PC Connection, Inc. — Q3 2022 Form 10-Q
Business context and period. The company is an IT solutions and products reseller serving small and medium-sized businesses, enterprises, and public-sector customers. This unaudited filing covers the quarter and nine months ended September 30, 2022; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $775.7 | $751.4 | $2,392.5 | $2,092.4 |
| Gross profit / margin | $136.6 / 17.6% | $120.7 / 16.1% | $401.8 / 16.8% | $337.5 / 16.1% |
| SG&A | $104.9 | $93.4 | $305.2 | $272.3 |
| Operating income / margin | $31.7 / 4.1% | $27.3 / 3.6% | $96.6 / 4.0% | $65.2 / 3.1% |
| Net income | $23.2 | $20.0 | $70.4 | $47.5 |
| Diluted EPS | $0.88 | $0.76 | $2.66 | $1.80 |
| Operating cash flow | Not separately provided | Not separately provided | $15.7 | $8.8 |
- Q3 year-over-year: Sales rose 3.2%, gross profit 13.2%, operating income 16.1%, and net income approximately 15.8%. Gross-margin expansion reflected a more favorable mix, including higher-margin software and services recognized on a net basis.
- Nine-month year-over-year: Sales increased 14.3%, gross profit 19.0%, operating income to $96.6 from $65.2, and net income to $70.4 from $47.5. SG&A rose in dollars but declined to 12.8% of sales from 13.0%.
- Segment trends: Q3 Business Solutions sales increased 12.2%; Enterprise Solutions fell 1.4% and Public Sector Solutions fell 3.7%. For the nine months, sales increased in all three segments: Business 21.3%, Enterprise 12.2%, and Public Sector 5.5%.
- Balance sheet at September 30: Cash was $116.2; accounts receivable $646.7; inventory $213.3; current assets $986.3; current liabilities $352.9; and stockholders’ equity $756.1. At December 31, 2021, cash was $108.3, receivables $607.5, inventory $206.6, current liabilities $374.6, and equity $682.5.
- Liquidity and debt: No credit-facility borrowings were outstanding at quarter-end, with the full $50.0 facility available; capacity may increase to $80.0 subject to conditions. The company was in covenant compliance. It borrowed and repaid $36.5 during the nine-month period.
- Cash flow: Cash increased $7.9 to $116.2 over the first nine months. Investing cash use was $7.0, primarily for equipment and capitalized software; financing cash use was $0.8. Operating cash flow was affected by a $41.8 increase in receivables, a $6.8 increase in inventory, and a $23.3 decrease in accounts payable.
Management commentary, outlook, and risks
- Management said inflation was more significant in 2022 than in 2021 but had been managed through pricing actions; it cautioned there is no certainty this can continue.
- Supply-chain conditions improved during Q3 and backlog declined from Q2, but backlog remained elevated versus 2021. Management expected some supply-chain challenges to persist through year-end and into Q1 2023.
- The company said cash on hand, operating cash generation, and available credit should fund working capital, capital expenditures, and other needs for the next 12 months and beyond. No specific earnings or revenue guidance was provided.
- Principal disclosed risks include inflation and rising rates, economic and geopolitical uncertainty, competition and pricing pressure, supplier dependence, supply disruptions, inventory obsolescence, customer credit risk, changing IT distribution models, cybersecurity, and dependence on skilled personnel. The filing says legal proceedings and tax or other audits are not expected to have a material adverse effect.
- Related-party facility leases are disclosed. Total lease liabilities were $9.1, including $3.5 short-term and $5.6 long-term. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved supply availability and lower backlog persist, particularly through Q1 2023, and how they affect sales and inventory.
- Whether gross-margin gains from product mix and pricing are sustainable, and whether personnel and other SG&A growth erodes operating leverage.
- Working-capital trends: receivables and inventory increased, and the cash conversion cycle rose to 63 days from 60 days year over year.
- Ongoing covenant headroom and borrowing capacity if earnings weaken; the facility is subject to financial tests despite having no quarter-end borrowings.
- Potential effects of macroeconomic conditions, vendor concentration, customer collections, and technology-product obsolescence on future results.