PC Connection, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. PC Connection sells IT products and solutions through SMB, Large Account, and Public Sector segments.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $2,574.0 million | $2,463.3 million |
| Gross profit / margin | $341.0 million / 13.2% | $323.4 million / 13.1% |
| Operating income / margin | $78.6 million / 3.0% | $71.5 million / 2.9% |
| Net income | $46.8 million | $42.7 million |
| Diluted EPS | $1.76 | $1.61 |
| Cash from operations | $30.9 million | $35.4 million |
| Capital expenditures | $12.3 million | $7.6 million |
| Cash and cash equivalents at year-end | $80.2 million | $60.9 million |
| Working capital at year-end | $330.8 million | $293.4 million |
Revenue increased 4.5%, operating income 9.9%, and net income 9.7% year over year. Operating cash flow declined as receivables and inventory absorbed cash; receivables rose $64.2 million, primarily due to year-end sales timing, and days sales outstanding increased to 44 from 40. Inventory rose $11.9 million, with inventory days increasing to 16 from 15. Operating cash flow less property-and-equipment purchases was approximately $18.5 million.
Fourth quarter: Sales were $684.3 million versus $630.8 million in Q4 2014; operating income was $22.9 million versus $20.1 million; net income was $13.6 million versus $11.9 million; diluted EPS was $0.51 versus $0.45. Gross margin was approximately 13.4%, compared with approximately 13.2%.
No bank-line borrowings were outstanding at year-end. The company had a $50 million receivables-secured facility available through February 2017, expandable to $80 million subject to lender approval and covenants. Trade-credit financing of $23.0 million was included in accounts payable; total accounts payable was $166.5 million. Total liabilities were $246.6 million and stockholders’ equity was $392.5 million.
Business changes and drivers
- Large Account sales rose 13.0% to $961.0 million, driven by software and server/storage solutions. SMB sales were nearly flat at $1,040.6 million; Public Sector sales declined 0.4% to $572.4 million.
- Mobility/notebooks increased to 23% of sales from 21%; software increased to 17% from 16%. Other hardware/services fell to 38% from 41%.
- Annual segment gross margins were 15.5% for SMB (up from 15.1%), 12.0% for Large Account (down from 12.2%), and 11.3% for Public Sector (up from 10.9%).
- SG&A increased 4.2% to $262.5 million but remained 10.2% of sales. Personnel costs rose with sales-force and solution-support investments and higher variable compensation. The new distribution center also increased facilities expense; management said expense for the previous facilities would end in 2016.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings guidance. It expected 2016 capital expenditures of $10–12 million and lease and other contractual payments of approximately $3.5 million. Planned IT infrastructure investments could exceed $20 million over the next two to four years, with associated future depreciation and operating costs.
- Management said cash, operating cash flow, and available credit should fund working capital, capital expenditures, and other requirements for at least the next 12 months. No current plan exists for additional dividends; the $0.40-per-share special dividend declared in 2015 was paid in January 2016.
- Key risks include intense price competition and thin product margins; dependence on vendors, including HP products representing 22% of sales; reductions in vendor incentives or supply; inventory obsolescence; shifts to cloud and direct-to-customer distribution; cybersecurity or systems disruption; and changes in business or government IT spending.
- A multi-state unclaimed-property audit remained in progress; the company had accrued $1.7 million, but final assessments had not been made. Other tax and employment audits could result in additional liabilities. Patent-related claims were not accrued; management said outcomes were not expected to be material, while noting potential exposure could be significant.
- The company reported no goodwill impairment in 2015; $51.3 million of goodwill was held in the Large Account segment. Management identified performance and cash-flow assumptions as key impairment sensitivities. Disclosure controls and internal control over financial reporting were assessed as effective; the auditor issued unqualified opinions.
Most important facts for investors to verify
- Whether receivables growth and the increase in days sales outstanding reverse, and whether operating cash generation improves.
- Whether Large Account solution growth and improved consolidated margins continue, particularly given the segment’s lower gross margin.
- How planned IT investment and sales/service staffing affect SG&A, capital spending, and returns.
- Any developments in the unclaimed-property audit, other tax assessments, or patent claims and indemnification exposure.
- Availability and terms of vendor support, trade credit, and the bank facility, including compliance with financial covenants.