PC Connection, Inc. — Q3 2011 Form 10-Q
Business context and period: PC Connection is an IT products reseller and solutions provider serving SMB, large-account, public-sector, and consumer/SOHO customers. This unaudited filing covers the three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods.
Financial performance and liquidity
Amounts are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $575.6 | $532.8 | $1,550.1 | $1,418.6 |
| Gross profit / margin | $70.4 / 12.2% | $62.0 / 11.6% | $196.1 / 12.6% | $166.6 / 11.7% |
| SG&A | $54.6 | $47.6 | $160.3 | $139.6 |
| Operating income / margin | $15.9 / 2.8% | $14.3 / 2.7% | $35.8 / 2.3% | $27.0 / 1.9% |
| Net income | $9.4 | $8.6 | $21.4 | $16.1 |
| Diluted EPS | $0.35 | $0.32 | $0.80 | $0.59 |
| Operating cash flow | — | — | $22.4 | $0.9 |
- At September 30, cash was $39.8; current assets were $391.3 and current liabilities $180.2. Working capital was approximately $211.2, and the current ratio approximately 2.2.
- No borrowings were outstanding under the $50 million revolving credit facility; it was fully available. The facility may increase to $80 million for approved purposes and matures in October 2012. Capital lease obligations totaled $2.2. Accounts payable included $16.4 owed under supplier-supported inventory financing arrangements.
- Operating cash flow improved substantially year over year, but included a $22.1 increase in accounts payable and was partly offset by a $30.4 use of cash from receivables. Receivables rose $31.9 from year-end; reported days sales outstanding were 46 versus 49 a year earlier.
Material changes versus prior periods
- Q3 sales increased 8.0%; nine-month sales increased 9.3%. Operating income rose to $15.9 million in Q3 and $35.8 million year to date, while net income increased to $9.4 million and $21.4 million, respectively.
- Higher gross margins drove improvement: consolidated margin rose 0.6 percentage point in Q3 and 0.9 point year to date. Management cited better invoice selling margins, solution sales, and, year to date, increased vendor consideration.
- Large Account was the principal growth segment: sales rose 29.4% in Q3 and 18.1% for nine months, including ValCom revenue. Excluding ValCom, management reported growth of 24% in Q3 and 14% year to date. SMB sales rose 1.7% and 9.0%, respectively; Consumer/SOHO sales fell 35.2% and 19.5%.
- SG&A increased 14.5% in Q3 and 14.8% year to date, faster than sales, and increased as a share of sales. Personnel costs, sales and service investments, marketing, ValCom operating costs, and acquisition expenses contributed.
- ValCom, an IT infrastructure and managed-services provider, was acquired in March 2011. It contributed $17.2 million in external sales since acquisition. The acquisition added $3.2 million of goodwill and $3.4 million of customer-list intangibles.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected a 2011 effective tax rate of 39%–41%.
- Management stated that cash, operating cash generation, and available credit were expected to fund requirements for at least 12 months. Expected capital expenditures, excluding new IT systems, were $6–$8 million over the next 12 months; capital lease and other contractual payments were estimated at approximately $4 million.
- The business-software review could require more than $20 million of additional capital over three years if fully implemented. The company had capitalized $7.1 million for the initial Customer Master Data Management project by September 30.
- Up to $2.0 million of contingent ValCom consideration remained tied to two revenue milestones measured in 2012. The reported fair-value liability was $1.9 million; the valuation assumed a 100% probability of achievement.
- Risks highlighted include supplier attempts to sell directly to customers; competitive pricing and changing technology/customer buying behavior; dependence on sales productivity and growth in higher-margin services; and the possibility that service-staff and IT investment costs will outpace revenue benefits. A multi-state unclaimed-property audit was ongoing; management said additional assessments could materially adversely affect results, though the ultimate outcome was not yet determinable.
- The credit facility includes financial and operating covenants; reduced EBITDA could constrain borrowing. Management was negotiating a replacement facility and expected to complete it in Q1 2012. Management reported no material change in market risks and stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether gross-margin gains and stronger operating cash flow persist as SG&A, receivables, and investment needs increase.
- Large Account growth and ValCom’s contribution, including performance against the remaining 2012 earnout milestones.
- Returns and total spending for the software/IT program and solution-services expansion.
- Renewal terms and covenant headroom for the credit facility before its October 2012 maturity.
- Developments in the unclaimed-property audit and any resulting liability or cash-flow exposure.