PC Connection, Inc. — Q1 2015 Form 10-Q
Business context and reporting period: The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014. PC Connection is an IT solutions reseller serving small and medium-sized businesses (SMB), large accounts, and public-sector customers.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $581.3 | $559.8 | +3.8% |
| Gross profit | $77.6 | $72.8 | +6.5% |
| Gross margin | 13.3% | 13.0% | +0.3 percentage points |
| SG&A | $63.4 | $61.1 | +3.8% |
| Operating income | $14.2 | $11.7 | +20.7% |
| Operating margin | 2.4% | 2.1% | +0.3 percentage points |
| Net income | $8.6 | $7.1 | +20.4% |
| Diluted EPS | $0.32 | $0.27 | +$0.05 |
| Operating cash flow | $21.2 | $23.8 | -$2.6 |
| Capital expenditures | $2.3 | $1.5 | +$0.8 |
Cash and cash equivalents were $79.9 million at March 31, 2015, up from $60.9 million at year-end 2014. Total current assets were $452.3 million and current liabilities were $150.0 million, a current ratio of approximately 3.0. The company had no bank borrowings and its $50 million revolving credit facility was fully available. There is no reported funded bank debt; $26.6 million of accounts payable related to supplier inventory financing arrangements.
Q1 operating cash flow reflected seasonal working-capital releases, including lower receivables and inventory, partly offset by lower accounts payable. Days sales outstanding increased to 41 days from 39 days in the prior-year quarter; inventory turns declined to 25 from 27.
Material changes and segment performance
- SMB sales declined 1.4% to $249.9 million, reflecting lower desktop sales after the prior-year Windows XP support expiration drove elevated demand. Segment gross margin improved to 15.5% from 14.9%.
- Large Account sales rose 4.2% to $209.5 million. Management cited growth in technical solutions; server, software, and storage sales increased 83%, 26%, and 54%, respectively. Segment gross margin was 12.0% in both periods.
- Public Sector sales rose 15.7% to $121.9 million, including 48% growth in federal sales. Segment gross margin improved to 11.2% from 10.5%, but the segment still recorded an operating loss of $0.6 million, versus a $1.9 million loss.
- Headquarters/Other operating loss widened to $3.0 million from $2.0 million, mainly because of higher unallocated personnel and related costs.
- Higher demand for servers and storage supported sales and margin growth. SG&A remained 10.9% of sales, while increasing in dollars due to variable compensation and investments in solution sales and support personnel.
Outlook, risks, and other notable items
- Management said cash, operating cash generation, and available credit were expected to fund working capital, capital expenditures, and other needs for at least the next 12 months. Planned capital expenditures for that period were $10–$12 million, including $4 million for a new distribution center; lease and other contractual payments were estimated at approximately $3.6 million.
- A potential broader IT infrastructure project could require more than $20 million in incremental capital over three to five years. The company had not finalized its investment plans. Management also cautioned that adding service engineers could pressure results if higher-margin service revenue does not grow enough to cover the added costs.
- The company noted risks from supplier direct sales, changing demand and technology, sales-force recruitment and productivity, and the need to control costs while investing in IT and solution-selling capabilities. It provided no specific full-year earnings or revenue guidance and cautioned that Q1 results may not indicate full-year performance.
- A multi-state unclaimed-property audit remains in progress. Management said the ultimate outcome is uncertain and additional assessments could materially adversely affect financial condition, results, or cash flows. Other ordinary-course legal matters, including patent claims, were not expected by management to have a material effect.
- The $50 million receivables-backed credit facility expires in February 2017 and includes financial and operating covenants. The company reported compliance; the maximum funded-debt ratio is 2.0-to-1.0. A decline in adjusted EBITDA could constrain future borrowing capacity.
- The company was assessing the impact of the new revenue-recognition standard, ASU 2014-09; the filing notes the proposed delay of its effective date to January 1, 2018. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Public Sector growth and improved segment margins can continue, and whether the segment can return to operating profitability.
- Whether solution and service revenue growth can offset the costs of additional engineers, IT investment, and higher corporate overhead.
- Cash conversion and working-capital trends, particularly the rise in days sales outstanding and decline in inventory turns.
- The outcome and potential financial exposure from the unclaimed-property audit and other tax assessments.
- Final timing, scope, and cost of the distribution center and contemplated IT infrastructure investments.
- Future covenant headroom and borrowing availability if operating performance weakens.