
Segment Net Segment Net %
Amount Sales Amount Sales Change
Enterprise Solutions $ 26.5 8.6 % $ 23.6 9.1 % 12.3 %
Business Solutions 41.9 14.9 37.8 16.4 10.8
Public Sector Solutions 19.7 12.3 19.6 12.1 0.5
Headquarters/Other, unallocated 5.3 5.8 (8.6) Total$ 93.4 12.4 %$ 86.8 13.3 % 7.6 %
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 attributable to increased personnel costs of
primarily by higher variable compensation expense associated with higher gross
? profit, along with a
as a percentage of net sales were 8.6% for the Enterprise Solutions segment in
the third quarter of 2021, which reflects a decrease of 50 basis points. This
decrease is a result of higher sales in the quarter compared with the same
period a year ago.
SG&A expenses for the Business Solutions segment increased in dollars but
decreased as a percentage of net sales. The year-over-year change in SG&A
dollars was driven primarily by higher advertising costs of
compared to the same period last year, primarily due to increased marketing
activities. This year-over-year increase in SG&A expenses was also attributable
to a
? million increase in bad debt expense. Additionally, personnel costs increased
by
higher variable compensation expense associated with higher gross profit. SG&A
expenses as a percentage of net sales were 14.9% for the Business Solutions
segment in the third quarter of 2021, which reflects a decrease of 150 basis
points and is a result of higher sales in the quarter compared with the same
period a year ago.
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SG&A expenses for the Public Sector Solutions segment increased in dollars as
well as a percentage of net sales. The increase is primarily driven by an
increase in the use of Headquarter services of
? increase was partially offset by lower personnel costs. SG&A expenses as a
percentage of net sales was 12.3% for the Public Sector Solutions segment in
the third quarter of 2021, which reflects an increase of 20 basis points and
was due to the higher headquarter costs allocation.
SG&A expenses for the Headquarters/Other group decreased by
decrease was primarily due to a decrease in unallocated executive oversight
costs year-over-year. The Headquarters/Other group provides services to the
? three segments in areas such as finance, human resources, IT, marketing, and
product management. Most of the operating costs associated with such corporate
Headquarters services are charged to the segments based on their estimated
usage of the underlying services. The amounts shown in the table above represent the remaining unallocated costs. Income from operations for the third quarter of 2021 increased to$27.3 million , compared to$21.1 million for the third quarter of 2020, primarily due to the increases in net sales and gross profit. Income from operations as a percentage of net sales was 3.6% for the third quarter of 2021, compared to 3.2% for the prior year quarter, primarily driven by higher net sales as well as lower SG&A expenses as a percentage of net sales. Our provision for income taxes in the three months endedSeptember 30, 2021 was$7.3 million , which included$0.3 million of discrete items mainly related to R&D tax credits. Our provision for income taxes in the three months endedSeptember 30, 2020 was$4.1 million , which included$1.7 million of discrete items mainly related to R&D tax credits Net income for the third quarter of 2021 increased to$20.0 million , compared to$16.9 million for the third quarter of 2020, primarily due to higher net sales and gross profit.
Nine Months Ended
Changes in net sales and gross profit by segment are shown in the following
table (dollars in millions):
Nine Months Ended September 30,
2021 2020
% of % of %
Amount Net Sales Amount Net Sales Change
Net Sales :
Enterprise Solutions $ 882.2 42.2 % $ 839.9 43.9 % 5.0 %
Business Solutions 795.0 38.0 700.9 36.6 13.4
Public Sector Solutions 415.2 19.8 373.8 19.5 11.1
Total $ 2,092.4 100.0 % $ 1,914.6 100.0 % 9.3 %
Gross Profit:
Enterprise Solutions $ 130.1 14.7 % $ 122.0 14.5 % 6.6 %
Business Solutions 153.4 19.3 136.3 19.4 12.5
Public Sector Solutions 54.0 13.0 51.6 13.8 4.7
Total $ 337.5 16.1 % $ 309.9 16.2 % 8.9 %
Net sales increased for the nine months ended
Net sales of
increase of
improvement in our ability to navigate the ongoing supply chain constrains on
behalf of our customers. Net sales of notebooks/mobility, displays and sound,
? and desktops increased year-over-year by
million, respectively. These increases were partially offset by decreases in
accessories, other hardware/services, net/com products, servers/storage, and
software of$32.8 million ,$13.3 million ,$7.8 million ,$6.2 million , and$5.9 million , respectively. 19 Table of Contents
Net sales of
increase of
was primarily driven by strong growth in cloud-based and security software net
? sales. We experienced increases in notebooks/mobility, other hardware/services,
displays and sound, net/com products and accessories of
million,
increases were partially offset by the decrease of net sales of
desktops.
Net sales of
by
increase was primarily driven by the timing of a large project rollout to the
federal government and an increase of sales in state, local government and
? educational institutions. Net sales of notebooks/mobility products and other
hardware/services products increased by
respectively, compared with the prior year, which was partially offset by the
decrease of net sales in net/com products, software and servers/storage of
million,$4.6 million , and$4.4 million , respectively.
Gross profit for the nine months ended
Gross profit for the Enterprise Solutions segment increased year-over-year,
primarily as a result of the 5.0% increase in net sales year-over-year. The
? increase in gross margin in for the nine months ended
basis points, compared to the prior year period, was primarily driven by a
change of product mix.
Gross profit for the Business Solutions segment increased as a result of a
? 13.4% increase in net sales. Gross margin decreased year-over-year by 10 basis
points, resulting from a change of product mix.
Gross profit for the Public Sector Solutions segment increased by
? year-over-year, primarily as a result of increased net sales. Gross margin
decreased by 80 basis points based on changes in product mix, which included
decreased sales of higher-margin products. Selling, general and administrative expenses increased in dollars but decreased as a percentage of net sales in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . SG&A expenses attributable to our three segments and the remaining unallocated Headquarters/Other group expenses are summarized in the table below (dollars in millions): Nine Months Ended September 30, 2021 2020 % of % of Segment Net Segment Net % Amount Sales Amount Sales Change Enterprise Solutions$ 78.0 8.8 %$ 76.6 9.1 % 1.8 % Business Solutions 123.8 15.6 114.6 16.4 8.0 Public Sector Solutions 58.2 14.0 53.6 14.3 8.6 Headquarters/Other, unallocated 12.3 11.8 4.2 Total$ 272.3 13.0 %$ 256.6 13.4 % 6.1 %
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
Headquarter services, primarily due to the higher variable compensation
resulting from the higher gross profit of the nine months ended
? 2021. These increases were partially offset by a decrease of
bad debt expenses as well as a decrease of
amortization expenses. SG&A expenses as a percentage of net sales were 8.8% for
the Enterprise Solutions segment for the nine months ended
which reflects a decrease of 30 basis points. This decrease year-over-year was
due to the higher net sales for the nine months ended
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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
million, including the higher variable compensation expenses resulting from the
higher gross profit of for the nine months ended
year-over-year increase in SG&A was also attributable to the increased
personnel costs and advertising costs in the amount of
? million respectively. Those increases were partially offset by lower bad debt
expense of
primarily due to the higher expected credit losses from customers who had been
significantly impacted by the COVID-19 pandemic. SG&A expenses as a percentage
of net sales were 15.6% for the Business Solutions segment for the nine months
ended
reflects a decrease of 80 basis points year-over-year, resulting from higher
net sales compared with the same period a year ago.
SG&A expenses for the Public Sector Solutions segment increased in dollars but
decreased as a percentage of net sales. The increase in SG&A dollars
year-over-year is attributable to an increase in the usage of Headquarter
services of
expenses associated with the higher gross profit for the nine months ended
?
increased bad debt expense of
year-over-year SG&A increase. SG&A expenses as a percentage of net sales were
14.0 % for the Public Sector Solutions segment for the nine months ended
year-over-year is primarily attributable to higher net sales compared with the
same period a year ago.
SG&A expenses for the Headquarters/Other group increased by
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. Income from operations for the nine months endedSeptember 30, 2021 increased to$65.2 million , compared to$52.3 million for the nine months endedSeptember 30, 2020 primarily due to the increases in net sales and gross profit. Income from operations as a percentage of net sales increased to 3.1% for the nine month endedSeptember 30, 2021 , compared to 2.7% of net sales for the prior year, primarily due to the increase in net sales and the decrease in SG&A expenses as a percentage of net sales year-over-year. Our provision for income taxes in the nine months endedSeptember 30, 2021 was$17.7 million , which included$0.3 million of discrete items mainly related to R&D tax credits recognized in the third quarter. Our provision for income taxes in the nine months endedSeptember 30, 2020 was$12.9 million , which included$1.7 million of discrete items mainly related to R&D tax credits recognized in the third quarter of 2020. Net income for the nine months endedSeptember 30, 2021 increased to$47.5 million , compared to$39.5 million for the nine months endedSeptember 30, 2020 , primarily due to higher net sales and gross profit, combined with a lower operating expenses as a percentage of net sales in 2021, as compared to the
same period of 2020.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our credit facility. We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, special dividend payments, repurchases of common stock for treasury, and as opportunities arise, acquisitions of businesses. Market conditions impact and help determine our strategic use of funds. We believe that funds generated from operations, together with available credit under our credit facility, will be sufficient to finance our working capital, capital expenditures, and other requirements for at least the next twelve calendar months. Our investments in IT systems and infrastructure are designed to enable us to operate more efficiently and to provide our customers enhanced functionality.
We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations, and borrowings under our credit facility, as follows:
? Cash on Hand. AtSeptember 30, 2021 , we had$89.7 million in cash and cash equivalents. 21 Table of Contents
Cash Generated from Operations. We expect to generate cash flows from
? operations in excess of operating cash needs by generating earnings and
managing net changes in inventories and payables to generate a positive cash
flow.
? Credit Facility. As of
million credit facility, which is available untilFebruary 10, 2022 . 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 continue to be materially adversely affected by the COVID-19 pandemic, our cash flows from operations
may be substantially affected.
Summary of Sources and Uses of Cash
The following table summarizes our sources and uses of cash over the periods
indicated:
Nine Months Ended September 30,
2021 2020Net cash provided by operating activities $ 8.8$ 46.4 Net cash used in investing activities (5.5) (9.6) Net cash used in financing activities (9.2) (18.8) (Decrease) increase in cash and cash equivalents $ (5.9)$ 18.0 Cash provided by operating activities was$8.8 million in the nine months endedSeptember 30, 2021 . Cash flow provided by operations during the nine months endedSeptember 30, 2021 , resulted primarily from net income, other non-cash charges adding back and a decrease in accounts receivable, which decreased by$22.4 million for the nine months endedSeptember 30, 2021 , and was driven primarily by the timing of collections. These factors that contributed to the positive inflow of cash from operating activities were partially offset by increases in inventory of$34.5 million for the nine months endedSeptember 30, 2021 , primarily driven by the increase of inventory purchases for customer requested future rollouts. Accounts payable also decreased by$50.0 million from prior year period which led to offset the positive cash flow from operations. Operating cash flow in the nine months endedSeptember 30, 2020 resulted primarily from net income before depreciation and amortization, a decrease in accounts receivable, an increase in accounts payable, and partially offset
by increases in inventory.
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:
(in days) September 30,
2021 2020
Days of sales outstanding (DSO)(1) 66 73
Days of supply in inventory (DIO)(2) 25 22
Days of purchases outstanding (DPO)(3) (31) (47) Cash conversion cycle
60 48
(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.
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The cash conversion cycle increased to 60 days at September 30, 2021 , compared
to 48 days at September 30, 2020 . The increase is primarily due to the 16-day
decrease of DPO and the 3-day increase of DIO, and partially offset by the 7 day
decrease of DSO. The lower DPO was driven by mixing vendors with shorter payment
terms in comparison to the prior year. The decrease of DSO was primarily due to
lower accounts receivable balance for the quarter ended September 30, 2021
compared to the same period of prior year.
Cash used in investing activities in the nine months ended September 30, 2021
represented $7.1 million of purchases of property and equipment. These
expenditures were primarily for computer equipment and capitalized
internally-developed software in connection with investments in our IT
infrastructure. In the prior year, we made similar investments of $9.6 million
in purchases of property and equipment. Cash used for capital expenditures for
the nine months ended September 30, 2021 was partially offset by $1.5 million of
cash proceeds from life insurance.
Cash used in financing activities in the nine months ended September 30, 2021
consisted primarily of an $8.4 million payment of a special $0.32 per share
dividend. In the prior year period, financing activities primarily represented
an $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 facility and other contractual obligations. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see "Factors Affecting Sources of Liquidity" below. For more information about 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 untilFebruary 2022 and is collateralized by our accounts receivable. Our borrowing capacity is up to$50.0 million . Amounts outstanding under the facility bear interest at the one-month London Interbank Offered Rate, or LIBOR, plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate (3.25% atSeptember 30, 2021 ). The one-month LIBOR rate atSeptember 30, 2021 was 0.08%. 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." AtSeptember 30, 2021 ,$50.0 million was available for borrowing under the facility.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, or capital resources.
Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting our internally generated funds are our ability to minimize costs and fully achieve our operating efficiencies, timely collection of our customer receivables, and management
of our inventory levels.
Credit Facility. 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. Our credit facility does not include restrictions on future dividend payments. Any failure to comply with the covenants and other restrictions would constitute a default and could prevent us from borrowing funds under this credit facility. This credit facility contains two financial covenants:
Our funded debt ratio (defined as the average outstanding advances under the
credit facility for the quarter, divided by our consolidated trailing twelve
months Adjusted EBITDA-earnings before interest expense, taxes, depreciation,
amortization, and special charges-for the trailing four quarters) must not be
? more than 2.0 to 1.0. Our outstanding borrowings under the credit facility
during the three months ended
the funded debt ratio did not limit potential borrowings as of
2021. Future decreases in our consolidated trailing twelve months Adjusted
EBITDA, could limit our potential borrowings under the credit facility.
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Our minimum consolidated net worth (defined as our consolidated total assets
less our consolidated total liabilities) must be at least
? 50% of consolidated net income for each quarter, beginning with the quarter
ended
as
equity at that date was$686.2 million . Capital Markets. Our ability to raise additional funds in the capital market depends upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies have not materially changed from those
discussed in our Annual Report on Form 10-K for the year ended
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently issued financial accounting standards are detailed in Note 1, "Basis of
Presentation," in the Notes to the Unaudited Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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PC CONNECTION, INC. AND SUBSIDIARIES
PART I-FINANCIAL INFORMATION© Edgar Online, source
