PC Connection, Inc. — Q2 2019 Form 10-Q
Business context and reporting period: PC Connection is an IT solutions reseller and services provider, operating through Business Solutions, Enterprise Solutions, and Public Sector Solutions. This unaudited quarterly report covers the three and six months ended June 30, 2019; comparisons are with the same 2018 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $741.1 | $706.6 | $1,374.0 | $1,331.5 |
| Gross profit / margin | $117.0 / 15.8% | $107.5 / 15.2% | $216.3 / 15.7% | $203.8 / 15.3% |
| SG&A | $84.7 | $82.5 | $165.9 | $163.4 |
| Operating income / margin | $32.3 / 4.4% | $24.9 / 3.5% | $49.7 / 3.6% | $40.4 / 3.0% |
| Net income | $23.7 | $18.2 | $36.4 | $29.5 |
| Diluted EPS | $0.89 | $0.68 | $1.37 | $1.10 |
- Q2 sales grew 4.9%; gross profit rose 8.8%, and operating income increased $7.4 million. H1 sales grew 3.2%, gross profit 6.1%, and operating income $9.3 million.
- Q2 sales growth was led by Enterprise Solutions (+5.6%) and Public Sector Solutions (+12.2%); Business Solutions increased 0.4%. For H1, Enterprise grew 6.3% and Public Sector 6.9%, while Business Solutions declined 1.7%.
- Q2 gross margin improved 60 basis points. Business Solutions margin rose to 19.5% from 17.5%; Public Sector margin declined to 12.0% from 12.5%; Enterprise remained 14.4%.
Cash flow, balance sheet, and liquidity
- H1 operating cash flow was $3.3 million, down from $41.5 million. Increases in accounts receivable ($52.9 million cash use) and inventory ($56.7 million use) substantially absorbed earnings and other operating inflows. Inventory was elevated by customer orders not yet shipped and shipments in transit; inventory turns were 17 versus 26 in the prior-year quarter. Days sales outstanding were 55, versus 53 a year earlier.
- H1 investing cash outflow was $13.9 million, principally equipment and IT/software purchases, compared with $9.9 million in 2018. Financing outflow was $11.4 million, including an $8.5 million special dividend ($0.32 per share) and $3.5 million of treasury-share purchases.
- Cash was $69.7 million at June 30, 2019, down from $91.7 million at year-end 2018. Current assets were $753.7 million and current liabilities $321.2 million. Accounts receivable was $500.9 million and inventory $175.9 million.
- No bank borrowings were outstanding. The company had $50 million available under its receivables-secured credit facility, expiring February 2022, with a potential increase to $80 million subject to lender approval and terms. Management said cash, operating cash flow, and the facility should cover requirements for at least the next 12 months.
- Stockholders’ equity was $560.2 million. The minimum-net-worth covenant requirement was $431.1 million at June 30; the company reported compliance. No material off-balance-sheet arrangements were reported.
Changes, outlook, and risks
- Management attributed Q2 improvement to higher gross profit, including better invoice selling margins and increased software sales, alongside SG&A growing more slowly than revenue. A greater share of certain cloud and security software transactions was recognized net because the company acted as agent, which weighs on reported sales but can support margins.
- The company expected its 2019 corporate income tax rate to be 27%–29%; the H1 effective rate was 27.4%. The filing provides no revenue or earnings guidance.
- H1 included $0.7 million of restructuring charges for Headquarters/Other workforce reductions and closing an office. The actions were complete by March 31, with no ongoing restructuring plans. Q2 also included a $21,000 gain on disposal of a lease asset and liability following an office closure.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities. At June 30, right-of-use assets were $15.2 million and lease liabilities totaled $16.1 million, including $5.4 million associated with related-party leases.
- Key disclosed business risks include rapid technology change and inventory obsolescence, product availability and allocation, reliance on suppliers and vendor relationships, supplier direct sales, competition and pricing, economic activity and IT spending, and the ability to recruit and retain sales and technical staff. Management also noted that planned service-engineer investment could pressure results if service revenue fails to grow sufficiently. Legal proceedings were not expected by management to have a material effect; tax, employment, and other audits could result in additional liabilities with potentially material adverse effects.
Important facts for investors to verify
- Whether elevated receivables and inventory convert into cash as customer orders ship and are collected; monitor working-capital trends, DSO, and inventory turns.
- Whether margin gains and operating leverage persist, particularly as product mix, net-versus-gross software revenue recognition, and vendor agency fees change.
- Whether service revenue growth justifies investment in technical personnel and IT infrastructure, and whether capital spending remains elevated.
- Track available credit and covenant headroom, special dividends and share repurchases, and any liabilities arising from tax or other audits.
- Consider the lease obligations, including related-party arrangements, and review the company’s cited annual-report risk factors; this filing reports no newly identified risks.