Our management's discussion and analysis of our financial condition and results of operations include 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 "Item 1A. Risk Factors."
OVERVIEW
We are a national 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, data center
solutions, 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 providers. We operate through three sales
segments, which serve primarily: (a) small- to medium-sized businesses, or in
our Business Solutions segment, through our
We generate sales primarily through outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets, our websites, and 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, 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
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 decline.
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Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest on an ongoing basis in our own IT 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
In
National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limiting operations and instructing people to stay at home. Our company was deemed an essential business by local government authorities as we have worked diligently to supply technology solutions to federal and state government agencies, along with hospitals and other healthcare facilities across the country. We implemented remote work arrangements and restricted business travel in mid-March, but to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We have also evaluated the potential impact of the COVID-19 pandemic on the carrying values of our goodwill and intangible assets, and based on our assessment, did not identify any indications to suggest that an impairment may exist.
The COVID-19 pandemic has resulted in adverse economic conditions that are impacting, and may continue to impact, our business and the businesses of our suppliers and customers. Although the extent and duration of the impact of the COVID-19 pandemic on our business and operations and the business and operations of our suppliers and customers remains uncertain, the continued spread of COVID-19 and the imposition of related public health measures and restrictions have and may continue to materially adversely impact our business, financial condition, results of operations and cash flows.
The COVID-19 pandemic has caused material disruptions to our business and operations and could cause further material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker illness, worker absenteeism due to illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, our suppliers and their manufacturers. Depending on the extent and duration of the previously-described effects on our business and the operations of our suppliers, our costs to obtain certain products could increase, our ability to obtain products or services from suppliers may be adversely impacted, our ability to service certain customers could be adversely impacted and, as a result, our business, financial condition and results of operations could be materially adversely affected.
In addition, the COVID-19 pandemic has caused, and may continue to cause, material disruptions to the business and operations of our customers. Certain of our customers have been, and may in the future be, required to close down or operate at a lower capacity, which may adversely impact our business, financial condition and results of operations. In our opinion, customers who operate within the hospitality, airline, and retail industries are likely to be most adversely affected. We have experienced, and may continue to experience, decreases in orders as a result of the COVID-19 pandemic and there can be no assurances that any decrease in sales resulting from the COVID-19 pandemic will be met by increased sales in the future. We also experienced, and may continue to experience, delays in collecting amounts owed to us, and in some cases, may experience inabilities to collect altogether.
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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:
Years Ended December 31, 2020 2019 2018 Net sales (in millions)$ 2,590.3 $ 2,820.0 $ 2,699.5 Gross margin 16.2 % 16.0 % 15.2 %
Selling, general and administrative expenses 13.3 12.0 12.0 Income from operations
2.8 4.0 3.2
Net sales of
26 Table of Contents Sales Distribution The following table sets forth our percentage of net sales by sales segment and product mix: Years Ended December 31, 2020 2019 2018 Sales Segment Enterprise Solutions 43 % 42 % 43 % Business Solutions 37 38 38 Public Sector Solutions 20 20 19 Total 100 % 100 % 100 % Product Mix Notebooks/Mobility 32 % 29 % 26 % Desktops 10 12 11 Software 11 12 12 Servers/Storage 8 8 11 Net/Com Product 8 8 8 Displays and sound 8 9 9 Accessories 14 13 13 Other Hardware/Services 9 9 10 Total 100 % 100 % 100 % Gross Profit Margins
The following table summarizes our overall gross profit margins, as a percentage of net sales, for the last three years:
Years Ended December 31, 2020 2019 2018 Sales Segment Enterprise Solutions 14.5 % 14.4 % 13.9 % Business Solutions 19.4 19.1 18.0 Public Sector Solutions 13.8 13.6 12.7Total Company 16.2 % 16.0 % 15.2 % 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.
27 Table of Contents Operating Expenses
The following table reflects our most significant operating expenses for the last three years (in millions of dollars):
Years Ended December 31, 2020 2019 2018 Personnel costs$ 256.6 $ 257.8 $ 249.2 Advertising 14.0 19.4 16.2 Facilities operations 23.5 19.0 16.9 Professional fees 19.4 10.6 8.6 Credit card fees 6.8 6.6 6.9
Depreciation and amortization 13.6 13.3 14.1 Other
11.8 11.9 12.5 Total SG&A expense$ 345.7 $ 338.6 $ 324.4
As a percentage of net sales 13.3 % 12.0 % 12.0 %
Personnel costs decreased in 2020 compared to 2019 primarily due to decreased variable compensation associated with lower gross profit. Depreciation and amortization increased in 2020 compared to 2019 primarily due to our new ERP system placed in service in 2020.
Personnel costs increased in 2019 compared to 2018 primarily due to increased variable compensation associated with higher gross profit, combined with increases in other employee-related expenses. Depreciation and amortization decreased in 2019 compared to 2018 primarily due to lower levels of IT infrastructure in service in 2019 compared to 2018.
Restructuring and other charges
In each of the years ended
28 Table of Contents YEAR-OVER-YEAR COMPARISONS
Year Ended
Net sales decreased by 8.1% to
Years Ended December 31, 2020 2019 % of % of % Amount Net Sales Amount Net Sales ChangeNet Sales : Enterprise Solutions$ 1,115.6 43.1 %$ 1,193.8 42.3 % (6.6) % Business Solutions 966.0 37.3 1,060.0 37.6 (8.9) Public Sector Solutions 508.7 19.6 566.2 20.1 (10.2) Total$ 2,590.3 100.0 %$ 2,820.0 100.0 % (8.1) % Gross Profit: Enterprise Solutions$ 161.7 14.5 %$ 171.7 14.4 % (5.8) % Business Solutions 187.0 19.4 202.7 19.1 (7.7) Public Sector Solutions 70.1 13.8 76.9 13.6 (8.8) Total$ 418.8 16.2 %$ 451.3 16.0 % (7.2) %
Net sales of
decrease of
business partners faced the challenges of the decline in macroeconomic
conditions resulting from the COVID-19 pandemic. Net sales of displays and ? sound, notebook/mobility, desktop, software products and accessories decreased
year-over-year by
in net/com and server/storage products of
respectively, primarily as a result of the timing of large project rollouts.
Net sales of
decrease of
customers served by our Business Solutions segment are small- to medium-sized
business, which have been heavily impacted by the decline in macroeconomic
conditions in 2020 resulting from the COVID-19 pandemic. We experienced ? declines in net sales across a majority of our product lines, including
decreases in desktop, software, net/com, and other hardware/services of
million,
decreases were partially offset by increases in notebook/mobility and
accessories products of
as a result of entities shifting to work from home due to the COVID-19
pandemic.
Net sales of
by
experienced decreases year-over-year in other hardware and services of
million, primarily as a result of the decline in the current macroeconomic
environment, along with some larger projects with the Federal government in the ? first half of 2019 that did not repeat in the current year. Net sales of
desktop, server/storage, and software products also decreased by
These decreases in net sales were partially offset by an increase in sales of
notebooks/mobility products of
educational institutions preparing for and implementing remote learning
capabilities.
Gross profit for 2020 decreased year-over-year in dollars but slightly increased as a percentage of net sales (gross margin), as explained below:
Gross profit for the Enterprise Solutions segment decreased primarily due to ? the 6.6% decrease in net sales. The decrease in gross margin of 10 basis points
compared with the prior year was driven by fluctuations in customer and
hardware product mix. 29 Table of Contents
Gross profit for the Business Solutions segment decreased as a result of an ? 8.9% decrease in net sales. However, gross margin increased year-over-year by
30 basis point, resulting from higher invoice selling margins and a greater
percentage of our software sales in the current period reported on a net basis.
Gross profit for the Public Sector Solutions segment decreased by
year-over-year, primarily as a result of lower net sales in the current period. ? Gross margin improved by 20 basis points based on changes in customer mix,
improved hardware margins, and a higher percentage of our software sales in the
current period reported on a net basis.
Selling, general and administrative expenses ("SG&A") in 2020 increased in dollars, and slightly increased 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): Years Ended December 31, 2020 2019 % of Net % of Net % Amount Sales Amount Sales Change Enterprise Solutions$ 102.2 9.2 %$ 103.9 8.7 % (1.6) % Business Solutions 154.5 16.0 150.1 14.2 2.9 Public Sector Solutions 72.8 14.3 69.6 12.3 4.6 Headquarters/Other, unallocated 16.2 15.0 8.0 Total$ 345.7 13.3 %$ 338.6 12.0 % 2.1 %
SG&A expenses for the Enterprise Solutions segment decreased in dollars, but
increased as a percentage of net sales. The year-over-year change in SG&A
dollars was primarily attributable to a
costs, driven mostly by lower variable compensation expense associated with
lower gross profit, along with a
advertising expense. These changes were partially offset by an increase in the
? use of Headquarter services of
contractor and consulting fees associated with the deployment of our new ERP
system. SG&A expenses as a percentage of net sales was 9.2% for the Enterprise
Solutions segment for the year ended
increase of 50 basis points. This is primarily attributable to lower net sales
compared with the same period a year ago, rather than any individually
significant drivers of this change .
SG&A expenses for the Business Solutions segment increased in both dollars and
as a percentage of net sales. The year-over-year increase in SG&A dollars was
primarily due to a
driven, in part, by an increase in contractor and consulting fees associated
with the deployment of our new ERP system. Bad debt expense also increased by
increases were partially offset by decreases in product marketing and
advertising expense, credit card fees, and personnel costs of
net sales was 16.0% for the Business Solutions segment for the year ended
increase of 200 basis points year-over-year, resulting from lower net sales and
increased spending compared with the same period a year ago.
SG&A expenses for the Public Sector Solutions segment increased in both dollars
and as a percentage of net sales. The increase in SG&A dollars year-over-year
was primarily driven by an increase in the usage of Headquarter services of
percentage of net sales was 14.3% for the Public Sector Solutions segment for
the year ended
points. This increase year-over-year is primarily attributable to lower net
sales and increased spending compared with the same period a year ago.
30 Table of Contents
SG&A expenses for the Headquarters/Other group increased primarily as a result
of a
the deployment of our new ERP system and an increase of
contracts. Personnel costs also increased by
increases were partially offset by a reduction in the allocation of Headquarter
? services of
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.
Restructuring and other charges incurred in 2020, 2019, and 2018 were as follows: Years Ended December 31, 2020 2019 2018 Employee separations$ 1.0 $ 0.5 $ 1.0 Lease termination costs - 0.2 -
Total restructuring and other charges
The restructuring and other charges recorded in 2020 were related to a reduction in workforce across our business segments, and included cash severance payments and other related termination benefits.
The restructuring and other charges recorded in 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits. Also included in net restructuring charges were exit costs incurred associated with the closing of one of our office facilities.
The restructuring and other charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.
Income from operations for the year ended
Income taxes. Our effective tax rate was 23.8% for the year-ended
Net income decreased by
31 Table of Contents
Year Ended
Discusion of the the year ended
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 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, 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 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 2021 through a combination of cash on hand, cash generated from operations, and borrowings on our bank line of credit, as follows:
? Cash on Hand. At
equivalents.
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.
Credit Facilities. As of
against our
option, to
the bank. Borrowings are, however, limited by certain minimum collateral and
earnings requirements, as described more fully below. As of
we are in compliance with all of our financial covenants.
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."
32 Table of Contents
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):
Years Ended December 31, 2020 2019 2018
Net cash provided by operating activities
(11.0) (25.7) (21.2) Net cash used in financing activities (19.5) (12.5) (23.9)
Increase (decrease) in cash and cash equivalents
Cash provided by operating activities decreased
At
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:
December 31, (in days) 2020 2019 Days of sales outstanding (DSO)(1) 75 63
Days of supply in inventory (DIO)(2) 23 19 Days of purchases outstanding (DPO)(3) (44) (36) Cash conversion cycle
54 46
(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.
33 Table of Contents
The cash conversion cycle increased to 54 days at
Cash used in investing activities decreased
Cash used in financing activities increased
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.
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
Contractual Obligations. The following table sets forth information with respect to our long-term obligations payable in cash as ofDecember 31, 2020 (in thousands): Payments Due By Period Less Than 1 - 3 3 - 5 More Than Total 1 Year Years Years 5 Years Contractual Obligations: Operating lease obligations (1)$ 14,712 4,343 7,887 2,482 -
(1) Excluding taxes, insurance, and common area maintenance charges.
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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.
Off-Balance Sheet Arrangements. We do not have any other 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, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
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.
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't have any ? outstanding borrowings under the credit facility during the fourth quarter of
2020, and accordingly, the funded debt ratio did not limit potential borrowings
as of
however, could limit our potential borrowings under the credit facility.
Minimum Consolidated
consolidated net income for each quarter, beginning with the quarter ended
?
million, whereas our actual consolidated stockholders' equity at this date was
$636.3 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
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.
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
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Table of Contents
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 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
Information technology, or 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. Amounts recognized on a net basis included in net sales for such
software sales transactions were
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
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
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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.
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.
Significant Judgments
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
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
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difficulty. Therefore, if the financial condition of certain of our customers
were to deteriorate, or if we noted there was a 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
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.
Considerable judgment 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. 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
Vendor Consideration
We receive allowances from merchandise vendors for price protections, discounts, product rebates, and other programs. These allowances are treated as a reduction of the vendor's prices and are recorded as adjustments to cost of sales. We also receive vendor co-op advertising funding for our marketing activities and other programs. Vendors have the ability to place advertisements in the catalogs or fund other advertising activities for which we receive advertising allowances. These vendor allowances, to the extent that they represent specific reimbursements of incremental and identifiable costs, are offset against SG&A expense on the consolidated statements of income. Vendor consideration that cannot be associated with a specific program funded by an individual vendor or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales. Our vendor partners generally consolidate their funding of advertising and other marketing programs, and as a result, we classify substantially all vendor allowances as a reduction of cost of inventory purchases rather than a reduction of advertising expense.
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. 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
Value of
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
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carrying value of all these assets based partly on our projections of anticipated cash flows. These projections are, in part, dependent upon anticipated market conditions, operational performance, and legal status. Any impairment charge that is recorded negatively impacts our earnings. Cash flows are generally not impacted by an impairment charge.
In 2020, the Company assessed the goodwill impairment both qualitatively and quantitatively. The qualitative assessment includes considerations of macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flow, changes in the Company's stock price and market capitalization, and other relevant entity-specific events. The Company used a discounted cash flow methodology to determine the fair value of each reporting unit. Internal forecasts were used to estimate the future year cash flow and long-term growth rates was estimated based on the most recent views of each reporting unit. Discount rate used in the model reflects the risk and uncertainty associated with the respective businesses.
Our Enterprise Solutions and Business Solutions segments hold
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.
INFLATION
We have historically offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate. We do not expect inflation to have a significant impact on our business in the foreseeable future.
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