PC Connection, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. PC Connection distributes IT products and provides related technology solutions and services through Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $704.2 | $550.0 | $1,341.1 | $1,261.9 |
| Gross profit | $116.3 | $89.0 | $216.8 | $202.1 |
| Gross margin | 16.5% | 16.2% | 16.2% | 16.0% |
| Operating income | $23.8 | $10.6 | $37.9 | $31.2 |
| Operating margin | 3.4% | 1.9% | 2.8% | 2.5% |
| Net income | $17.3 | $7.6 | $27.5 | $22.5 |
| Diluted EPS | $0.66 | $0.29 | $1.04 | $0.86 |
Q2 sales rose 28.0% year over year, and H1 sales rose 6.3%. Q2 growth spanned all three segments: Business Solutions +39.9%, Enterprise Solutions +24.5%, and Public Sector Solutions +15.6%. H1 sales were mixed by segment: Business Solutions +9.3%, Public Sector Solutions +20.4%, and Enterprise Solutions −1.3%.
Management attributed Q2 growth to customer demand related to hybrid work and noted the comparison benefited from lower sales in Q2 2020 amid COVID-19. H1 Enterprise sales were affected by first-quarter supply constraints and a stronger prior-year comparison. Q2 gross margin improved 30 basis points; SG&A rose in dollars but declined as a share of sales to 13.1% from 14.1%. The company reported no restructuring charges in 2021, versus $1.0 million in Q2 and H1 2020.
Cash, liquidity, debt, and balance sheet
- Cash and equivalents were $115.7 at June 30, 2021, up from $95.7 at year-end 2020. Current assets were $878.0 and current liabilities were $330.5.
- H1 operating cash flow was $31.8, versus $102.4 in H1 2020. Working-capital movements included a $26.8 cash source from lower receivables, offset partly by a $26.2 inventory build and a $9.1 decrease in accounts payable.
- Investing cash outflow was $3.1, including $4.6 of equipment and capitalized software purchases, partly offset by $1.5 of life-insurance proceeds. Financing cash outflow was $8.7, principally the $8.4 special dividend ($0.32 per share); the prior-year period also included $10.2 of treasury-stock purchases.
- No bank borrowings were outstanding; the $50.0 receivables-backed credit facility was fully available and expires February 10, 2022. The company reported compliance with its covenants. Lease liabilities totaled $11.9, including $8.1 noncurrent.
- The cash conversion cycle lengthened to 56 days from 52 days a year earlier, reflecting higher DSO and lower DPO, partly offset by lower inventory days.
Outlook, commentary, and risks
Management said operating cash, cash on hand, and available credit should be sufficient for working capital, capital expenditures, and other requirements for at least the next 12 months. The company expects a 2021 corporate income tax rate of 26%–28%; it provided no specific revenue or earnings guidance in the supplied filing text. Management cautioned that interim results may not indicate full-year performance.
Key exposures include product availability and supply-chain constraints, inventory obsolescence, competitive pricing and margin pressure, dependence on vendors and third-party shippers, customer credit risk, economic and government-spending conditions, COVID-19 effects, and cybersecurity. The company said ordinary-course legal proceedings and tax or other audits were not expected to have a material adverse effect. 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 inventory purchases affect product availability, sales, and working capital in subsequent quarters.
- Whether stronger demand and gross-margin improvement persist, particularly across segments with different sales and margin trends.
- Why H1 operating cash flow fell year over year and whether the cash conversion cycle improves.
- Renewal or replacement plans for the credit facility expiring in February 2022, and continued covenant headroom.
- Whether the stated 26%–28% tax-rate expectation and the company’s 12-month liquidity assessment remain current.