PC Connection, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. PC Connection provides IT products and services through Business Solutions, Enterprise Solutions, and Public Sector Solutions. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $550.0 | $741.1 | $1,261.9 | $1,374.0 |
| Gross profit / margin | $89.0 / 16.2% | $117.0 / 15.8% | $202.1 / 16.0% | $216.3 / 15.7% |
| Operating income / margin | $10.6 / 1.9% | $32.3 / 4.4% | $31.2 / 2.5% | $49.7 / 3.6% |
| Net income | $7.6 | $23.7 | $22.5 | $36.4 |
| Diluted EPS | $0.29 | $0.89 | $0.86 | $1.37 |
- Q2 sales fell 25.8% year over year; first-half sales fell 8.2%. Q2 net income declined to $7.6 million from $23.7 million. Gross margin improved, but operating margin contracted as lower sales left SG&A higher relative to revenue.
- Q2 sales declined across all three segments: Business Solutions 29.5%, Public Sector Solutions 26.2%, and Enterprise Solutions 22.4%. First-half declines were 10.3%, 17.4%, and 2.3%, respectively.
- For the six months, operating cash flow was $102.4 million, versus $3.3 million in 2019. The increase mainly reflected a $99.3 million decrease in receivables and higher accounts payable, partly offset by a $41.0 million increase in inventory. The filing reports cash flow for the six-month period, not Q2 alone.
- Cash and cash equivalents were $165.9 million at June 30, 2020, compared with $90.1 million at year-end 2019. Current assets were $791.7 million and current liabilities $308.2 million. Stockholders’ equity was $611.2 million.
- No bank borrowings were outstanding; the $50.0 million receivables-backed credit facility was fully available. The company reported no other material debt in the supplied filing text.
Changes, management commentary, and outlook
- Management attributed the broad sales decline primarily to COVID-19-related economic deterioration and lower customer demand. Public Sector notebook and mobility sales benefited from remote-learning demand, but this did not offset declines elsewhere.
- The new ERP system became operational in May 2020 and was substantially implemented during Q2. Management said implementation demands adversely affected Q2 execution and sales, reducing potential incremental sales, though it reported no material order cancellations or fulfillment failures. Integration work continued in Q3 at decreasing levels.
- COVID-19-related collection uncertainty increased the customer allowance for doubtful accounts by $3.3 million versus the prior-year period. Days sales outstanding rose to 68 from 55 a year earlier; inventory turns fell to 12 from 17. Inventory increased from year-end amid anticipated product shortages and price increases.
- Q2 included $1.0 million of restructuring charges for workforce reductions. The company said all currently planned charges had been incurred by June 30 and it had no ongoing restructuring plans. It also paid a special $0.32-per-share dividend ($8.4 million) and repurchased $10.2 million of stock during the first half.
- Management expected cash on hand, operating cash flow, and the credit line to cover working capital, capital expenditures, and other needs for at least the next 12 months. It expected a 2020 corporate tax rate of 26%–28%; no revenue or earnings guidance was provided in the filing text.
- Key risks include the uncertain duration and effects of COVID-19 on demand, customer collections, suppliers and product availability; potential customer payment concessions; competition and vendor direct sales; inventory obsolescence; and ERP integration or control risks. Management reported disclosure controls effective at the reasonable-assurance level and no identified goodwill or intangible impairment indicators.
- Management stated that ordinary-course legal matters and tax or other audits were not expected to have a material adverse effect. The credit facility has financial covenants, including a maximum funded-debt ratio of 2.0:1.0; the company reported compliance-related capacity was not limiting borrowings at period-end.
Important facts for investors to verify
- Whether demand and customer collections recovered or deteriorated after June 30, particularly given higher days sales outstanding and the increased doubtful-account allowance.
- Whether inventory levels, product availability, and inventory turns normalized, and whether anticipated shortages or price changes affected margins.
- Whether ERP integration was completed without further disruption, lost sales, or material changes to internal controls.
- Whether segment sales and operating profitability stabilized, especially in Business Solutions and Public Sector Solutions.
- Whether cash generation remained strong after the unusually favorable receivables and payables movements, and whether the company maintained access to its credit facility under covenant requirements.