PC Connection, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with Q1 2021 unless noted. Dollar amounts below are in millions, except per-share data.
Business context
PC Connection is an IT solutions provider and value-added reseller serving small and medium-sized businesses, enterprise customers, and public-sector organizations. It sells hardware, software, and services through its three reportable segments: Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $788.3 | $636.9 | +23.8% |
| Gross profit / margin | $128.3 / 16.3% | $100.5 / 15.8% | +27.6%; +0.5 percentage points |
| SG&A / % of sales | $98.2 / 12.5% | $86.4 / 13.6% | +13.6% in dollars |
| Operating income / margin | $30.1 / 3.8% | $14.1 / 2.2% | +113.4%; +1.6 percentage points |
| Net income | $21.8 | $10.2 | More than doubled |
| Diluted EPS | $0.83 | $0.39 | +112.8% |
| Operating cash flow | ($38.3) | $6.0 | Decreased $44.2 |
Sales increased across all three segments. Business Solutions sales rose 30.1% to $320.4 million; Enterprise Solutions rose 26.4% to $335.4 million; Public Sector Solutions rose 5.8% to $132.5 million. Segment operating income was $20.7 million, $14.3 million, and a loss of $1.1 million, respectively.
Gross-margin expansion reflected product and customer mix. Management attributed higher SG&A primarily to $9.3 million more personnel costs, largely variable compensation tied to higher gross profit, and $1.2 million more marketing expense. Effective tax rate was 27.7%, versus 27.8%.
Financial position and liquidity
- Cash and cash equivalents were $67.4 million at March 31, down from $108.3 million at year-end 2021. Total assets were $1,100.8 million and stockholders’ equity was $705.5 million.
- Current assets were $950.7 million and current liabilities $369.8 million. Accounts receivable was $634.1 million; inventory was $234.6 million.
- Operating cash use mainly reflected increases in inventory ($28.0 million) and receivables ($27.2 million), and a decrease in accounts payable ($10.5 million). Inventory purchases were advanced in anticipation of customer rollouts. Investing cash use was $2.5 million, primarily for IT equipment and software. Financing cash use was $0.2 million; the prior-year period included an $8.4 million special dividend.
- The cash conversion cycle was 64 days, versus 63 days a year earlier. Inventory days rose to 32 from 24; days sales outstanding improved to 69 from 74.
- No bank borrowings were outstanding at quarter-end; the $50 million receivables-backed facility was available through March 31, 2025. The company was in compliance with its covenants. Operating lease liabilities totaled $9.9 million, including current and long-term portions.
Outlook, risks, and contingencies
- The filing provides no numerical revenue or earnings guidance. Management said cash on hand, expected operating cash flows, and available credit should meet working-capital, capital-expenditure, and other needs for the next 12 months and beyond; it does not currently anticipate needing additional financing.
- Management expects global supply-chain challenges to persist for the foreseeable future. Product availability constraints delayed order fulfillment and increased backlog; the company raised inventory to support anticipated customer rollouts.
- Key risks include supply-chain disruption, including COVID-19 effects and the Russia-Ukraine conflict; inflation and higher interest rates; demand and government-spending changes; competition and pricing pressure; vendor dependence; inventory obsolescence; customer credit risk; and cyber threats. Management cautioned that Q1 results may not indicate full-year results.
- Ordinary-course legal claims, including patent claims, and state tax and other audits are disclosed; management does not expect them to have a material adverse effect. A related-party lease arrangement was reported, with $2.0 million of associated right-of-use assets and lease liabilities.
Important facts for investors to verify
- Whether supply constraints, customer backlog, and elevated inventory convert into timely shipments and cash collection.
- Whether the working-capital outflow reverses and operating cash generation aligns with reported earnings.
- Whether gross-margin gains and segment-level profitability persist, particularly the Public Sector Solutions segment’s operating loss.
- Whether demand, inflation, interest rates, and vendor availability affect the company’s stated liquidity outlook and access to its credit facility.