PC Connection, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. PC Connection is an IT solutions reseller serving small and midsize businesses (SMB), large accounts, and public-sector customers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $680.8m | $639.6m | $1,889.7m | $1,832.6m |
| Gross profit | $88.6m | $83.7m | $249.2m | $240.3m |
| Gross margin | 13.0% | 13.1% | 13.2% | 13.1% |
| Operating income | $21.9m | $20.4m | $55.7m | $51.4m |
| Operating margin | 3.2% | 3.2% | 3.0% | 2.8% |
| Net income | $13.0m | $12.2m | $33.2m | $30.7m |
| Diluted EPS | $0.49 | $0.46 | $1.25 | $1.16 |
For the nine months, SG&A was $193.5m (10.2% of sales), versus $188.9m (10.3%) a year earlier. Effective tax rates were 40.4% for Q3 and 40.3% year to date.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $25.3m, down from $28.9m; investing cash outflow was $10.1m versus $5.5m, primarily reflecting higher capital spending. Financing provided $0.7m. Cash increased $15.9m to $76.9m.
- At September 30, cash was $76.9m, accounts receivable $331.2m, inventory $102.6m, and current assets $523.8m. Current liabilities were $199.8m; stockholders’ equity was $388.7m.
- No bank borrowings were outstanding under the $50m receivables-secured credit facility, leaving it fully available; it expires February 2017 and may be increased to $80m with lender approval. The filing reports $32.6m payable under supplier-supported inventory trade-credit arrangements, included in accounts payable.
- Receivables rose $39.3m from year-end and inventory rose $11.7m. Days sales outstanding were 40, versus 36 a year earlier; inventory turns were 23, versus 24 in Q3 2014.
Material changes and segment trends
- Q3 sales increased 6.4%; year-to-date sales increased 3.1%. Q3 growth was led by Large Account (+20.2%) and SMB (+5.6%), partly offset by Public Sector (-7.6%).
- Year-to-date Large Account sales rose 9.4%; SMB rose 0.3%; Public Sector declined 0.9%. Management cited advanced-solution selling, mobility demand, and certain software and server product cycles as contributors. Public Sector weakness included lower K-12 sales.
- Q3 gross margin slipped 0.1 percentage point as lower-margin product mix and lower Large Account invoice margins offset gains in SMB and Public Sector. Year-to-date gross margin improved 0.1 point.
- Q3 operating income grew 7.1%, while operating margin held at 3.2%. Year-to-date operating income rose 8.4%, with margin improving from 2.8% to 3.0%.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects liquidity from cash, operations, and available credit to cover requirements for at least 12 months. Expected capital expenditures for the next 12 months are $8m–$10m; leases and other contractual payments are approximately $3.9m.
- A broader IT infrastructure/software initiative could require more than $20m of incremental capital over three to five years. Management also expects investment in solution-selling personnel and service engineers; costs could pressure results if service revenue does not grow sufficiently.
- Key business risks include supplier direct-sales efforts, competition and product pricing, dependence on sales staff and suppliers, changing IT demand, and working-capital management. Management noted that weaker demand could materially affect operating cash flow.
- Legal proceedings, including patent claims, were not expected by management to have a material effect. A multi-state unclaimed-property audit remains in progress; the ultimate outcome is uncertain, and additional liabilities could materially negatively affect results, financial position, or cash flows.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was assessing the impacts of new revenue-recognition and inventory-accounting standards.
Important facts for investors to verify
- Whether receivables collection and inventory levels normalize, given higher DSO and lower inventory turns.
- Whether Large Account growth and advanced-solution investments sustain margins, and whether Public Sector sales stabilize.
- Actual capital spending and returns from the distribution-center and IT investments, including the potential multi-year software initiative.
- The outcome and potential financial exposure from the unclaimed-property audit.
- Continued covenant compliance and availability of the bank facility if earnings or working-capital needs change.