PC Connection, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. PC Connection is an IT solutions reseller and services provider serving small and midsize businesses, large enterprises, and public-sector customers.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $2,892.6 million | $2,590.3 million |
| Gross profit / margin | $464.6 million / 16.1% | $418.8 million / 16.2% |
| Operating income / margin | $96.5 million / 3.3% | $72.1 million / 2.8% |
| Net income | $69.9 million | $55.8 million |
| Diluted earnings per share | $2.65 | $2.12 |
| Cash from operations | $57.8 million | $36.1 million |
- Sales increased 11.7%; management attributed growth mainly to demand for mobility products supporting hybrid and work-from-anywhere arrangements, with growth across all three segments.
- Gross profit rose 10.9%, while gross margin declined 10 basis points. SG&A rose $22.3 million to $368.1 million, but declined as a share of sales to 12.7% from 13.3%. The effective tax rate increased to 27.6% from 23.8%.
- At year-end, cash and cash equivalents were $108.3 million, inventory was $206.6 million (up from $140.9 million), and stockholders’ equity was $682.5 million. The company reported no bank borrowings and had its full $50 million revolving credit facility available, with maturity extended to March 31, 2025.
- Operating cash flow improved, but inventory purchases used $65.7 million of cash. The cash conversion cycle was 55 days versus 54 days in 2020.
- FY2021 investing cash outflow was $8.7 million, including $10.3 million of equipment and capitalized software purchases. Financing cash outflow was $36.4 million, primarily reflecting $34.6 million in dividend payments.
Material changes and segment performance
- Enterprise Solutions sales rose 12.0% to $1,249.5 million; operating income increased to $74.7 million from $59.4 million.
- Business Solutions sales rose 13.7% to $1,098.5 million; operating income increased to $43.8 million from $32.4 million.
- Public Sector Solutions sales increased 7.1% to $544.6 million, but operating loss widened to $4.9 million from $2.8 million. Segment gross margin fell to 13.3% from 13.8%.
- Notebooks and mobility products represented 38% of sales, up from 32% in 2020. Product mix contributed to lower gross margins in Business Solutions and Public Sector Solutions.
- The company declared a special dividend of $1.00 per share in 2021, totaling $26.2 million. It made no share repurchases in 2021.
Outlook, commentary, and risks
- No quantified revenue, earnings, or margin guidance is provided. Management expected global supply-chain challenges to persist through the first half of 2022. Product delays increased backlog and prompted higher inventory purchases; the filing notes that most backlog consists of cancelable orders and is not considered a reliable indicator of future results.
- Management is investing in solution services, technical personnel, cloud capabilities, and IT systems. It cautions that higher service-related staffing costs could weigh on results if service revenue does not grow sufficiently.
- Key risks include supply availability and vendor concentration, intense price competition and margin pressure, inventory obsolescence, customer credit and collection risk, dependence on third-party shippers, cybersecurity and system disruptions, and changes in IT distribution models. HP products accounted for 15% of 2021 sales; Ingram Micro, TD Synnex, and Dell represented 23%, 23%, and 12% of product purchases, respectively.
- Public-sector contracting and compliance risks, legal and tax audits, and the COVID-19 pandemic’s effects on supply, customers, and operations are also disclosed. Management said ordinary-course legal matters were not expected to have a material effect, while noting that outcomes and audit exposures remain uncertain.
- Patricia Gallup beneficially owned or controlled approximately 56% of shares at December 31, 2021. The filing reports effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether supply constraints and elevated inventory levels persisted beyond management’s stated first-half 2022 expectation, and how they affected sales fulfillment, working capital, and obsolescence.
- Whether revenue growth translated into sustained gross-margin improvement, particularly in Business Solutions and the loss-making Public Sector segment.
- Customer collections, credit-loss provisions, and cash conversion as receivables and inventory evolve.
- Ongoing reliance on major vendors, especially HP, and the terms and availability of vendor trade credit.
- Future capital returns: the special dividend was discretionary, and $12.7 million remained authorized for repurchases at year-end.