PC Connection, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Unless noted, financial amounts below are in millions of dollars. PC Connection resells IT hardware and software and provides related services through Business Solutions, Enterprise Solutions, and Public Sector Solutions.
Financial results and liquidity
- Revenue: $636.9, down 10.5% from $711.9 in Q1 2020. Management cited supply-chain constraints and a strong prior-year comparison, when demand rose with work-from-home transitions.
- Profitability: Gross profit was $100.5, down 11.1%; gross margin was 15.8% versus 15.9%. SG&A was $86.4, down 6.6%, but increased to 13.6% of sales from 13.0%. Operating income fell to $14.1 from $20.7, and operating margin declined to 2.2% from 2.9%. Net income was $10.2 versus $14.9; diluted EPS was $0.39 versus $0.56.
- Segments: Enterprise Solutions revenue fell 20.4% to $265.3; Business Solutions fell 11.7% to $246.3; Public Sector Solutions rose 25.7% to $125.3, helped by a large federal project rollout and higher K-12 sales. Public Sector operating loss narrowed to $2.8 from $3.3; Business and Enterprise operating income was $8.4 and $12.5, respectively.
- Cash flow: Operating cash flow was $6.0 versus $44.6. Receivable collections contributed $54.9, partly offset by a $60.9 decrease in accounts payable. Investing used $0.9, including $2.4 of capital expenditures partly offset by $1.5 of life-insurance proceeds. Financing used $8.5, mainly the $8.4 special dividend ($0.32 per share). Cash declined $3.4 to $92.3.
- Balance sheet and debt: Current assets were $802.9 and current liabilities $274.9 at March 31. Stockholders’ equity was $647.5. The company had no bank borrowings and had $50.0 available on its receivables-secured facility, which expires February 10, 2022; it may be increased to $80.0 for permitted purposes. Operating lease liabilities totaled $12.6, including $3.8 current.
Changes, outlook, and risks
- Product mix shifted toward notebooks/mobility, which represented 37% of sales versus 28% a year earlier; accessories fell to 13% from 18%. Public Sector gross margin declined to 12.5% from 14.5% amid lower-margin mix. Business and Enterprise margins improved modestly.
- The cash conversion cycle lengthened to 63 days from 46, primarily as DSO rose to 74 from 58 days; management attributed the DSO change mainly to customer payment terms extended in the prior year.
- Management said cash on hand, operating cash generation, and available credit are expected to fund working capital, capital expenditures, and other needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance and cautions Q1 results may not indicate full-year results.
- Management described ongoing COVID-19-related customer disruption and uncertainty, as well as supply constraints. Key risks include competition and pricing pressure, vendor dependence and product availability, inventory obsolescence, customer credit and collections, economic and government-spending conditions, cybersecurity, and reliance on personnel. Management said pending legal matters and tax or other audits were not expected to have a material adverse effect.
- Other notable items: the quarter included $1.5 of life-insurance proceeds; Q1 2020 included $10.2 of treasury-share repurchases, while Q1 2021 did not. The company reported compliance with credit-facility covenants.
Important facts for investors to verify
- Whether supply constraints ease and sales recover, particularly in Enterprise and Business Solutions.
- Whether the Public Sector growth tied partly to a large federal rollout and K-12 demand is repeatable, and how segment margins develop.
- Whether receivable collection trends and the longer cash conversion cycle improve without weakening cash generation.
- Whether gross margin and SG&A as a share of sales recover as product and customer mix change.
- Credit-facility renewal and borrowing capacity after its February 2022 expiration, along with continuing covenant compliance.