PC Connection, Inc. — Q1 2020 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2020, for the IT products and solutions provider’s Business Solutions, Enterprise Solutions, and Public Sector Solutions segments. Results reflect the early effects of COVID-19, including increased demand for remote-work technology and higher expected credit losses.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with Q1 2019 unless otherwise noted.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $711.9 | $632.9 | Up 12.5% |
| Gross profit / margin | $113.1 / 15.9% | $99.3 / 15.7% | Gross profit up 13.9%; margin +19 basis points |
| SG&A | $92.5 | $81.2 | Up 13.9%; 13.0% of sales vs. 12.8% |
| Operating income / margin | $20.7 / 2.9% | $17.4 / 2.8% | Operating income up $3.2 |
| Net income | $14.9 | $12.7 | Up 17.0% |
| Diluted EPS | $0.56 | $0.48 | Up 16.7% |
| Operating cash flow | $44.6 | $18.1 | Improved, in part from lower accounts receivable |
| Cash and cash equivalents | $111.3 | $90.1 at Dec. 31, 2019 | Quarter-end balance |
| Bank borrowings | $0 | $0 at Mar. 31, 2019 | $50.0 credit facility available |
At March 31, 2020, total assets were $913.2 million and stockholders’ equity was $602.6 million. Operating cash flow also reflected a $12.3 million inventory increase and reductions in accounts payable and accrued liabilities. Capital expenditures were $4.6 million. Financing used $18.7 million, principally for $10.2 million of share repurchases and an $8.4 million special dividend of $0.32 per share. Operating lease liabilities totaled $16.6 million, including current and noncurrent portions.
Material changes and segment trends
- Enterprise Solutions: Sales rose 21.0% to $333.4 million; operating income increased to $16.7 million from $15.5 million. Sales growth included accessories, mobility, and networking/communications products. Gross margin declined to 13.9% from 14.9%.
- Business Solutions: Sales rose 10.2% to $278.8 million; operating income increased to $11.3 million from $8.8 million. Gross margin improved to 18.8% from 17.8%.
- Public Sector Solutions: Sales declined 4.5% to $99.6 million. The segment reported an operating loss of $3.3 million versus a $3.1 million loss; gross margin improved to 14.5% from 12.6%.
- Sales gains were associated with the PC refresh cycle, remote-work deployments, healthcare demand, and large accessory project rollouts. SG&A growth included higher personnel costs and increased bad-debt expense tied to anticipated COVID-19 collection challenges.
Outlook, risks, and other matters
- Management said cash on hand, operating cash generation, and available credit were expected to fund working capital, capital expenditures, and other requirements for at least the next 12 months. The company provided no specific revenue or earnings guidance; it expected a 2020 corporate income tax rate of 26%–28%.
- The company was deemed an essential business and said remote work and travel restrictions had not materially impaired operations as of the filing. Management cautioned that COVID-19’s duration and effects remained uncertain and could harm demand, supplier availability, customer collections, cash flows, and results. Hospitality, airline, and retail customers were identified as particularly exposed.
- The company increased its allowance for expected credit losses; the cash flow statement reports a $2.8 million provision for doubtful accounts, versus $0.3 million in Q1 2019. Days sales outstanding were 58 days, compared with 55 days at March 31, 2019.
- The $50.0 million receivables-backed credit facility expires in February 2022 and may be increased to $80.0 million for permitted uses. Borrowing capacity is subject to covenants, including a maximum funded-debt ratio of 2.0-to-1.0. The company reported compliance capacity based on its financial position and no borrowings at quarter-end.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect, but tax, employment, and other audits could result in additional liabilities with potentially material effects. No goodwill or intangible-asset impairment indicators were identified in the company’s COVID-19 assessment.
Important facts for investors to verify
- Whether COVID-19-related customer credit deterioration leads to further bad-debt expense, delayed collections, or uncollectible receivables.
- Whether supply-chain constraints, weaker customer demand, or customer concessions affect sales, margins, and cash conversion after Q1.
- Whether inventory levels and the quarter’s unusually strong operating cash flow are sustainable; the filing attributes much of the cash inflow to receivables collection and shipment timing.
- How segment profitability develops, particularly Enterprise Solutions’ lower gross margin and continuing Public Sector operating losses.
- Progress under the share-repurchase program and the company’s ability to maintain liquidity and covenant headroom as conditions evolve.