PC Connection, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. PC Connection sells IT products and services through SMB, Large Account, and Public Sector segments.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $2,221.6 million | $2,158.9 million | +2.9% |
| Gross profit / margin | $293.0 million / 13.2% | $282.1 million / 13.1% | +3.9%; +0.1 percentage point |
| Operating income / margin | $59.4 million / 2.7% | $54.6 million / 2.5% | +8.7% |
| Net income | $35.7 million | $33.1 million | +7.9% |
| Diluted EPS | $1.35 | $1.24 | +8.9% |
| Operating cash flow | $19.7 million | $69.7 million | Down $50.0 million |
Gross-margin improvement reflected stronger invoice selling margins and a continued shift toward higher-margin solution products and services. SG&A rose 3.2% to $233.6 million but remained 10.5% of sales. The effective tax rate was 39.8%, versus 39.3% in 2012.
Fourth quarter: Sales were $578.6 million versus $556.2 million in Q4 2012 (+4.0%); operating income was $16.4 million versus $14.6 million, and net income was $9.8 million versus $8.9 million. Diluted EPS was $0.37 versus $0.33.
Segments and material changes
- SMB sales rose 5.6% to $952.7 million; segment gross margin improved to 15.4% from 15.2%.
- Large Account sales rose 2.6% to $793.7 million; gross margin held at 11.5%.
- Public Sector sales fell 1.6% to $475.2 million. Federal sales declined 22.6%, partly offset by 11.0% growth in state/local government and education. Segment operating income fell to $3.4 million from $8.3 million.
- Operating cash flow weakened as accounts receivable increased $16.8 million and inventory rose $9.5 million. Days sales outstanding increased to 42 from 41; inventory days rose to 14 from 13.
Liquidity, debt, and capital allocation
Year-end cash was $42.5 million; working capital was $256.4 million, and total assets were $500.9 million. No borrowings were outstanding on the $50 million revolving credit facility, available through February 2017. The company reported no bank debt at year-end; accounts payable included $15.5 million under inventory trade-credit arrangements. Stockholders’ equity was $319.8 million.
Investing cash outflow was $7.6 million and financing cash outflow was $9.4 million. The company paid $10.5 million in dividends ($0.40 per share) and made no open-market share repurchases in 2013. In February 2014, the Board authorized a new $15 million repurchase program; the company said it intended to complete the remaining authorization under its prior program first.
Outlook, risks, and unusual items
- Management expected 2014 capital expenditures of $8–10 million and approximately $3.7 million of lease and other contractual payments. It anticipated further IT infrastructure investment over three to five years, potentially exceeding $20 million beyond the Customer MDM project.
- The first phase of Customer MDM was placed in service in 2013 with $12.0 million of software and integration costs. Depreciation was expected to increase by about $2.0 million annually in 2014.
- Management said operating cash generation and available credit should cover anticipated needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Key exposures include intense price competition and thin product margins, rapid technology change and inventory obsolescence, changing cloud/SaaS distribution models, and reliance on vendors. HP products were 25% of sales; the five largest suppliers accounted for 61% of product purchases.
- Federal spending constraints affected Public Sector results. Cybersecurity/system interruption, customer credit and collection, and vendor incentive reductions are also cited risks. Two principal stockholders controlled approximately 62% of shares.
- A multi-state unclaimed-property audit remained ongoing; the recorded accrual was $1.8 million, and additional liabilities could be material. Patent-infringement claims were unresolved and unaccrued; management stated outcomes were not expected to have a material effect, while noting potential exposure could be material. Goodwill of $51.3 million was assigned to Large Account; no impairment was recorded.
- No special charges were recorded in 2013 (versus $1.1 million in 2012). Management and the auditor reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether the 2013 decline in operating cash flow and increases in receivables and inventory were temporary, and how working capital performs subsequently.
- Whether SMB and Large Account growth and improved margins can offset Public Sector weakness and continued pricing pressure.
- Actual 2014 capital spending, Customer MDM depreciation, and returns from planned IT and solution-sales investment.
- Developments in the unclaimed-property audit and patent claims, including any new assessments, accruals, or material exposure.
- Continuing supplier concentration and HP product availability, as well as the timing and execution of the new share-repurchase authorization and any future dividends.