PC nection(CNXN) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Unaudited statements show year-over-year declines in revenue and net income for Q2 and H1 2023, though assets and operating cash flow improved Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $1.16 billion, driven by a rise in cash, while stockholders' equity also grew Balance Sheet Highlights | Balance Sheet Highlights | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :--- | :--- | :--- | | Total Current Assets | 1,021,933 | 953,792 | | Cash and cash equivalents | 243,983 | 122,930 | | Inventories, net | 159,734 | 208,682 | | Total Assets | 1,164,275 | 1,099,826 | | Total Current Liabilities | 347,305 | 310,517 | | Total Liabilities | 370,155 | 333,651 | | Total Stockholders' Equity | 794,120 | 766,175 | Condensed Consolidated Statements of Income Net sales and net income declined in both the second quarter and first six months of 2023 compared to the prior year Q2 Income Statement | Income Statement (Q2) | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | | :--- | :--- | :--- | | Net sales | 733,547 | 828,509 | | Gross profit | 127,777 | 136,901 | | Income from operations | 25,071 | 34,770 | | Net income | 19,697 | 25,398 | | Diluted EPS | $0.75 | $0.96 | H1 Income Statement | Income Statement (H1) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :--- | :--- | :--- | | Net sales | 1,461,092 | 1,616,853 | | Gross profit | 250,073 | 265,207 | | Income from operations | 43,188 | 64,905 | | Net income | 33,895 | 47,190 | | Diluted EPS | $1.28 | $1.79 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $794.1 million, driven by net income which offset stock repurchases and dividend payments - For the six months ended June 30, 2023, total stockholders' equity increased by $27.9 million, from $766.2 million to $794.1 million[19] - Key activities impacting equity in H1 2023 included net income of $33.9 million, stock repurchases of $5.4 million, and dividend declarations of $4.2 million[19] Condensed Consolidated Statements of Cash Flows The company generated strong operating cash flow of $135.4 million in H1 2023, a significant reversal from the cash used in H1 2022 H1 Cash Flow Summary | Cash Flow Summary (H1) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 135,445 | (8,395) | | Net cash used in investing activities | (4,860) | (4,565) | | Net cash used in financing activities | (9,532) | (454) | | Increase (decrease) in cash | 121,053 | (13,414) | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, segment performance, and restructuring charges related to a workforce reduction - The company recorded restructuring charges of $1.7 million for Q2 2023 and $2.6 million for H1 2023, primarily related to an involuntary reduction in its headquarter workforce[27][28][29] - The company has a $50 million credit facility that expires in March 2025, which can be increased to $80 million, and as of June 30, 2023, there were no outstanding borrowings[58][59] Net Sales by Segment (H1 2023) | Net Sales by Segment (H1 2023) | Amount ($ thousands) | | :--- | :--- | | Business Solutions | 534,141 | | Enterprise Solutions | 601,096 | | Public Sector Solutions | 325,855 | | Total net sales | 1,461,092 | Operating Income by Segment (H1 2023) | Operating Income by Segment (H1 2023) | Amount ($ thousands) | | :--- | :--- | | Business Solutions | 35,384 | | Enterprise Solutions | 14,033 | | Public Sector Solutions | 1,679 | | Headquarters/Other | (7,908) | | Total operating income | 43,188 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a challenging quarter with decreased net sales, improved gross margin, and strong liquidity Results of Operations Q2 and H1 2023 sales declined due to weakness in notebooks, though the Public Sector segment grew and gross margin percentage improved - The company incurred restructuring charges of $1.7 million in Q2 2023 and $2.6 million in H1 2023 related to workforce reductions, with no similar charges in 2022[82][84] Key Metrics (Q2 2023 vs Q2 2022) | Key Metrics (Q2 2023 vs Q2 2022) | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net Sales | $733.5M | $828.5M | | Gross Margin % | 17.4% | 16.5% | | SG&A % of Sales | 13.8% | 12.3% | | Income from Operations % | 3.4% | 4.2% | Net Sales Change by Segment (Q2 2023 vs Q2 2022) | Net Sales Change by Segment (Q2 2023 vs Q2 2022) | $ Change (M) | % Change | | :--- | :--- | :--- | | Enterprise Solutions | $(61.8) | (17.7)% | | Business Solutions | $(67.4) | (20.5)% | | Public Sector Solutions | $34.2 | 22.6% | | Total | $(95.0) | (11.5)% | Liquidity and Capital Resources The company maintains a strong liquidity position with $244.0 million in cash, an undrawn credit facility, and an improved cash conversion cycle - As of June 30, 2023, the company had $244.0 million in cash and cash equivalents and no outstanding borrowings under its $50.0 million credit facility[128][130] - The company declared and paid two quarterly cash dividends of $0.08 per share in H1 2023 and another $0.08 dividend was declared on August 2, 2023[134] Cash Conversion Cycle (in days) | Cash Conversion Cycle (in days) | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Days of sales outstanding (DSO) | 68 | 66 | | Days of supply in inventory (DIO) | 24 | 29 | | Days of purchases outstanding (DPO) | (42) | (37) | | Cash conversion cycle | 50 | 58 | Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks are reported since the year-end 2022 disclosure - No material changes related to market risks have occurred since December 31, 2022[157] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[159] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[160] PART II OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal proceedings from the ordinary course of business are not expected to have a material adverse effect - The outcomes of ordinary course legal proceedings and claims are not expected to have a material, adverse effect on the Company's financial position, results of operations, and/or cash flows[55][163] Item 1A. Risk Factors A new risk factor has been identified concerning the company's use of artificial intelligence and machine learning technologies - A new risk factor has been introduced regarding the use of artificial intelligence and machine learning, citing potential negative impacts from incorrectly designed models, regulatory scrutiny, and ethical concerns[164][165] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased approximately $2.0 million of its common stock in Q2 2023, with $32.3 million remaining under its buyback program - The company's board has authorized an aggregate of $80.0 million for its stock repurchase program, and as of June 30, 2023, $32.3 million was still available for repurchases[169] Stock Repurchases (Q2 2023) | Stock Repurchases (Q2 2023) | Value | | :--- | :--- | | Total Shares Purchased | 49,538 | | Average Price Paid Per Share | $39.75 | | Total Cost (approx.) | $2.0 million | Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading agreements during the second quarter of 2023 - No directors or officers adopted or terminated a Rule 10b5-1 trading agreement during the second quarter of 2023[170] Item 6. Exhibits This section lists exhibits filed with the report, including officer certifications and interactive data files - Exhibits filed include the Fourth Amendment to the Credit and Security Agreement, certifications by the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906, and Inline XBRL documents[172][173]