PC Connection, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. PC Connection is an IT solutions reseller serving business, enterprise, government, and education customers. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $632.9 | $624.9 | +1.3% |
| Gross profit / margin | $99.3 / 15.7% | $96.4 / 15.4% | Gross profit +3.0% |
| SG&A | $81.2 | $80.9 | +0.4%; 12.8% vs. 12.9% of sales |
| Restructuring and other charges | $0.7 | — | Workforce reduction and office closure |
| Operating income / margin | $17.4 / 2.8% | $15.5 / 2.5% | Operating income +$1.9 |
| Net income | $12.7 | $11.3 | +12.6% |
| Diluted EPS | $0.48 | $0.42 | +$0.06 |
| Operating cash flow | $18.1 | $37.2 | Down $19.1 |
Cash, liquidity, and obligations: Cash was $93.5 at March 31, compared with $91.7 at December 31, 2018. Current assets were $672.3 and current liabilities $258.9. The company had no bank borrowings and had the full $50 million receivables-secured credit facility available, expiring in February 2022; it may be increased to $80 million subject to lender terms and covenants. Stockholders’ equity was $537.6. Adoption of lease accounting put $16.8 of right-of-use assets and $17.8 of lease liabilities on the balance sheet, including $5.7 of related-party lease liabilities.
Investing cash outflow was $6.6, primarily equipment and IT infrastructure spending. Financing cash outflow was $9.8, including an $8.5 special dividend ($0.32 per share) and $1.3 of share repurchases. The company reported no off-balance-sheet arrangements.
Material changes and operating trends
- Enterprise Solutions sales rose 7.2% to $275.6, led by accessories and desktop products; management cited timing of large rollouts. Business Solutions sales fell 3.9% to $252.9, partly because more software transactions were recorded net as agent revenue. Public Sector Solutions sales were essentially flat at $104.4.
- Enterprise gross margin improved to 14.9% from 14.3%; Business Solutions improved to 17.8% from 17.6%; Public Sector declined to 12.6% from 12.9%. Overall gross-margin improvement reflected higher invoice margins on advanced-solution sales and increased software sales.
- Operating cash flow fell year over year. Higher inventory absorbed cash, partly offset by lower receivables and higher payables. Inventory rose $18.5 from year-end, inventory turns were 17 versus 23 a year earlier, and days sales outstanding were 55 versus 53.
Outlook, commentary, and risks
- No specific sales or earnings guidance was provided. Management said available cash, operating cash generation, and the credit line should fund working capital, capital expenditures, and other needs for at least the next 12 months.
- The company expected $3–$4 million of remaining capital investment in its IT infrastructure initiative over the following three to six months. Management expects its 2019 effective tax rate to range from 27% to 29%; Q1 rate was 27.7%.
- Management is investing in technical personnel and higher-margin IT solutions, but warned that results could suffer if service revenue growth does not offset added personnel costs. Other key risks include technology change and inventory obsolescence, supplier availability and direct-sales competition, pricing and competitive pressures, economic conditions, and the ability to manage receivables, inventory, and costs.
- Restructuring charges were $0.7, comprising $0.6 of employee-separation costs and $0.2 of lease-termination costs (rounded). All planned actions were completed by March 31; the company reported no ongoing restructuring plan.
- Ordinary-course legal claims, including patent matters, were not expected by management to materially affect results. State tax, income-tax, employment, and other audits could result in additional liabilities with potentially material adverse effects. The company reported no new risk factors and no material change in market risks.
- ASC 842 lease accounting was adopted January 1, 2019; comparative periods were not restated. Management said adoption did not produce a cumulative opening-equity adjustment.
Important facts for investors to verify
- Whether inventory turns recover and inventory growth converts into customer shipments and cash, given the Q1 inventory build and lower operating cash flow.
- Whether Enterprise Solutions growth and improved gross margins persist, and whether Business Solutions and Public Sector margins stabilize.
- How much sales growth reflects underlying demand versus software revenue being recorded net, and the resulting effect on reported revenue and margins.
- Progress and remaining costs of the IT infrastructure investment, service-revenue growth, and the impact of lease commitments, including related-party leases.
- Any developments in tax audits or legal claims, and continued compliance with credit-facility covenants.