PC Connection, Inc. — Q2 2015 Form 10-Q
Business context and period: PC Connection is a value-added reseller of IT products and services, serving small and medium-sized businesses (SMB), large accounts, and public-sector customers. This unaudited report covers the three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $627.6 | $633.2 | $1,208.9 | $1,193.0 |
| Gross profit / margin | $83.0 / 13.2% | $83.8 / 13.2% | $160.6 / 13.3% | $156.6 / 13.1% |
| SG&A | $63.4 | $64.6 | $126.8 | $125.7 |
| Operating income / margin | $19.6 / 3.1% | $19.2 / 3.0% | $33.8 / 2.8% | $30.9 / 2.6% |
| Net income | $11.6 | $11.4 | $20.2 | $18.6 |
| Diluted EPS | $0.44 | $0.43 | $0.76 | $0.70 |
- Cash flow and liquidity: First-half operating cash flow was $16.5 million, down from $20.8 million. Investing cash outflow was $5.8 million, chiefly for property, equipment, the new distribution center, and capitalized software. Cash increased $11.6 million to $72.5 million.
- Balance sheet and debt: At June 30, cash was $72.5 million, accounts receivable $332.9 million, inventory $98.6 million, current liabilities $205.9 million, and stockholders’ equity $375.6 million. No bank borrowings were outstanding; the $50 million receivables-backed facility was fully available and could be increased to $80 million for approved uses. Accounts payable included $32.2 million under supplier inventory-financing arrangements.
- Working capital: Receivables rose $40.6 million from year-end and inventory rose $7.7 million. Days sales outstanding increased to 43 from 40 a year earlier; inventory turns fell to 24 from 28 in Q2 2014.
Changes and management commentary
- Q2 sales declined 0.9%, while first-half sales grew 1.3%. Q2 weakness reflected lower SMB and Public Sector sales, including reduced desktop demand and lower sales of certain higher-margin products.
- For the first half, Large Account sales rose 4.3% and Public Sector sales rose 4.1%, while SMB sales fell 2.4%. Management attributed growth in parts of Large Account and Public Sector to technical-solution selling and product demand associated with Windows Server 2003 support ending in July 2015; SMB remained affected by the prior-year Windows XP upgrade cycle.
- Q2 gross margin was flat year over year. Lower SG&A supported higher operating income despite lower sales. First-half gross margin improved 0.2 percentage point and operating margin improved 0.2 percentage point; net income rose 8.9%.
- Management is investing in service engineers and IT systems, expecting higher-margin services to support growth, but cautioned that costs may rise before service revenue does. It also noted pressure to grow revenue and gross margin, improve sales productivity, and control SG&A.
Outlook, risks, and contingencies
- Management expected cash from operations and available credit to cover working capital and other needs for at least the next 12 months. Planned next-12-month capital expenditures were $10–$12 million, including $1.3 million for a new distribution center; lease and other contractual payments were estimated at about $3.9 million. Potential IT infrastructure investment could exceed $20 million over three to five years; areas of investment were not finalized.
- The filing gives no specific revenue or earnings guidance. Management cautioned that interim results may not indicate full-year or future performance.
- Risks include supplier efforts to sell directly to customers, demand and product-mix changes, the ability to collect receivables and manage inventory, and execution and cost risks in service and IT investments. Lower Adjusted EBITDA could constrain borrowing capacity under the credit facility.
- A multi-state unclaimed-property audit remained in progress. Management said known and estimated liabilities were provided for, but formal assessments were incomplete and additional liabilities could materially adversely affect results, financial position, or cash flows. Other legal proceedings and claims, including patent matters, were not expected by management to have a material effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was assessing the impacts of recently issued revenue-recognition and inventory-accounting standards.
Important facts for investors to verify
- Whether receivables growth, higher DSO, and lower inventory turns reverse or continue, and their effect on operating cash flow.
- Whether SMB demand recovers and growth in Large Account and Public Sector persists, including the durability and margins of technical-solution sales.
- Whether service-revenue growth offsets added engineering costs and planned IT investment.
- The outcome and potential financial exposure of the unclaimed-property audit and other tax assessments.
- Capital spending against the stated plans, and continued compliance with credit-facility covenants.