Datalink Corp has a market cap of $164.6 million; its shares were traded at around $9.1 with a P/E ratio of 13.1 and P/S ratio of 0.4. Datalink Corp had an annual average earning growth of 8.7% over the past 5 years.
Highlight of Business Operations:Our sales increased $86.3 million or 29.4% to $380.0 million for 2011 as compared to 2010. Our gross profit increased $22.0 million or 32.5% to $89.6 million for 2011 as compared to 2010. Our earnings from operations increased $12.8 million or 322% to $16.8 million for 2011 as compared to 2010. The following table shows, for the periods indicated, certain selected financial data expressed as a percentage of net sales.
Service gross profit as a percentage of service sales was 24.8% in 2011 as compared to 25.9% in 2010 and 27.6% in 2009. In 2011, our decrease in service gross profit is due to an increase in the sales of products on which we are not able to sell first call support and Datalink professional services, which carry lower gross margins. In 2010, our decrease in service gross profit was in part due to $853,000 of Incentra-related acquisition accounting adjustments to reduce acquired maintenance contracts to fair value. Excluding these adjustments, service gross profit margin would have been 26.6% for 2010. In addition, we have experienced a decrease in the mix of products we can provide first call maintenance support for which generally have higher margins. We estimate that our service gross margins for 2012 will be between 24% and 26%.
General and Administrative. General and administrative expenses include wages for administrative personnel, professional fees, depreciation, communication expenses and rent and related facility expenses. General and administrative expenses increased to $ 15.5 million or 4.1% of net sales as compared to $14.1 million or 4.8% of net sales for 2010 and $11.9 million, or 6.7% of net sales for 2009. Our general and administrative expenses increased $1.4 million in 2011 as compared to 2010, but as a percentage of net sales it decreased to 4.1% from 4.8% in 2010. Our general and administrative expenses increased $2.1 million in 2010 as compared to 2009, but as a percentage of net sales it decreased to 4.8% from 6.7% in 2009. The increase in general and administrative expenses for 2011 was due to a combination of an increase in bonus variable compensation of $416,000 commensurate with the increase in sales and gross margins for 2011 and an increase in stock compensation expense of $399,000 due to additional grants issued in 2011. The increase in general and administrative expenses for 2010 was due to increased rent and facility charges of $1.3 million for the addition of Incentra offices we acquired and expenses of $536,000 for our 2010 national sales meeting. The decrease in general and administrative expenses as a percentage of net sales, in 2010 as compared to 2009, reflects
Engineering. Engineering expenses include employee wages and travel, hiring and training expenses for our field and customer support engineers and technicians. We allocate engineering costs associated with installation and configuration services and with consulting services to our cost of service sales. Engineering expenses increased to $17.5 million, or 4.6% of net sales in 2011 compared to $15.7 million, or 5.3% of net sales in 2010 and $11.7 million, or 6.5% of net sales in 2009. The increase in engineering expenses in absolute dollars for 2011 over 2010 is primarily due to the Midwave acquisition, which increased engineering headcount by approximately 82% in the fourth quarter of 2011. The increase in engineering expenses in absolute dollars for 2010 over 2009 is primarily due to an increase in compensation expense in connection with our Incentra acquisition, which increased our engineering headcount by approximately 31%. The decreases in engineering expenses as a percentage of sales, for 2011 as compared to 2010, and 2010 as compared to 2009, respectively, is primarily a result of a greater percentage of our engineering costs being allocated to our cost of service sales since a greater percentage of our installation and configuration services were performed by our engineering personnel.
Other Income. For 2011, 2010 and 2009 we had other income of $1.1 million, $503,000 and $0, respectively. Our Cross acquisition included a reverse earn-out agreement, which required Cross to purchase at least $1.8 million of networking products and services from us over three years. Cross agreed to pay any shortfall between customer purchases and the guaranteed annual purchase amount. We believed that we would meet the revenue targets and accordingly, we determined that the reverse earn-out had no fair value at the date of this business combination or in any subsequent periods prior to the settlement date. At September 30, 2010 and 2011, as the first and second years of the three year reverse earn-out agreement came to an end, there was a shortfall between customer purchases and the guaranteed annual purchase of $574,000 and $503,000, respectively. Per the services agreement any shortfall between customer purchases and the guaranteed annual purchase amount would be payable by Cross at that time. Since we had assumed that the revenue targets would be met and the reverse earn-out had no fair value, the shortfall amounts of $574,000 and $503,000 represented a change in fair value of the acquisition date reverse earn-out and, in accordance with ASC 805-30-35 was classified as other income within operation expenses on our statement of operations. In addition, in October 2011, we entered into an agreement with Cross to allow for an early buyout of the third year reverse earn-out agreement for which Cross paid $553,000. This early buyout also represented a change in fair value of the acquisition date and in accordance with ASC 805-30-35 was classified as other income within operating expenses on our statement of operations.
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