PC Connection, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2020. The company is an IT solutions reseller and services provider serving business, enterprise, government, and education customers. Figures below are in U.S. dollars; financial statement amounts are in millions unless indicated otherwise.
Financial performance and position
- Third-quarter revenue: $652.8 million, down 10.5% from $729.4 million. Gross profit was $107.8 million, down 9.3%; gross margin improved to 16.5% from 16.3%.
- Third-quarter earnings: Operating income was $21.1 million versus $32.6 million, and net income was $16.9 million versus $23.8 million. Diluted EPS was $0.64 versus $0.90.
- Nine-month results: Revenue was $1,914.6 million, down 9.0%; gross profit was $309.9 million, down 7.5%, with gross margin of 16.2% versus 15.9%. Operating income was $52.3 million versus $82.4 million; net income was $39.5 million versus $60.1 million. Diluted EPS was $1.50 versus $2.27.
- Cash flow: Nine-month operating cash flow was $46.4 million, compared with $40.0 million a year earlier. Investing activities used $9.6 million, principally for equipment and IT investments; financing activities used $18.8 million, including share repurchases and a special dividend. Cash increased by $18.0 million to $108.1 million.
- Liquidity and debt: At September 30, cash was $108.1 million and current assets were $843.7 million, against current liabilities of $338.4 million. The company had no bank borrowings and had $50.0 million available under its credit facility, which expires in February 2022. Lease liabilities totaled $14.6 million, including $4.0 million current and $10.6 million noncurrent.
- Other balance-sheet changes: Accounts receivable increased to $589.0 million from $549.6 million at year-end 2019; inventory rose to $134.7 million from $124.7 million. Stockholders’ equity was $628.3 million.
Material changes and segment trends
- Revenue declined in all three segments in the quarter: Business Solutions fell 15.6% to $231.0 million; Enterprise Solutions fell 6.6% to $259.8 million; and Public Sector Solutions fell 8.6% to $162.0 million. The company attributed the broad decline primarily to weaker economic conditions and COVID-19 effects.
- For the first nine months, revenue declined 12.1% in Business Solutions, 3.7% in Enterprise Solutions, and 13.8% in Public Sector Solutions. Education demand for notebooks and mobility products partly offset other Public Sector declines.
- SG&A rose to 13.3% of quarterly revenue from 11.8%, and to 13.4% for the nine-month period from 12.0%. ERP implementation-related professional and consulting costs contributed to the increase; lower revenue also pressured expense ratios.
- Operating cash flow benefited from a $48.7 million increase in accounts payable, partly offset by a $42.6 million increase in receivables. Days sales outstanding rose to 73 days from 52 days at September 30, 2019.
Outlook, risks, and unusual items
- Management provided no specific revenue or earnings guidance. It said cash on hand, operating cash generation, and available credit were expected to fund working capital, capital expenditures, and other needs for at least the next 12 months.
- COVID-19 created uncertainty around customer demand, collections, supplier availability, and operating conditions. The company reported delayed collections and increased its doubtful-account allowance by $3.3 million during the first nine months. It warned that further pandemic effects could materially adversely affect results and cash flows.
- The new ERP system became operational in May 2020 and was substantially deployed in the second quarter. Management expects it to improve processes over time, but implementation-related costs continued; the company also identified ERP integration as a risk.
- Revenue-cutoff corrections: Errors identified in the third quarter had understated second-quarter net sales by $0.945 million, gross profit by $4.214 million, and net income by $2.955 million. The company corrected them in the third quarter, which consequently included corresponding overstatements of those amounts. Management concluded the errors were not material to the affected prior or current-period financial statements.
- The company recorded $1.0 million of workforce-restructuring charges in the first half of 2020 and none in the third quarter; it reported no ongoing restructuring plans. Third-quarter income tax provision included $1.7 million of discrete items, mainly R&D tax credits.
- Management reported no material expected adverse effect from ordinary-course legal matters or tax and other audits. The filing also notes reliance on suppliers, competition including manufacturers’ direct sales, technology and inventory-obsolescence risks, and credit-facility covenants.
Important facts for investors to verify
- How much of third-quarter reported gross profit and net income reflects the revenue-cutoff corrections, and whether subsequent filings report any further corrections.
- Whether receivables collection performance and the elevated 73-day DSO improve, and whether the doubtful-account allowance adequately reflects customer credit risk.
- Whether demand, supplier availability, and customer payment terms stabilize as pandemic effects evolve.
- Whether ERP integration costs decline and anticipated operational benefits are realized.
- Whether segment-level margins and operating income recover as revenue changes, particularly in Business and Public Sector Solutions.
- Progress on the authorized remaining $12.7 million share-repurchase capacity and the company’s capital-return plans; the nine-month period included a $0.32-per-share special dividend.