PC Connection, Inc. — Q3 2013 Form 10-Q
Business and period: PC Connection is an IT solutions reseller serving small and midsize businesses (SMB), large accounts, and public-sector customers. This unaudited filing covers the quarter and nine months ended September 30, 2013; income-statement comparisons are to the corresponding 2012 periods. Cash-flow figures cover the nine months.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $580.4 | $561.3 | $1,643.1 | $1,602.6 |
| Gross profit / margin | $76.6 / 13.2% | $72.2 / 12.9% | $217.3 / 13.2% | $210.4 / 13.1% |
| SG&A | $59.0 | $55.9 | $174.3 | $169.3 |
| Operating income / margin | $17.5 / 3.0% | $16.3 / 2.9% | $43.0 / 2.6% | $40.0 / 2.5% |
| Net income | $10.6 | $9.9 | $25.8 | $24.2 |
| Diluted EPS | $0.40 | $0.37 | $0.98 | $0.91 |
| Operating cash flow | — | $41.4 | $63.7 |
Q3 sales grew 3.4% year over year; nine-month sales grew 2.5%. SMB was the strongest segment, up 7.3% in Q3 and 5.8% for the nine months. Q3 Large Account sales were nearly flat (+0.2%), while Public Sector rose 1.8%; for the nine months, Public Sector sales declined 0.9%, reflecting constrained federal spending. Q3 gross margin improved in SMB and Large Account, with management citing stronger selling margins and growth in higher-margin solutions and products. Nine-month margin improvement was modest overall.
SG&A rose 5.5% in Q3 and 3.0% for the nine months, driven principally by personnel costs, investments in solutions sales/support and systems, and variable compensation. The nine-month 2012 comparison included $1.1 million of special charges, primarily related to a former executive’s retirement; there were no such charges in 2013.
Financial position and liquidity
- At September 30, 2013, cash was $77.2 million, versus $39.9 million at December 31, 2012. Current assets were $414.3 million and current liabilities $163.0 million; stockholders’ equity was $319.8 million.
- Accounts receivable was $251.0 million, down from $267.3 million at year-end; inventory was $76.4 million, up from $69.6 million.
- Nine-month operating cash flow was $41.4 million, down from $63.7 million. Management attributed cash generation to earnings and lower receivables, partly offset by higher inventory; days sales outstanding improved to 37 from 41 a year earlier and at year-end. Inventory turns were 27, unchanged year over year.
- Investing cash use was $4.9 million, primarily capital expenditures, versus $7.0 million in 2012. Financing provided $0.8 million, versus $7.8 million used in 2012. Cash increased $37.3 million over the nine months.
- No bank-line borrowings were outstanding; the full $50 million facility was available and expires in February 2017. It may be increased to $80 million with lender approval. Inventory trade-credit balances of $13.2 million were included in accounts payable. The filing reports a $187,000 current capital-lease maturity.
Outlook, risks and other notable items
- Management gave no specific revenue or earnings guidance. It said existing cash, operating cash generation, trade credit, and available credit should meet requirements for at least 12 months.
- Expected capital expenditures for the next 12 months were $8–10 million, with approximately $4 million of lease and other contractual payments. A broader software program, if fully implemented beyond the Customer MDM project, could require more than $20 million over three years; decisions on additional software were not finalized.
- The first phase of Customer MDM was placed in service in Q3, with $12 million of related software and integration expenditures. Depreciation was expected to increase by $0.5 million per quarter beginning in Q4 2013. Management also cautioned that expanding service-engineer headcount could pressure results if service revenue does not grow enough to cover the added costs.
- Management identified supplier direct-sales efforts, competition, economic uncertainty, federal budget constraints, and the need to sustain sales growth and margins as business challenges. The filing says results for the interim periods may not indicate full-year results.
- Legal claims, including patent matters, were not expected by management to materially affect results. A multistate unclaimed-property audit remained in progress; formal assessments were not finalized, and additional liabilities could have a material adverse effect.
- The corporate headquarters lease with an affiliated company was due to expire in November 2013; renewal negotiations were underway. Management reported no material change in market risks and concluded disclosure controls were effective.
- The filing says no treasury-stock purchases were made under the repurchase program during the first nine months. Separately, 18,511 shares withheld in August to satisfy restricted-stock tax withholding were reported in the quarterly issuer-purchases table and were not counted against the program authorization.
Investor facts to verify
- Whether SMB growth and improved gross margins can continue, particularly as sales investments and higher personnel costs increase SG&A.
- How federal spending constraints affect Public Sector sales and whether Large Account demand recovers.
- Cash conversion and working-capital trends, including receivables collections and inventory levels, given the decline in operating cash flow.
- The scale, timing, and returns of additional IT-system investment beyond Customer MDM, including the expected depreciation and service-engineer costs.
- Any outcome or assessment from the unclaimed-property and other tax audits, and the status and terms of the headquarters lease renewal.
- Compliance with credit-facility covenants and continued availability of the borrowing capacity if operating performance weakens.