PC Connection, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. PC Connection is an IT products and solutions reseller serving small and medium businesses (SMB), large corporate accounts, and public-sector and education customers.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $2,692.6 million | $2,574.0 million | +4.6% |
| Gross profit / margin | $371.2 million / 13.8% | $341.0 million / 13.2% | +8.8% gross profit |
| SG&A | $290.6 million / 10.8% of sales | $262.5 million / 10.2% | +10.7% |
| Operating income / margin | $80.5 million / 3.0% | $78.6 million / 3.0% | +2.5% |
| Net income | $48.1 million | $46.8 million | +2.7% |
| Diluted EPS | $1.80 | $1.76 | +2.3% |
| Operating cash flow | $33.6 million | $30.9 million | +$2.7 million |
Sales rose across all three segments: SMB $1,091.2 million (+4.9%), Large Account $1,012.0 million (+5.3%), and Public Sector $589.4 million (+3.0%). Segment gross margins improved to 15.8% in SMB, 12.8% in Large Account, and 11.7% in Public Sector. Management attributed the consolidated margin improvement mainly to increased sales of higher-margin software and advanced solutions. Higher personnel costs, variable compensation, acquisitions, and solution-sales investments pushed SG&A up faster than revenue.
Fourth quarter: Sales were $735.5 million versus $684.3 million a year earlier; net income was $13.0 million versus $13.6 million, and diluted EPS was $0.49 versus $0.51.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $49.2 million at year-end, down from $80.2 million. Working capital was $328.9 million versus $330.8 million; total assets were $686.1 million and stockholders’ equity $433.4 million.
- Operating cash flow was $33.6 million. Investing used $54.9 million, including $43.0 million of acquisition payments and $11.9 million of net property and equipment purchases. Financing used $9.7 million, including a $10.6 million dividend payment.
- No bank-line borrowings were outstanding. The $50 million receivables-secured facility was fully available at year-end and renewed in February 2017 through February 2022; it can be increased to $80 million for approved uses. Accounts payable were $177.9 million, including $33.1 million under inventory trade-credit arrangements.
- The company declared a $0.34-per-share special dividend ($9.0 million), paid January 12, 2017. It reported no current plan for additional dividends in the foreseeable future. No shares were repurchased in 2016.
Material changes and unusual items
- Acquired substantially all Softmart assets in May 2016 for $31.9 million net of acquired cash, and acquired GlobalServe in October for $11.1 million net of acquired cash. The acquisitions expanded software-services and global IT procurement capabilities; their post-acquisition results were not material to consolidated results. GlobalServe’s purchase-price allocation remained preliminary.
- Software increased to 20% of sales from 17%; servers and storage fell to 10% from 13%. HP products accounted for 20% of sales, down from 22%.
- Cash flow benefited from a $12.4 million inventory reduction, but receivables rose $33.8 million. Days sales outstanding increased to 48 from 44; inventory days declined to 13 from 16.
- Sales to the federal government were 7.5% of total sales, up from 6.7%. No individual customer accounted for more than 2% of sales.
Outlook, commentary, and risks
Management gave no specific revenue or earnings guidance. It expects next-12-month capital expenditures of $10–12 million and lease and other contractual payments of about $4.5 million. Potential IT-infrastructure investments could exceed $20 million over the next one to three years. Management said operating funds and available credit should be sufficient for working capital, capital expenditures, and other needs for at least twelve months, while noting that weaker IT demand could affect cash generation.
Management’s priorities include growing higher-margin solutions and services, improving sales productivity, and investing in IT systems. It cautioned that adding service engineers and technology investments may weigh on results if associated service revenue does not grow sufficiently. Key risks include intense price competition and low product margins; rapid technology change and inventory obsolescence; vendor concentration and the risk of disruption in HP supply; supplier incentives and trade credit; direct-to-customer and cloud/SaaS distribution shifts; cybersecurity or systems interruptions; government-contract compliance; and economic or government-spending weakness. Two principal stockholders controlled approximately 56% of shares.
State audits covering taxes, unclaimed property, employment matters, and other assessments remained unresolved; unclaimed-property accruals were $0.8 million. Management said ordinary-course legal matters, including patent claims, were not expected to be material, but outcomes of audits and claims could differ from estimates. Goodwill totaled $73.6 million; the annual impairment test found no impairment. The company reported effective disclosure controls and internal control over financial reporting; the assessment and auditor’s review excluded Softmart’s internal controls, representing 7% of consolidated assets and 4% of revenue.
Important facts for investors to verify
- Whether revenue and gross-margin growth from software and advanced solutions can continue to offset rising SG&A and personnel costs.
- Fourth-quarter earnings and EPS decline despite higher sales, and the trajectory of receivables, days sales outstanding, and operating cash conversion.
- Final purchase-price allocation and realized performance of Softmart and GlobalServe, alongside acquisition-related spending.
- Availability and terms of supplier support, inventory trade credit, and HP products; HP represented 20% of sales.
- Expected timing, cost, and returns of planned IT infrastructure investment, and any material effect from new accounting standards or unresolved audits.
The filing includes audited consolidated financial statements with an unqualified audit opinion. Amounts are presented in U.S. dollars.