PC Connection, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. PC Connection is a U.S. IT solutions reseller and services provider, operating through Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $2,590.3 million | $2,820.0 million | -8.1% |
| Gross profit / margin | $418.8 million / 16.2% | $451.3 million / 16.0% | Gross profit -7.2%; margin +0.2 percentage points |
| SG&A | $345.7 million / 13.3% of sales | $338.6 million / 12.0% | +2.1% in dollars |
| Operating income / margin | $72.1 million / 2.8% | $112.0 million / 4.0% | -35.6%; margin -1.2 percentage points |
| Net income | $55.8 million | $82.1 million | -32.1% |
| Diluted EPS | $2.12 | $3.10 | -31.6% |
| Operating cash flow | $36.1 million | $36.6 million | -1.4% |
At December 31, 2020, cash and cash equivalents were $95.7 million, working capital was $516.7 million, and stockholders’ equity was $636.3 million. The company had no bank borrowings and its $50 million revolving credit facility was fully available; it reported compliance with covenants. Accounts payable were $266.8 million. Total assets were $1.02 billion.
Working-capital trends weakened: receivables rose $63.7 million and inventory rose $16.2 million year over year, partly offset by a $32.5 million increase in payables. Days sales outstanding rose to 75 from 63, inventory days to 23 from 19, and the cash conversion cycle to 54 from 46 days. Credit-loss expense was $3.3 million, versus $0.03 million in 2019.
Fourth quarter: Net sales were $675.7 million versus $716.6 million in Q4 2019 (-5.7%); operating income was $19.8 million versus $29.6 million; net income was $16.3 million versus $22.0 million; diluted EPS was $0.62 versus $0.83.
Material changes and drivers
- Management attributed lower annual sales across all segments primarily to COVID-19-related economic weakness and reduced customer demand. Notebook and mobility sales benefited from work-from-home and remote-learning needs, but did not offset declines elsewhere.
- Enterprise Solutions sales fell 6.6%, Business Solutions 8.9%, and Public Sector Solutions 10.2%. Public Sector reported an operating loss of $2.8 million, compared with $7.3 million of operating income in 2019.
- Gross margin improved slightly overall, with segment margin gains in Business and Public Sector; lower sales and higher SG&A nevertheless reduced operating income. ERP implementation drove increased professional and consulting costs; management cited $8.8 million of higher professional-service fees.
- The new ERP system became operational in May 2020. Management reported effective disclosure controls and internal control over financial reporting, while saying it will continue monitoring controls as implementation changes settle.
- Cash from investing activities was $11.0 million, mainly for equipment and capitalized software, down from $25.7 million in 2019. Financing cash outflow was $19.5 million, including $10.2 million of share repurchases and an $8.4 million special dividend payment.
Outlook, risks, and unusual items
- No quantified revenue, earnings, or margin guidance is provided. Management said cash on hand, operating cash generation, and available credit should cover working capital, capital expenditures, and other needs for at least 12 months. It noted that future COVID-19 effects on demand, collections, suppliers, and operations remained uncertain.
- Principal risks include pandemic-related demand and supply disruption; intense pricing and channel competition; dependence on key vendors and trade credit; product obsolescence; slower customer collections; cybersecurity and IT-system disruption; and adapting to cloud and software-as-a-service distribution.
- HP products represented approximately 18% of 2020 net sales. Ingram Micro, Synnex, and HP Inc. represented 21%, 15%, and 12% of product purchases, respectively; Dell and Tech Data together represented 66% of purchases. Management warned that a disruption in HP supply could materially affect results and cash flows.
- Other income included a $1.1 million non-operating life-insurance gain following the death of co-founder and director David Hall. The effective tax rate was 23.8%, compared with 27.1% in 2019, including $2.9 million of discrete tax items, mainly R&D credits.
- The company declared a $0.32-per-share special dividend in 2020, paid in January 2021. It repurchased $10.2 million of shares during 2020 and had $12.7 million of authorized repurchase capacity remaining at year-end. Future dividends are not assured.
- Management said ordinary-course legal matters were not expected to have a material effect; it cautioned that outcomes and potential losses remain uncertain. Goodwill impairment was not identified in the 2020 test.
Important facts for investors to verify
- Whether sales and operating performance recover, particularly in Business and Public Sector Solutions, and whether segment margins hold.
- Whether receivables, DSO, inventory, and credit-loss expense improve; review subsequent collections and working-capital cash flow.
- Whether ERP-related consulting costs subside and the new system operates effectively without material control or business disruption.
- Whether COVID-19, vendor concentration, product availability, and trade-credit terms affect supply, demand, or liquidity.
- Whether the reported $95.7 million cash balance and undrawn credit line remain sufficient under changing operating conditions; assess the facility’s February 2022 expiration and covenant limits.