PC Connection, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Amounts below are in U.S. dollars, generally millions unless otherwise noted. PC Connection is an IT products and solutions reseller serving SMB, large-account, and public-sector customers.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $505.4 | $498.8 | +1.3% |
| Gross profit / margin | $66.8 / 13.2% | $66.6 / 13.4% | Profit +0.3%; margin down 0.2 percentage points |
| SG&A | $56.7 | $56.5 | +0.5%; 11.2% of sales vs. 11.3% |
| Operating income / margin | $10.1 / 2.0% | $9.0 / 1.8% | Operating income +$1.1 |
| Net income | $6.1 | $5.5 | +11.4% |
| Diluted EPS | $0.23 | $0.21 | +$0.02 |
| Operating cash flow | $19.0 | $55.2 | Down $36.1 |
| Cash and cash equivalents | $58.5 at Mar. 31 | $39.9 at Dec. 31 | Up $18.6 |
Gross-margin pressure reflected lower product margins, product-mix changes, and pricing pressure. Personnel costs rose with investment in solution sales and support staff. Operating income improved principally because sales increased and the prior-year quarter included $1.1 million of special charges; Q1 2013 had none.
Segments and notable drivers
- SMB: Sales rose 4.6% to $235.7 million; segment operating income was $7.1 million versus $6.3 million. Management cited growth in networking/communications, notebooks/tablets, and desktops.
- Large Account: Sales rose 2.8% to $186.4 million; segment operating income declined to $6.2 million from $7.4 million. Margin pressure and increased sales-support costs were noted.
- Public Sector: Sales fell 9.6% to $83.4 million; operating loss widened to $1.5 million from $0.04 million. Federal-government sales declined 29.0%, attributed to federal budget cuts.
Cash, debt, and liquidity
Operating cash flow was $19.0 million, compared with $55.2 million a year earlier. Cash generation included lower receivables and inventory, partly offset by lower accounts payable. Receivables fell $30.8 million from year-end; days sales outstanding were 40 versus 43 a year earlier. Inventory fell $10.0 million, and inventory turns increased to 26 from 25.
Cash was $58.5 million. The company had no bank-line borrowings and had the full $50.0 million receivables-backed credit facility available; the facility expires in February 2017 and may be increased to $80.0 million for approved purposes. Accounts payable was $94.6 million, including $14.5 million under supplier-supported inventory financing. The balance sheet reported $0.7 million of current capital-lease obligations. Management said available cash, operating cash flows, and credit capacity should cover requirements for at least the next 12 months.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected 2013 capital expenditures of $8–$10 million, apart from the Customer MDM software initiative, and approximately $3.8 million of capital-lease and other contractual payments.
- The company had capitalized $13.9 million for the first stage of its IT software initiative. Additional software implementation decisions were not finalized; a fully implemented project could require more than $20 million over three years. Management also warned that adding solution engineers may increase SG&A before related service revenue grows sufficiently.
- Risks include supplier efforts to sell directly to customers, competitive pricing and margin pressure, dependence on sales-staff productivity, and weaker demand—particularly federal spending reductions. Management stated that market-risk disclosures had not materially changed from year-end.
- A multi-state unclaimed-property audit remained ongoing, with no formal assessment yet. Management said the ultimate outcome was too early to determine; additional liabilities could materially adversely affect results, financial position, or cash flows. Other ordinary-course legal matters, including patent claims, were not expected by management to have a material effect.
- Goodwill impairment testing identified no impairment as of January 1, 2013, and management reported no interim impairment indicators through March 31.
Important facts for investors to verify
- Whether Public Sector and federal-government demand stabilized after the reported sales declines.
- Whether product-margin pressure continues and whether solution-service growth offsets added personnel and IT-system costs.
- Cash-flow conversion and working-capital movements, especially receivables, inventory, and accounts payable.
- Progress, total cost, timing, and expected benefits of the Customer MDM and broader software initiative.
- Developments in the unclaimed-property audit and any resulting assessment or liability.