PC Connection, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. PC Connection sells IT products and services through SMB, Large Account, and Public Sector segments. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $557.3 | $542.6 | $1,062.7 | $1,041.3 |
| Gross profit / margin | $73.9 / 13.3% | $71.6 / 13.2% | $140.8 / 13.2% | $138.2 / 13.3% |
| Operating income / margin | $15.4 / 2.8% | $14.7 / 2.7% | $25.5 / 2.4% | $23.7 / 2.3% |
| Net income | $9.2 | $8.8 | $15.3 | $14.3 |
| Diluted EPS | $0.35 | $0.33 | $0.58 | $0.54 |
- Sales grew 2.7% in Q2 and 2.1% in the first half. Q2 gross margin improved modestly, while first-half margin edged down.
- Q2 SG&A was $58.5 million (10.5% of sales), versus $56.9 million (10.5%); first-half SG&A was $115.2 million (10.8%), versus $113.4 million (10.9%).
- First-half operating cash flow was $27.0 million, down from $72.0 million. Investing used $4.3 million; financing provided $1.6 million. Cash increased $24.3 million to $64.2 million.
- At June 30, cash was $64.2 million, accounts receivable $256.1 million, inventory $77.1 million, current assets $407.8 million, and current liabilities $168.1 million. Stockholders’ equity was $308.9 million.
- No bank-line borrowings were outstanding; the full $50 million facility was available. Inventory trade-credit arrangements had $19.8 million payable outstanding, included in accounts payable. Current capital-lease maturities were $0.5 million.
Material changes and segment trends
- Q2 SMB sales rose 5.5%, Public Sector sales rose 2.5%, and Large Account sales were essentially flat (down 0.4%). In the first half, SMB rose 5.0% and Large Account 1.1%, while Public Sector declined 2.8%.
- SMB growth reflected solution, enterprise networking, and software demand. Public Sector weakness reflected constrained federal spending: first-half federal sales declined 25.8%, partly offset by 7.3% growth in state/local government and education.
- Q2 gross margin improved in SMB and Public Sector, but declined in Large Account. First-half Large Account margin fell 0.3 percentage points, contributing to the consolidated margin decline.
- First-half 2012 included $1.1 million of special charges related to a former executive’s retirement and workforce reductions; no such charges were recorded in first-half 2013.
Outlook, risks and contingencies
- Management gave no specific sales or earnings forecast. It expects funds from operations, cash, and available credit to cover requirements for at least the next 12 months. Expected capital expenditures, aside from the software initiative, are $8–$10 million over that period; capital-lease and other contractual payments are approximately $3.9 million.
- The Customer Master Data Management software project had $14.6 million of capitalized costs at June 30. Broader IT-system implementation, if fully pursued, could require more than $20 million of additional capital over three years. Management also expects increased investment in solution-sales staff and engineers; costs may pressure results if service revenue does not grow enough to offset them.
- Risks include supplier attempts to sell directly to customers, demand and technology shifts, maintaining margins and sales productivity, federal budget constraints, and execution of IT investments. Management said lower IT demand could materially affect operating cash flow.
- A multi-state unclaimed-property audit remains underway; formal assessments have not been finalized, and additional liabilities could materially affect results or financial position. Management does not expect ordinary-course legal proceedings, including patent claims, to have a material effect.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether SMB and solution-services growth continues to offset Large Account margin pressure and Public Sector weakness.
- Whether first-half operating cash flow normalizes, given the year-over-year decline and the working-capital effects of inventory, receivables, and payables.
- Actual spending, capitalization, and returns from the Customer MDM and broader IT initiatives, including staffing costs.
- Any developments or assessments from the unclaimed-property audit and compliance with credit-facility covenants.
- Whether available liquidity remains adequate as working-capital needs and planned capital expenditures evolve.