PC Connection, Inc. — Q1 2012 Form 10-Q
Business context and period. The filing reports unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011. PC Connection sells IT products and services through SMB, Large Account, and Public Sector segments. Effective January 1, 2012, Consumer/SOHO activity was combined with SMB; prior-year segment data was recast.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $498.8 | $461.9 | +8.0% |
| Gross profit | $66.6 | $58.8 | +13.2% |
| Gross margin | 13.4% | 12.7% | +0.7 percentage points |
| SG&A | $56.5 | $51.3 | +10.1% |
| Special charges | $1.1 | — | — |
| Operating income | $9.0 | $7.5 | +19.9% |
| Net income | $5.5 | $4.5 | +21.8% |
| Diluted EPS | $0.21 | $0.17 | — |
| Operating cash flow | $55.2 | $29.1 | +$26.0 |
Operating margin was 1.8%, versus 1.6%. Management attributed higher gross margin across all three segments to improved invoice selling margins, margin initiatives, higher-margin solutions and products, and vendor consideration. SG&A rose due to systems and solutions investments, higher variable compensation, and ValCom expenses.
Segments and material changes
- SMB: sales of $225.3 million, up 0.2%; excluding consumer/SOHO sales, management said sales increased 4.0%. Segment gross margin rose to 15.2% from 14.1%.
- Large Account: sales of $181.3 million, up 23.5%; excluding ValCom, sales increased 17.1%. Segment gross margin was 11.8%, versus 11.4%.
- Public Sector: sales of $92.2 million, up 2.0%; gross margin was 11.9%, versus 11.5%.
ValCom, acquired in March 2011, contributed to Large Account growth. Consolidated growth excluding ValCom was 5.9%, according to management. The company recorded $1.135 million of special charges for awards associated with a former executive’s retirement and workforce reductions.
Cash, liquidity, debt, and investment
- Cash and cash equivalents were $49.8 million at March 31, 2012, versus $4.6 million at year-end. Operating cash flow was $55.2 million; investing cash use was $2.8 million and financing cash use was $7.2 million.
- Cash generation mainly reflected reductions in receivables and inventory, partly offset by lower accounts payable. Days sales outstanding were 43 days, compared with 41 a year earlier and 47 at year-end; inventory turns were 25, versus 24.
- No bank-line borrowings were outstanding at quarter-end. The February 2012 five-year facility provides $50 million of capacity, potentially expandable to $80 million subject to lender approval and conditions. The new facility is secured by receivables and no longer restricts dividends or share repurchases.
- Current liabilities included $1.0 million of current capital-lease obligations; total capital-lease obligations were $1.7 million. Accounts payable included $16.4 million under supplier-funded inventory arrangements.
- Management estimated capital expenditures of $9–$12 million over the next 12 months, apart from the Customer MDM software initiative. It had capitalized $9.5 million for that project at quarter-end and said additional software implementation beyond MDM, if fully undertaken, could cost more than $20 million over three years.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said operating results for the quarter may not indicate full-year results and believed cash on hand, operating cash flow, and available credit would cover requirements for at least the next 12 months. It cautioned that weaker IT-product demand could materially affect operating cash flow, and that planned service-engineer hiring and IT investment could pressure results if service revenue fails to offset costs. Management also cited supplier attempts to sell directly to customers, pricing competition, and the need to recruit and retain sales personnel.
- A multi-state unclaimed-property audit remained ongoing; no formal assessments had been made, and additional liabilities could materially adversely affect results or financial position. Management considered other ordinary-course legal proceedings, including patent claims, unlikely to have a material effect.
- Following achievement of a ValCom milestone, the company paid $1.0 million of contingent consideration in April 2012; up to another $1.0 million was expected in Q4 2012 if a further revenue milestone is met.
- The company repurchased approximately 162,000 shares for $1.5 million during the quarter. Approximately $2.8 million remained under the board authorization.
- Management reported disclosure controls effective at the reasonable-assurance level and no material quarterly change in internal control over financial reporting. No material change in market risks was reported.
Most important facts for investors to verify
- Whether sales and margin gains persist, particularly in Large Account, and how much growth depends on ValCom.
- Whether higher-margin services can grow enough to offset increased personnel, SG&A, and IT-system costs.
- Cash-flow sustainability: Q1 operating cash generation benefited substantially from working-capital reductions.
- Availability of the credit facility under its financial covenants if earnings weaken, and the eventual cost and scope of IT investments.
- Outcomes of the unclaimed-property and other tax audits, and achievement of the remaining ValCom milestone.