PC Connection, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. PC Connection is an IT solutions reseller serving small and midsize businesses (SMB), large accounts, and public-sector customers. This filing reports the unaudited quarter and nine months ended September 30, 2014; amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $639.6 | $580.4 | $1,832.6 | $1,643.1 |
| Gross profit / margin | $83.7 / 13.1% | $76.6 / 13.2% | $240.3 / 13.1% | $217.3 / 13.2% |
| Operating income / margin | $20.4 / 3.2% | $17.5 / 3.0% | $51.4 / 2.8% | $43.0 / 2.6% |
| Net income | $12.2 | $10.6 | $30.7 | $25.8 |
| Diluted EPS | $0.46 | $0.40 | $1.16 | $0.98 |
- Q3 sales grew 10.2%, operating income 16.6%, and net income 15.0% year over year. Nine-month sales rose 11.5%, operating income 19.4%, and net income 18.9%.
- Q3 sales increased in each segment: SMB 8.1%, Large Account 4.6%, and Public Sector 20.5%. For the nine months, segment growth was 8.8%, 8.6%, and 21.8%, respectively.
- Q3 gross margin was nearly flat year over year; higher Large Account margins were offset by lower SMB and Public Sector margins. SG&A increased in dollars but declined as a share of sales, to 9.9% from 10.2% in Q3 and 10.3% from 10.6% for the nine-month period.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $28.9, down from $41.4 in 2013, despite higher earnings. The filing attributes cash generation primarily to earnings and lower receivables; lower accounts payable and higher inventory were offsets. Investing outflow was $5.5, mainly capital expenditures; financing provided $0.5.
- Cash was $66.4 at September 30, 2014, versus $42.5 at December 31, 2013. Current assets were $438.8 and current liabilities $150.2.
- No bank borrowings were outstanding. The $50.0 receivables-secured credit line was fully available and expires in February 2017; it may be increased to $80.0 for approved purposes. The company reported no funded-debt-ratio limitation at quarter-end.
- Accounts payable included $21.7 under supplier inventory trade-credit arrangements. Total liabilities were $168.9 and stockholders’ equity was $351.8.
Management commentary, outlook and risks
- Management attributed quarterly growth partly to delayed corporate IT refresh projects returning to market. Nine-month demand also benefited from the April 2014 end of Windows XP support and public-sector demand for notebooks and tablets associated with standardized digital testing.
- The company is investing in solution-sales personnel and IT infrastructure. Management expects capital expenditures of $10.0–$12.0 over the next 12 months and lease and other contractual payments of approximately $4.1. A broader software initiative, if fully implemented, could exceed $20.0 over three to five years; its scope was not finalized.
- Management said cash on hand, operating cash generation, and available credit should fund requirements for at least the next 12 months. Results for the interim periods may not indicate full-year performance; the filing provides no specific earnings or revenue guidance.
- Key risks include supplier attempts to sell directly to customers, pressure on product margins, and the risk that growth in higher-margin services may not cover the cost of adding service engineers. A multistate unclaimed-property audit remains in progress; additional liabilities could materially affect results, though the amount is not clear in the filing. Management considers other ordinary-course legal matters not expected to have a material effect.
- A new ten-year Wilmington, Ohio distribution-center lease begins September 1, 2015, with annual payments listed at $0.2 for 2015, $0.7 for 2016–2019, and $4.3 thereafter. The company also extended its headquarters lease. The new revenue-recognition standard is effective for the company January 1, 2017; its impact was still being assessed.
Important facts for investors to verify
- Whether sales growth, especially in Public Sector and refresh-related demand, persists beyond the identified drivers.
- Whether gross-margin pressure in SMB and Public Sector continues, and whether solution and service growth improves consolidated margins.
- Why operating cash flow declined despite higher net income, including subsequent trends in payables, inventory turns, and receivables collections.
- The outcome and potential exposure from the unclaimed-property audit, and the effect of planned IT spending and new lease commitments on cash needs.
- Future availability of the credit facility under its covenants if earnings weaken; the filing reports no bank debt at September 30, 2014.