PC Connection, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. The unaudited statements are prepared under U.S. GAAP. PC Connection is an IT products and solutions reseller serving small and medium-sized businesses (SMB), large accounts, and public-sector customers.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $572.4 million | $581.3 million | Down 1.5% |
| Gross profit / margin | $82.2 million / 14.4% | $77.6 million / 13.3% | Up 5.9%; margin +1.1 percentage points |
| SG&A | $67.0 million | $63.4 million | Up 5.7%; 11.7% vs. 10.9% of sales |
| Operating income / margin | $15.2 million / 2.7% | $14.2 million / 2.4% | Higher |
| Net income | $9.1 million | $8.6 million | Up 5.6% |
| Diluted EPS | $0.34 | $0.32 | Up $0.02 |
| Operating cash flow | $23.5 million | $21.2 million | Higher |
Gross-margin improvement reflected better invoice selling margins and product/customer mix across all three segments. SG&A increased mainly from personnel costs, variable compensation, and solution-sales investments. The effective tax rate was 40.2%, compared with 39.5%.
Segment results
- SMB: Sales of $261.2 million, up 4.6%; operating income of $11.3 million versus $9.3 million. Growth in notebook/mobility and software helped results.
- Large Account: Sales of $200.1 million, down 4.5%; operating income of $7.2 million versus $8.5 million. Fewer large-project orders, including nonrecurring prior-year rollouts, weighed on sales.
- Public Sector: Sales of $111.0 million, down 8.9%; operating loss narrowed to $0.15 million from $0.60 million. State/local education and federal contract sales declined.
Cash, balance sheet, and debt
- Cash and cash equivalents were $91.0 million at March 31, 2016, up from $80.2 million at December 31, 2015. Total assets were $570.5 million, down from $639.1 million; stockholders’ equity was $401.8 million.
- Operating cash flow of $23.5 million was driven largely by lower receivables and inventory, partly offset by lower accounts payable. Receivables declined $67.9 million from year-end; days sales outstanding remained 41. Inventory fell $5.4 million, while inventory turns decreased to 19 from 25 a year earlier.
- Investing cash outflow was $2.1 million, primarily for equipment and internally developed software. Financing cash outflow was $10.6 million, including a special $0.40-per-share dividend.
- No bank borrowings were outstanding. The $50 million receivables-backed credit line, expiring February 24, 2017, was fully available; it may be increased to $80 million with lender approval. The company reported compliance with its financial covenants.
- Accounts payable included $27.8 million under supplier inventory trade-credit arrangements, which carry no interest or discount fees paid by the company. The filing reports no material change in contractual obligations or material off-balance-sheet arrangements.
Outlook, risks, and notable items
- No specific earnings or revenue guidance was provided. Management said cash, operating cash flow, and available credit should cover requirements for at least the next 12 months.
- Expected capital expenditures for the next 12 months were $10–$12 million; lease and other contractual payments were estimated at approximately $4 million. A potential IT infrastructure project could require more than $20 million over the next two to four years, if fully implemented.
- Management is investing in solution-selling personnel and services, which it expects to support higher-margin revenue over time; it cautioned that added service-engineer costs could pressure results if service revenue does not grow sufficiently.
- Key risks include rapid technology change and inventory obsolescence, product availability and allocation, vendor dependence and direct sales by manufacturers, competition and pricing pressure, and economic conditions affecting IT investment. Management attributed weaker Large Account project activity partly to increased economic uncertainty early in 2016.
- A multi-state unclaimed-property audit remains underway. Management believes known and estimated liabilities are adequately provided for, but says additional assessments could materially adversely affect financial position, results, or cash flows. Other ordinary-course legal matters, including patent claims, were not expected by management to have a material effect.
- The company early-adopted the deferred-tax classification standard prospectively, reclassifying $7.9 million of current deferred tax assets to non-current liabilities; adoption did not affect income. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved gross margins and segment-level profitability can persist despite lower overall sales and higher SG&A.
- Whether Public Sector and Large Account demand recovers, and whether prior-year large project rollouts create difficult comparisons.
- Whether solution-sales and IT investments generate sufficient incremental revenue and margin to offset personnel and infrastructure costs.
- The outcome and potential financial exposure of the multi-state unclaimed-property audit.
- Availability of the credit line through its February 2017 expiration and continued compliance with its covenants.
- Inventory turns, receivables collection, and working-capital cash flow, including the unusually large seasonal reduction in receivables.