PC Connection, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. PC Connection is an IT products reseller and solutions provider serving SMB, large-account, public-sector, and Consumer/SOHO customers. The company acquired IT services provider ValCom in March 2011.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $2,103.3 million | $1,974.2 million |
| Gross profit / gross margin | $264.9 million / 12.6% | $229.9 million / 11.6% |
| SG&A / percentage of sales | $217.3 million / 10.3% | $191.2 million / 9.7% |
| Operating income / margin | $47.6 million / 2.3% | $38.7 million / 2.0% |
| Net income | $28.8 million | $23.0 million |
| Diluted earnings per share | $1.07 | $0.85 |
| Cash from operations | $(5.3) million | $(0.9) million |
- Sales rose 6.5%; gross margin improved in all four segments, primarily from stronger invoice selling margins and, to a lesser extent, increased vendor consideration. SG&A grew faster than sales, reflecting solution-sales investment, higher personnel costs, and ValCom.
- Operating cash use was driven largely by a $57.2 million increase in accounts receivable; days sales outstanding rose from 44 to 53. Inventory increased $3.1 million. Investing cash use was $16.0 million, including $10.9 million of net property and equipment purchases and $4.7 million for ValCom. Financing cash use was $9.4 million.
- At year-end, cash was $4.6 million, working capital $207.3 million, and total assets $468.0 million. The company had $5.3 million drawn on its $50 million credit facility and $2.0 million of capital lease obligations. Accounts payable was $130.9 million, including $22.8 million under inventory trade-credit arrangements.
- The February 2012 renewed credit facility runs for five years, is secured by receivables, and removes prior restrictions on share repurchases and dividends. Management said available operating funds, credit, and trade credit should cover needs for at least 12 months.
Material changes and Q4 results
- Large Account sales increased 17.9% to $711.2 million, including $28.6 million of post-acquisition ValCom sales; excluding ValCom, segment sales increased 13.2%. SMB sales rose 3.8% and Public Sector sales 1.5%. Consumer/SOHO sales fell 23.6% to $57.1 million.
- Internet sales were $742.5 million, or 35.3% of net sales, up from 30.7% in 2010. HP products represented 28% of sales in 2011 and 2010.
- Q4 2011 net sales were $553.2 million and net income was $7.4 million, versus $555.6 million and $6.9 million in Q4 2010.
- The company paid a one-time $0.40-per-share dividend totaling $10.6 million in December 2011 and repurchased $3.8 million of shares during the year.
Outlook, commentary, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects 2012 capital expenditures of $11–14 million, apart from the ongoing software initiative; full implementation of the broader software project could require more than $20 million in additional capital over three years. It expects operating cash generation in 2012, including improvement in collections and DSO.
- Management is investing in higher-margin IT solution services and technical sales support, but cautions that SG&A may rise materially and results could weaken if service revenue does not grow enough to offset added staffing and IT costs.
- Principal risks include economic weakness and reduced IT spending, intense price competition, inventory obsolescence, reliance on major vendors and vendor incentives, and supplier direct sales. HP supply disruption could materially harm results; HP accounted for 28% of sales. The five largest vendors supplied 65% of product purchases.
- Supplier and shipping interruptions, system outages, customer credit and collections, government-contract compliance, cybersecurity/privacy issues, and potential increases in shipping and catalog costs are also identified risks. The filing notes possible supply disruption and premium freight costs following flooding in Thailand.
- A multi-state unclaimed-property audit remained open; the company had accrued $1.6 million, but additional liabilities could be assessed and the outcome was uncertain. Management did not expect ordinary-course legal claims, including patent claims, to have a material effect. The company reported no 2011 special charges; 2009 included a $11.6 million noncash write-off of abandoned CRM software.
- Management and the auditor concluded internal controls over financial reporting were effective as of year-end. The auditor issued unqualified opinions on the financial statements and internal controls; ValCom was excluded from the internal-control assessment due to acquisition timing.
Important facts for investors to verify
- Whether receivables collection improves and DSO declines, given negative operating cash flow despite higher earnings.
- Whether gross-margin gains persist while SG&A, sales-support hiring, and software investment increase.
- ValCom’s integration, service-revenue growth, and payment of up to $2.0 million of remaining contingent consideration in 2012.
- Exposure to HP and other concentrated suppliers, inventory availability and obsolescence, and vendor funding terms.
- The outcome of the unclaimed-property audit and any additional tax or other assessments; also monitor credit-facility covenant compliance and planned capital spending.