PC Connection, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results are compared with the corresponding 2010 periods. Amounts below are in millions unless otherwise noted.
Business context and results
PC Connection sells IT products and services through SMB, Large Account, Public Sector, and Consumer/SOHO segments. It is a value-added reseller that is expanding solution and managed-services offerings. The March 2011 acquisition of ValCom added IT infrastructure and onsite managed services to Large Account.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $512.6 | $477.5 | $974.5 | $885.8 |
| Gross profit | $66.9 | $56.0 | $125.7 | $104.6 |
| Gross margin | 13.0% | 11.7% | 12.9% | 11.8% |
| SG&A | $54.5 | $47.5 | $105.8 | $92.0 |
| Operating income | $12.4 | $8.5 | $19.9 | $12.7 |
| Operating margin | 2.4% | 1.8% | 2.0% | 1.4% |
| Net income | $7.5 | $5.0 | $12.0 | $7.5 |
| Diluted EPS | $0.28 | $0.18 | $0.44 | $0.27 |
Cash, liquidity and debt
- Six-month operating cash flow was $32.9, versus $7.3 in 2010; cash increased $19.9 to $55.3. Management attributed the operating cash flow in part to higher payables, including timing of inventory purchases.
- Investing cash use was $11.3, including $6.1 of property and equipment purchases and $4.7 net cash used for the ValCom acquisition. Financing cash use was $1.6, mainly treasury-share purchases and capital-lease repayments.
- At June 30, cash was $55.3, accounts receivable $241.0, inventory $75.4, current assets $382.8, and current liabilities $178.4. Stockholders’ equity was $268.8.
- No bank-line borrowings were outstanding. The $50.0 secured facility was fully available and matures October 2012; it may increase to $80.0 subject to lender approval and conditions. Capital-lease obligations to an affiliate totaled $2.4. Inventory-finance balances of $25.1 were included in accounts payable, not reported as bank borrowings.
Material changes and management commentary
- Q2 sales rose 7.3%; first-half sales rose 10.0%. Growth was led by SMB, with Q2 segment sales up 14.4%, and Large Account, up 7.6% including ValCom. Excluding ValCom, Large Account growth was 2.3% for Q2 and 8.4% for the first half.
- Public Sector sales edged down 0.8% in Q2 but increased 5.1% in the first half; federal sales declined 6.3% year over year in the first half. Consumer/SOHO sales fell 16.3% in Q2 and 9.9% in the first half as the company prioritized profitability.
- Gross margin improved in all four segments. Management cited better invoice selling margins, vendor consideration, agency revenues, and lower inventory write-offs. SG&A grew 14.7% in Q2 and 15.0% in the first half, reflecting personnel and solution-sales investment, variable compensation, advertising, and ValCom costs.
- ValCom’s results were included from March 17; it contributed $8.8 of sales through June 30. The company paid $8.5 at closing and recorded $1.9 of remaining contingent consideration after paying $1.0 for an achieved milestone. Approximately $2.0 of additional contingent consideration was expected in 2012. Purchase-price allocations remained preliminary.
Outlook, risks and unusual items
- No specific revenue or earnings forecast was provided. Management said it expected cash, operating cash generation, and available credit to fund requirements for at least the next 12 months. Expected capital expenditures, excluding new IT systems, were $6–$8; capital-lease and other contractual payments were approximately $4.
- A broader business-software initiative could require more than $20 of additional capital over three years if fully implemented; $5.7 had been capitalized for the initial Customer Master Data Management phase by June 30. Management warned that added solution-service staff and IT investments could pressure SG&A if revenue growth does not offset costs.
- Management noted possible economic slowdown and high unemployment could curb Large Account IT spending in the second half of 2011. Competitive pricing, supplier direct sales, changing buying behavior, and costly online marketing were also identified as business pressures. Online marketing costs were $1.2 in the first half and expected to increase.
- Management expected a 2011 effective tax rate of 40%–41%. The filing says ordinary legal proceedings were not expected to have a material effect, but a multi-state unclaimed-property audit was ongoing; its outcome was uncertain and could materially affect results or financial condition.
- After quarter-end, effective August 8, Timothy McGrath became CEO, succeeding Patricia Gallup, who continued as Executive Chairman and Chief Administrative Officer. McGrath’s base salary increased to $750,000 and he received 100,000 restricted stock units.
Most important facts for investors to verify
- Whether gross-margin gains persist and continue to outweigh rising SG&A and investment costs.
- Underlying Large Account demand excluding ValCom, and exposure to economic conditions and federal-sector weakness.
- Cash-flow quality: the extent to which first-half operating cash flow depended on higher accounts payable and purchase timing.
- ValCom integration, service growth, final acquisition valuation, and achievement/payment of remaining earn-out milestones.
- Potential costs and timing of the broader IT-system initiative, and the outcome of the unclaimed-property audit.
- Availability of the bank facility under its borrowing-base and covenant requirements; management stated EBITDA declines could constrain borrowing capacity.