b
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
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incorporation or organization) |
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( | ||
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Emerging growth company |
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The number of shares outstanding of the issuer’s common stock as of April 27, 2023 was
PC CONNECTION, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
March 31, | December 31, | ||||||
| 2023 |
| 2022 |
| |||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net |
| |
| | |||
Inventories, net |
| |
| | |||
Prepaid expenses and other current assets |
| |
| | |||
Total current assets |
| |
| | |||
Property and equipment, net |
| |
| | |||
Right-of-use assets | | | |||||
Goodwill |
| |
| | |||
Intangibles, net |
| |
| | |||
Other assets |
| |
| | |||
Total Assets | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued payroll |
| |
| | |||
Accrued expenses and other liabilities |
| |
| | |||
Total current liabilities |
| |
| | |||
Deferred income taxes |
| |
| | |||
Noncurrent operating lease liabilities | | | |||||
Other liabilities |
| |
| | |||
Total Liabilities |
| |
| | |||
Stockholders’ Equity: | |||||||
Common Stock |
| |
| | |||
Additional paid-in capital |
| |
| | |||
Retained earnings |
| |
| | |||
Treasury stock, at cost | ( | ( | |||||
Total Stockholders’ Equity |
| |
| | |||
Total Liabilities and Stockholders’ Equity | $ | | $ | | |||
See notes to unaudited condensed consolidated financial statements.
1
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands, except per share data)
Three Months Ended | |||||||
March 31, | |||||||
| 2023 |
| 2022 |
| |||
Net sales | $ | | $ | | |||
Cost of sales |
| |
| | |||
Gross profit |
| |
| | |||
Selling, general and administrative expenses |
| |
| | |||
Restructuring and other charges | | — | |||||
Income from operations |
| |
| | |||
Other income (expense), net |
| |
| ( | |||
Income before taxes |
| |
| | |||
Income tax provision |
| ( |
| ( | |||
Net income | $ | | $ | | |||
Earnings per common share: | |||||||
Basic | $ | | $ | | |||
Diluted | $ | | $ | | |||
Shares used in computation of earnings per common share: | |||||||
Basic |
| |
| | |||
Diluted |
| |
| |
See notes to unaudited condensed consolidated financial statements.
2
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(amounts in thousands)
Three Months Ended March 31, 2023 | ||||||||||||||||||||
Common Stock | Additional | Retained | Treasury Shares |
| ||||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Total |
| ||||||
Balance - December 31, 2022 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | | ||||||
Stock-based compensation expense |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Restricted stock units vested |
| |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Shares withheld for taxes paid on stock awards |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( | ||||||
Repurchase of common stock for treasury |
| — |
| — |
| — |
| — |
| ( |
| ( |
| ( | ||||||
Dividend declaration ($ |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Net income |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Balance - March 31, 2023 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | | ||||||
Three Months Ended March 31, 2022 | ||||||||||||||||||||
Common Stock | Additional | Retained | Treasury Shares |
| ||||||||||||||||
| Shares |
| Amount |
| Paid-In Capital |
| Earnings |
| Shares |
| Amount |
| Total |
| ||||||
Balance - December 31, 2021 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | | ||||||
Stock-based compensation expense |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Restricted stock units vested |
| |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Shares withheld for taxes paid on stock awards |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( | ||||||
Net income |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Balance - March 31, 2022 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | |
See notes to unaudited condensed consolidated financial statements.
3
PC CONNECTION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Three Months Ended | |||||||
March 31, | |||||||
| 2023 |
| 2022 |
| |||
Cash Flows provided by (used in) Operating Activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
Adjustments to credit losses reserve |
| ( |
| | |||
Stock-based compensation expense |
| |
| | |||
Loss on disposal of fixed assets |
| |
| | |||
Changes in assets and liabilities: | |||||||
Accounts receivable |
| ( |
| ( | |||
Inventories |
| |
| ( | |||
Prepaid expenses and other current assets |
| ( |
| ( | |||
Other non-current assets |
| |
| | |||
Accounts payable |
| |
| ( | |||
Accrued expenses and other liabilities |
| |
| | |||
Net cash provided by (used in) operating activities |
| |
| ( | |||
Cash Flows used in Investing Activities: | |||||||
Purchases of equipment and capitalized software | ( | ( | |||||
Net cash used in investing activities |
| ( |
| ( | |||
Cash Flows used in Financing Activities: | |||||||
Proceeds from short-term borrowings |
| |
| | |||
Repayment of short-term borrowings | ( | ( | |||||
Purchase of common stock for treasury shares |
| ( |
| — | |||
Dividend payments |
| ( |
| — | |||
Payment of payroll taxes on stock-based compensation through shares withheld |
| ( |
| ( | |||
Net cash used in financing activities |
| ( |
| ( | |||
Increase (decrease) in cash and cash equivalents |
| |
| ( | |||
Cash and cash equivalents, beginning of year |
| |
| | |||
Cash and cash equivalents, end of period | $ | | $ | | |||
Non-cash Investing and Financing Activities: | |||||||
Accrued capital expenditures | $ | | $ | | |||
Supplemental Cash Flow Information: | |||||||
Income taxes paid | $ | | $ | | |||
Interest paid | $ | | $ | — | |||
See notes to unaudited condensed consolidated financial statements.
4
PC CONNECTION, INC. AND SUBSIDIARIES
PART I―FINANCIAL INFORMATION
Item 1―Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Note 1–Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of PC Connection, Inc. and its subsidiaries, or the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting and in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Such principles were applied on a basis consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Company’s financial condition as of the date of the interim balance sheet. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through the date of issuance of these financial statements. The operating results for the three months ended March 31, 2023 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2023.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period. Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances. By nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates and assumptions.
Restructuring and Other Charges
The restructuring and other charges recorded in the first quarter of 2023 were primarily related to an involuntary reduction in our headquarter workforce and included cash severance and other related termination benefits. These costs will be paid within a year of termination and any unpaid balances are included in accrued expenses as of March 31, 2023.
Restructuring and other charges are presented separately from selling, general and administrative expenses. Costs incurred were as follows (in thousands):
Three Months Ended March 31, | ||||||
2023 | 2022 | |||||
Employee separations | $ | | $ | — | ||
Other charges |
| |
| — | ||
Total restructuring and other charges | $ | | $ | — |
Included in accrued expenses and other liabilities as of March 31, 2023 was $
5
Recently Issued Financial Accounting Standards
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate, or LIBOR, and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022; however, ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 has extended the effective date through December 31, 2024. The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.
Note 2–Revenue
The Company disaggregates revenue from its arrangements with customers by type of products and services, as it believes this method best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following tables represent a disaggregation of revenue from arrangements with customers for the three months ended March 31, 2023 and 2022, along with the segment for each category (in thousands).
Three Months Ended March 31, 2023 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | $ | | $ | | $ | | $ | | ||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage | | | | | ||||||||
Net/Com Products | | | | | ||||||||
Displays and Sound |
| |
| |
| |
| | ||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services |
| |
| |
| |
| | ||||
Total net sales | $ | | $ | | $ | | $ | |
Three Months Ended March 31, 2022 | ||||||||||||
| Business |
| Enterprise |
| Public Sector |
| Total | |||||
Notebooks/Mobility | $ | | $ | | $ | | $ | | ||||
Desktops | | | | | ||||||||
Software | | | | | ||||||||
Servers/Storage | | | | | ||||||||
Net/Com Products | | | | | ||||||||
Displays and Sound |
| |
| |
| |
| | ||||
Accessories |
| |
| |
| |
| | ||||
Other Hardware/Services |
| |
| |
| |
| | ||||
Total net sales | $ | | $ | | $ | | $ | |
6
Contract Balances
The following table provides information about contract liabilities from arrangements with customers as of March 31, 2023 and December 31, 2022 (in thousands).
| March 31, 2023 |
| December 31, 2022 | |||
Contract liabilities, which are included in "Accrued expenses and other liabilities" | $ | | $ | |
Changes in the contract liability balances during the three months ended March 31, 2023 and 2022 are as follows (in thousands):
| 2023 | ||
Balance at December 31, 2022 | $ | | |
Cash received in advance and not recognized as revenue |
| | |
Amounts recognized as revenue as performance obligations satisfied |
| ( | |
Balance at March 31, 2023 | $ | | |
2022 | |||
Balance at December 31, 2021 | $ | | |
Cash received in advance and not recognized as revenue |
| | |
Amounts recognized as revenue as performance obligations satisfied |
| ( | |
Balance at March 31, 2022 | $ | |
Note 3–Earnings Per Share
Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to non-vested stock units and stock options outstanding, if dilutive.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended March 31, | |||||||
| 2023 |
| 2022 |
| |||
Numerator: | |||||||
Net income | $ | | $ | | |||
Denominator: | |||||||
Denominator for basic earnings per share |
| |
| | |||
Dilutive effect of employee stock awards |
| |
| | |||
Denominator for diluted earnings per share |
| |
| | |||
Earnings per share: | |||||||
Basic | $ | | $ | | |||
Diluted | $ | | $ | |
For the three months ended March 31, 2023 and 2022, the Company had
k
Note 4–Leases
The Company leases certain facilities from a related party, which is a company affiliated with us through common ownership. Included in the right-of-use, or ROU, asset as of March 31, 2023 was $
7
As of March 31, 2023, there were
Three Months Ended March 31, 2023 |
| Three Months Ended March 31, 2022 |
| |||||||||||||||
Related Parties | Others | Total |
| Related Parties | Others | Total |
| |||||||||||
Lease Cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Capitalized operating lease cost | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Short-term lease cost |
| |
| |
| |
| |
| |
| | ||||||
Total lease cost | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Other Information |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases: |
|
|
|
|
|
| ||||||||||||
Operating cash flows | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Weighted-average remaining lease term (in years): |
|
|
|
|
|
| ||||||||||||
Capitalized operating leases | ||||||||||||||||||
Weighted-average discount rate: | ||||||||||||||||||
Capitalized operating leases | ||||||||||||||||||
As of March 31, 2023, future lease payments over the remaining term of capitalized operating leases were as follows (in thousands):
For the Years Ended December 31, |
| Related Parties |
| Others |
| Total | |||
2023, excluding the three months ended March 31, 2023 | $ | | $ | | $ | | |||
2024 |
| |
| |
| | |||
2025 |
| |
| |
| | |||
2026 |
| |
| |
| | |||
2027 | | | | ||||||
Thereafter | — | | | ||||||
$ | | $ | | $ | | ||||
Imputed interest | ( | ||||||||
Lease liability balance at March 31, 2023 | $ | |
As of March 31, 2023, the ROU asset had a balance of $
Note 5–Segment Information
The internal reporting structure used by the Company’s chief operating decision maker, or CODM, to assess performance and allocate resources determines the basis for the Company’s operating segments. The Company’s CODM is its Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of operating income.
The Company’s operations are organized under
8
resources, information technology, or IT, marketing, and product management. Most of the operating costs associated with the Headquarters/Other group functions are charged to the operating segments based on their estimated usage of the underlying functions. The Company reports these charges to the operating segments as “Allocations”. Certain headquarters costs relating to executive oversight and other fiduciary functions that are not allocated to the operating segments are included under the heading of Headquarters/Other in the tables below.
Net sales presented below exclude inter-segment product revenues. Segment information applicable to the Company’s operating segments for the three months ended March 31, 2023 and 2022 is shown below (in thousands):
Three Months Ended | |||||||
March 31, | March 31, | ||||||
| 2023 |
| 2022 |
| |||
Net sales: | |||||||
Business Solutions | $ | | $ | | |||
Enterprise Solutions |
| |
| | |||
Public Sector Solutions |
| |
| | |||
Total net sales | $ | | $ | | |||
Operating income (loss): | |||||||
Business Solutions | $ | | $ | | |||
Enterprise Solutions |
| |
| | |||
Public Sector Solutions |
| |
| ( | |||
Headquarters/Other |
| ( |
| ( | |||
Total operating income |
| |
| | |||
Other income (expense), net |
| |
| ( | |||
Income before taxes | $ | | $ | | |||
Selected operating expense: | |||||||
Depreciation and amortization: | |||||||
Business Solutions | $ | | $ | | |||
Enterprise Solutions |
| |
| | |||
Public Sector Solutions |
| |
| | |||
Headquarters/Other |
| |
| | |||
Total depreciation and amortization | $ | | $ | | |||
Total assets: | |||||||
Business Solutions | $ | | $ | | |||
Enterprise Solutions |
| |
| | |||
Public Sector Solutions |
| |
| | |||
Headquarters/Other |
| ( |
| ( | |||
Total assets | $ | | $ | |
The assets of the Company’s
Note 6–Commitments and Contingencies
The Company is subject to various legal proceedings and claims, which have arisen during the ordinary course of business. The outcome of such matters is not expected to have a material, adverse effect on the Company’s financial position, results of operations, and/or cash flows.
9
The Company is subject to audits by states on sales and income taxes, employment matters, and other assessments. Additional liabilities for these and other audits could be assessed, but such outcomes are not expected to have a material, adverse impact on the Company’s financial position, results of operations, and/or cash flows.
Note 7–Bank Borrowings
The Company has a $
During the three months ended March 31, 2023, the Company borrowed $
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “would,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “anticipates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.
Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including
● | substantial competition reducing our market share; |
● | significant price competition reducing our profit margins; |
● | the loss of any of our major vendors adversely affecting the number of type of products we may offer; |
● | virtualization of information technology, or IT, resources and applications, including networks, servers, applications, and data storage disrupting or altering our traditional distribution models; |
● | service interruptions at third-party shippers negatively impacting our ability to deliver the products we offer to our customers; |
● | increases in shipping and postage costs reducing our margins and adversely affecting our results of operations; |
● | loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business; |
● | cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation; and |
● | macroeconomic factors facing the global economy, including disruptions in the capital markets, economic sanctions and economic slowdowns or recessions, rising inflation and changing interest rates reducing the level of investment our customers are willing to make in IT products. |
Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.
Unless the context otherwise requires, we use the terms “Connection”, the “Company”, “we”, “us”, and “our” in this Quarterly Report on Form 10-Q to refer to PC Connection, Inc. and its subsidiaries.
11
OVERVIEW
We are a Fortune 1000 Global Solutions Provider that simplifies the IT customer experience, guiding the connection between people and technology. Our dedicated account managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services. We provide a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. Our Technology Solutions Group, or TSG, and state-of-the-art Technology Integration and Distribution Center with ISO 9001:2015 certified technical configuration lab offer end-to-end services related to the design, configuration, and implementation of IT solutions. Our team also provides a comprehensive portfolio of managed services and professional services. These services are performed by our personnel and by third-party providers. Our GlobalServe offering ensures worldwide coverage for our multinational customers, delivering global procurement solutions through our network of in-country suppliers in over 150 countries.
The “Connection®” brand includes Connection Business Solutions, Connection Enterprise Solutions, and Connection Public Sector Solutions, which provide IT solutions and services to small- to medium-sized businesses, 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.
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 and, in some case successfully, eliminate our role. We believe that the success of these direct sales efforts by manufacturers will depend on their ability to meet our customers’ ongoing demands and provide solutions to meet their needs. We believe more of our customers are seeking out comprehensive and integrated IT solutions, rather than the ability to acquire specific IT products on a one-off basis. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customers’ individual needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our TSG, we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services to implement their IT projects. Such service offerings carry higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and gross margin improvements in this competitive environment.
The primary challenges we continue to face in effectively managing our business are (1) increasing our product and service revenues while at the same time improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales and technical support personnel, and (3) effectively controlling our selling, general and administrative, or SG&A, expenses while making investments in our IT systems and solution selling personnel, especially in relation to changing revenue levels.
To support future growth, we are investing in our IT solutions business, which requires the addition of highly skilled service engineers. Although we expect to realize the ultimate benefit of higher-margin service revenues under this multi-year initiative, we believe that our cost of services will increase as we add additional service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may be negatively impacted.
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
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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.
RESULTS OF OPERATIONS
The following table sets forth information derived from our statements of income expressed as a percentage of net sales for the periods indicated:
Three Months Ended March 31, | |||||||
2023 |
| 2022 |
| ||||
Net sales (dollars in millions) | $ | 727.5 | $ | 788.3 | |||
Gross margin | 16.8 | % | 16.3 | % | |||
Selling, general and administrative expenses |
| 14.2 | % |
| 12.5 | % | |
Income from operations |
| 2.5 | % |
| 3.8 | % |
Net sales of $727.5 million for the first quarter of 2023 reflected a decrease of $60.8 million, or 7.7% compared to the first quarter of 2022. The decrease was primarily driven by decreases in sales of notebooks/mobility, desktops, and displays and sound of $47.6 million, $23.1 million, and $20.6 million, respectively, as shown in the table in Note 2. These decreases were partially offset by increases in sales of software and net/com products of $22.5 million and $9.3 million, respectively. Gross profit decreased year-over-year by $6.0 million, or 4.7%, to $122.3 million as illustrated in the table and discussion beginning on page 15 of this Form 10-Q. Gross margin increased to 16.8% from 16.3% a year ago. The increase in gross margin was primarily driven by increased net sales of higher margin software, security, and networking solutions. SG&A expenses increased year-over-year by $5.1 million, or 5.2%, to $103.3 million. The increase in SG&A expenses was primarily driven by a $5.1 million increase in personnel cost related to investments in resources to strengthen our sales, technical sales, IT, and services organizations. SG&A expenses as a percentage of net sales increased to 14.2% compared to 12.5% a year ago. The increase in SG&A expenses as a percentage of net sales is primarily due to the decrease in net sales, as discussed above. Operating income in the first quarter of 2023 decreased year-over-year both in dollars and as a percentage of net sales by $12.0 million and 130 basis points, respectively, primarily as a result of the decrease in gross profit combined with the increase in SG&A expenses.
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Net Sales Distribution
The following table sets forth our percentage of net sales by segment and product mix:
Three Months Ended March 31, | ||||||
2023 |
| 2022 | ||||
Operating Segment | ||||||
Enterprise Solutions | 43 | % | 42 | % | ||
Business Solutions | 38 | 41 | ||||
Public Sector Solutions | 19 |
| 17 |
| ||
Total | 100 | % | 100 | % | ||
Product Mix | ||||||
Notebooks/Mobility | 36 | % | 39 | % | ||
Desktops | 9 | 11 | ||||
Software | 12 | 8 | ||||
Servers/Storage | 6 | 6 |
| |||
Net/Com Products | 9 |
| 7 |
| ||
Displays and Sound | 9 | 11 |
| |||
Accessories | 12 | 12 | ||||
Other Hardware/Services | 7 |
| 6 |
| ||
Total | 100 | % | 100 | % |
Gross Profit Margin
The following table summarizes our gross margin, as a percentage of net sales, over the periods indicated:
Three Months Ended March 31, | ||||||
2023 |
| 2022 | ||||
Operating Segment | ||||||
Enterprise Solutions | 13.4 | % | 14.6 | % | ||
Business Solutions | 21.9 | 19.4 | ||||
Public Sector Solutions | 14.5 |
| 13.1 |
| ||
Total Company | 16.8 | % | 16.3 | % |
Operating Expenses
The following table reflects our SG&A expenses for the periods indicated:
Three Months Ended March 31, | |||||||
($ in millions) | 2023 | 2022 | |||||
Personnel costs | $ | 79.2 | $ | 74.1 | |||
Advertising |
| 6.6 |
| 4.6 | |||
Service contracts/subscriptions | 5.2 | 4.9 | |||||
Professional fees |
| 3.8 |
| 3.9 | |||
Depreciation and amortization |
| 3.1 |
| 3.0 | |||
Facilities operations |
| 2.2 |
| 2.1 | |||
Credit card fees |
| 1.5 |
| 1.7 | |||
Other |
| 1.7 |
| 3.9 | |||
Total SG&A expense | $ | 103.3 | $ | 98.2 | |||
As a percentage of net sales | 14.2 | % | 12.5 | % | |||
Restructuring and Other Charges
In the first quarter of 2023, we undertook actions to lower our cost structure. In connection with these initiatives, we incurred restructuring and other charges of $0.9 million in the first quarter of 2023, which were primarily related to an
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