PC Connection, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 report; unaudited Q4 results are included below. PC Connection distributes IT products and provides related services to SMB, large-account, and public-sector customers.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $2,158.9 million | $2,103.3 million | +2.6% |
| Gross profit / margin | $282.1 million / 13.1% | $264.9 million / 12.6% | +6.5%; +0.5 percentage points |
| SG&A | $226.3 million / 10.5% of sales | $217.3 million / 10.3% | +4.2% |
| Operating income / margin | $54.6 million / 2.5% | $47.6 million / 2.3% | +14.7% |
| Net income | $33.1 million | $28.8 million | +14.9% |
| Diluted EPS | $1.24 | $1.07 | +15.9% |
| Operating cash flow | $69.7 million | $(5.3) million | Improved by $75.0 million |
Liquidity and debt: Cash was $39.9 million at year-end, versus $4.6 million in 2011; working capital was $223.0 million. No bank-line borrowings were outstanding at year-end, with the full $50 million facility available through February 2017. Accounts payable was $126.1 million, including $18.9 million under inventory trade-credit arrangements. Stockholders’ equity was $291.3 million.
Operating cash flow benefited mainly from lower receivables and inventory: receivables fell $26.3 million and inventory fell $7.8 million. Days sales outstanding improved to 41 from 47; inventory days declined to 13 from 15. Investing cash outflow was $9.2 million and financing cash outflow was $25.1 million.
Q4 2012: Net sales were $556.2 million, operating income $14.6 million, net income $8.9 million, and diluted EPS $0.33. Q4 2011 net sales were $553.2 million and net income was $7.4 million.
Material changes versus prior year
- Large Account sales rose 8.7% to $773.4 million; Public Sector sales rose 2.8% to $482.9 million. SMB sales declined 2.1% to $902.6 million, as SMB customer growth was outweighed by lower Consumer/SOHO sales.
- Gross margins improved across all segments, attributed to product-margin initiatives and a higher mix of solution products and services. Segment gross margins were 15.2% for SMB, 11.5% for Large Account, and 11.6% for Public Sector.
- SG&A increased as the company invested in solution-sales support and incurred higher variable compensation. Personnel costs rose to $164.0 million from $153.3 million.
- Cash generation rebounded from operating cash use in 2011, primarily because of improved collections and lower inventory. Capital expenditures were $9.3 million, compared with $10.9 million in 2011.
Outlook, commentary, risks, and unusual items
- Management expects liquidity from operations, cash, and available credit to cover needs for at least the next 12 months. It estimated 2013 capital expenditures of $8–10 million, plus about $3.8 million of capital-lease and other contractual payments.
- The company has capitalized $13.0 million for the initial Customer Master Data Management software phase. A broader IT initiative, if fully implemented, could require more than $20 million of additional capital over three years; the scope was not finalized. Management also expects investment in service engineers and warned that costs could pressure results if service revenue does not grow sufficiently.
- 2012 included $1.135 million of special charges related to a former executive’s retirement award and workforce reductions. The filing reports no goodwill impairment; Large Account goodwill was $51.3 million and remains sensitive to future performance assumptions.
- A $0.38-per-share special dividend totaling $10.1 million was paid in December 2012. The company said it had no current plans for further cash dividends. It repurchased 761,969 shares for $7.8 million, including a separate 600,000-share block purchase from two principal stockholders for $6.3 million.
- Supplier concentration is significant: HP products represented 27% of sales, and the four named leading suppliers accounted for 59% of product purchases. Management cautioned that an HP supply disruption could materially affect results and cash flows.
- Other principal risks include intense price competition and vendor incentive reductions; technology shifts, cloud delivery, and inventory obsolescence; reliance on IT and communications systems and third-party shippers; government-contract compliance and spending; and economic weakness reducing IT demand.
- A multi-state unclaimed-property audit remained ongoing. Accruals were $2.4 million, but no formal assessments had been received; additional liabilities could be material. Ordinary-course legal claims, including patent matters, were not expected by management to have a material effect.
- The company reported effective disclosure controls and internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether gross-margin improvements and higher-margin solution/service sales can continue to offset pricing pressure and rising personnel and IT costs.
- How SMB performance develops after the Consumer/SOHO decline, and whether Large Account growth persists without relying on acquisition-related comparisons.
- The cash-flow sustainability of the 2012 working-capital release, alongside the planned IT spending and service-engineer expansion.
- Exposure to HP and key distributors, including continuity of supply, vendor incentives, and trade-credit availability.
- Updates on the unclaimed-property audit, tax uncertainties, and any resulting assessments or cash obligations.
- Related-party arrangements and governance: two principal stockholders controlled approximately 63% of shares at year-end, and the 2012 block repurchase was from two principal stockholders.