PC Connection, Inc. — Q3 2021 Form 10-Q
Period: Three and nine months ended September 30, 2021; unaudited. PC Connection resells IT hardware and software and provides related services through Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $751.4 million | $652.8 million | $2,092.4 million | $1,914.6 million |
| Gross profit | $120.7 million | $107.8 million | $337.5 million | $309.9 million |
| Operating income | $27.3 million | $21.1 million | $65.2 million | $52.3 million |
| Net income | $20.0 million | $16.9 million | $47.5 million | $39.5 million |
| Diluted EPS | $0.76 | $0.64 | $1.80 | $1.50 |
- Q3 revenue increased 15.1% year over year; year-to-date revenue increased 9.3%. Q3 operating margin rose to 3.6% from 3.2%; year-to-date it rose to 3.1% from 2.7%.
- Gross margin was 16.1% in Q3 versus 16.5% a year earlier, and 16.1% year to date versus 16.2%. Q3 SG&A was $93.4 million, up from $86.8 million, but decreased as a share of sales to 12.4% from 13.3%.
- Q3 sales growth was concentrated in Enterprise Solutions (+19.2%) and Business Solutions (+21.8%); Public Sector Solutions declined 1.0%. Year-to-date all three segments grew: Enterprise +5.0%, Business +13.4%, and Public Sector +11.1%.
Cash, liquidity, and capital
- Cash was $89.7 million at September 30, 2021, compared with $95.7 million at December 31, 2020. Operating cash flow for the first nine months was $8.8 million, versus $46.4 million in 2020; cash decreased $5.9 million.
- Management attributed the lower operating cash generation chiefly to a $34.5 million inventory increase and a $50.0 million decrease in accounts payable, partly offset by collections reducing receivables by $22.4 million. The cash conversion cycle lengthened to 60 days from 48 days a year earlier.
- The company had no bank borrowings and $50.0 million available on its receivables-secured credit facility, which expires February 10, 2022. It reported covenant compliance. Total liabilities were $327.8 million and stockholders’ equity was $686.2 million; reported lease liabilities include current and noncurrent obligations.
- Investing cash outflow was $5.6 million, including $7.1 million of equipment and software purchases, partly offset by $1.5 million of life-insurance proceeds. Financing outflow was $9.2 million, including an $8.4 million special dividend ($0.32 per share).
Management commentary, outlook, and risks
- Management cited continued customer demand associated with hybrid work, manufacturing and healthcare growth, and its ability to navigate supply-chain constraints. It expects cash on hand, operating cash flow, and available credit to fund requirements for at least the next 12 months, but gave no specific revenue or earnings guidance.
- The company plans continued investment in IT infrastructure and solution-selling capabilities. Management noted that hiring skilled service engineers raises costs and that returns depend on service revenue growth.
- Key risks include COVID-19 and economic uncertainty, product availability and supply-chain constraints, competition and pricing pressure, vendor dependence, rapid technology changes and inventory obsolescence, customer credit and collections, shipping dependence and costs, cybersecurity, and public-sector contract compliance.
- Legal proceedings, including patent claims, and tax and other audits were not expected by management to have a material adverse effect. The company disclosed related-party facility leases. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether supply constraints and customer demand persist, and how they affect sales, product mix, and gross margin.
- Whether inventory growth and reduced supplier payment terms continue to pressure operating cash flow and the 60-day cash conversion cycle.
- Credit-facility renewal or replacement before its February 2022 expiry, and ongoing covenant headroom.
- Whether Public Sector Solutions profitability improves; the segment recorded a $4.3 million operating loss year to date.
- How service-engineer and IT investments translate into higher-margin services revenue, and whether COVID-19 or other stated risks materially affect results.