PC Connection, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PC Connection is an IT solutions reseller and services provider serving business, enterprise, and public-sector customers. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $828.5 | $704.2 | $1,616.9 | $1,341.1 |
| Gross profit | $136.9 | $116.3 | $265.2 | $216.8 |
| Gross margin | 16.5% | 16.5% | 16.4% | 16.2% |
| SG&A | $102.1 | $92.6 | $200.3 | $179.0 |
| Operating income | $34.8 | $23.8 | $64.9 | $37.9 |
| Operating margin | 4.2% | 3.4% | 4.0% | 2.8% |
| Net income | $25.4 | $17.3 | $47.2 | $27.5 |
| Diluted EPS | $0.96 | $0.66 | $1.79 | $1.04 |
- Q2 sales increased 17.7% year over year; first-half sales rose 20.6%. Growth spanned all three segments. Management cited hybrid and work-from-anywhere demand, workplace solutions, and data-center and cloud transformation.
- Q2 gross margin was flat year over year; first-half margin improved 0.2 percentage point. SG&A rose in dollars but declined as a share of sales, supporting operating-margin expansion. Q2 SG&A growth reflected personnel costs, variable compensation, and higher marketing expense.
- Q2 segment sales growth: Business Solutions 22.9%, Enterprise Solutions 13.6%, and Public Sector Solutions 16.5%. Business Solutions had the strongest growth; Enterprise Solutions gross margin declined 0.8 percentage point in Q2.
Cash flow, balance sheet, and debt
- First-half operating cash flow was negative $8.4, versus positive $31.8 in 2021. Working-capital uses included a $38.1 increase in accounts receivable, a $16.6 increase in inventory, and an $8.0 combined decrease in accounts payable and accrued expenses and other liabilities.
- Cash and cash equivalents were $94.9 at June 30, down from $108.3 at year-end 2021. Investing cash outflow was $4.6, primarily for equipment and capitalized software. Financing cash outflow was $0.5; the comparable 2021 period included an $8.4 special-dividend payment.
- Accounts receivable were $644.0 and inventory $223.2, up from $607.5 and $206.6, respectively, at year-end. The cash conversion cycle was 58 days versus 56 days a year earlier; inventory days increased while receivable days improved.
- No borrowings were outstanding at June 30. The company had a $50.0 receivables-secured credit facility available through March 2025 and reported compliance with its covenants. Total liabilities were $391.6; stockholders’ equity was $732.0.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management said available cash, expected operating cash generation, and the credit facility should be sufficient for working capital, capital expenditures, and other needs over the next 12 months and beyond.
- Supply chains remained challenged. Management reported a slight sequential backlog decrease, but backlog remained above the prior-year level, and expected supply-chain challenges to continue through at least year-end. Inventory was increased in anticipation of customer rollouts and to mitigate product delays.
- Risks highlighted include supply disruption, inflation and higher interest rates, weaker IT demand or business investment, vendor dependence and direct-to-customer competition, price and margin pressure, inventory obsolescence, customer credit and collection exposure, cybersecurity, and dependence on skilled personnel. Public-sector sales also benefited from K-12 Emergency Connectivity Fund demand and infrastructure stimulus funding.
- Routine legal proceedings and tax, employment, and other audits were not expected to have a material adverse effect. The company leases facilities from a related party; related-party right-of-use assets and lease liability were each $1.7.
Investor verification priorities
- Monitor whether higher inventory and receivables convert into operating cash, and whether the cash conversion cycle improves.
- Assess the duration and financial effect of supply constraints, elevated backlog, and inventory-obsolescence exposure.
- Track segment margins and operating costs, particularly Enterprise Solutions’ margin pressure and ongoing hiring and marketing investment.
- Evaluate how much sales growth depends on hybrid-work demand and temporary public-sector funding programs.
- Review the company’s assumptions about future operating cash generation and its ability to maintain credit-facility covenant headroom if earnings weaken.