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Connection (CNXN) Reports Record Second Quarter 2017 Results

07/27/17

SECOND QUARTER SUMMARY:

  • Record net sales: $750 million, up 10.9% y/y
  • Record gross profit: $100 million, up 6.2% y/y
  • Net income up 9.0% y/y
  • Diluted EPS: $0.51, up 8.2% y/y
  • Adjusted EPS excluding special charges: $0.53, up 8.0% y/y

MERRIMACK, N.H.--(BUSINESS WIRE)--Jul. 27, 2017-- Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider of a full range of information technology (IT) solutions to business, government, and education markets, today announced results for the quarter ended June 30, 2017. Net sales for the quarter ended June 30, 2017 increased by 10.9% to $749.8 million, compared to $676.2 million for the prior year quarter. Net income for the quarter ended June 30, 2017 increased by 9.0% to $13.6 million, or $0.51 per diluted share, compared to net income of $12.5 million, or $0.47 per diluted share for the prior year quarter.

The second quarter 2017 results include $0.9 million of severance and restructuring costs. Earnings per share, adjusted for severance and restructuring charges, increased to $0.53 cents per share for the quarter ended June 30, 2017, compared to $0.49 cents per share for the prior year quarter.

Net sales for the six months ended June 30, 2017 were $1,420.4 million, an increase of $171.8 million or 13.8%, compared to $1,248.6 million for the six months ended June 30, 2016. Net income for the six months ended June 30, 2017 was $21.0 million, or $0.78 per diluted share, compared to net income of $21.5 million, or $0.81 per diluted share, for the six months ended June 30, 2016. Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and rebranding, acquisition and restructuring costs (“Adjusted EBITDA”) totaled $94.0 million for the twelve months ended June 30, 2017, compared to $93.1 million for the twelve months ended June 30, 2016.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions (SMB) segment increased by 9.4% to $296.4 million in the second quarter of 2017, compared to the prior year quarter. Software, mobility, and desktop products were strong in this segment with an increase of 12%, 11%, and 11%, respectively. Gross margin decreased by 44 basis points due to increased sales of lower-margin mobility and desktop products.
  • Net sales for the Enterprise Solutions (Large Account) segment increased by 12.1% to $302.1 million in the second quarter of 2017, compared to the prior year quarter. Software and net/com products had strong growth during this quarter at 23% and 60%, respectively. Gross margin decreased by 39 basis points due to an increase in large project rollouts and a competitive sales environment.
  • Net sales to the Public Sector Solutions segment increased by 11.5% to $151.3 million in the second quarter of 2017, compared to the prior year quarter. Sales to the federal government increased by 44.7%, while sales to state and local government and educational institutions increased by 3.1%. Gross margin decreased by 119 basis points due to the completion of several large project rollouts that included lower-margin products such as desktops, which grew 48% during the quarter.

Quarterly Sales by Product Mix:

  • Software sales, the Company’s largest product category, increased by 15% year over year and accounted for 23% of net sales in the second quarter of 2017 compared to 22% of net sales in the prior year quarter. We experienced growth in cloud-based offerings, security, and office productivity.
  • Notebook/mobility sales increased by 2% year over year and accounted for 21% of net sales in the second quarter of 2017 compared to 23% of net sales in the prior year quarter. Business Solutions experienced strong year-over-year growth in notebook/mobility sales.
  • Desktop sales increased by 6% year over year and accounted for 10% of net sales in the second quarter of both 2017 and 2016. The Business Solutions and Public Sector Solutions segments experienced strong year-over-year growth in desktop sales.

Overall gross profit increased by $5.8 million, or 6.2%, in the second quarter of 2017, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased to 13.3% in the second quarter of 2017, compared to 13.9% for the prior year quarter.

Selling, general and administrative dollars, excluding severance and restructuring costs, increased in the second quarter of 2017 to $76.3 million from $72.0 million in the prior year quarter, with variable cost increasing due to higher levels of gross profit. We also had three months of Softmart SG&A in the current quarter. We continue to invest in technical solution sales capabilities and expect SG&A expenses to rise accordingly. However, we are highly focused on improving efficiencies and streamlining wherever possible.

Total cash was $28.1 million at June 30, 2017, compared to $49.2 million at December 31, 2016. Days sales outstanding were 47 days at June 30, 2017, and inventory turns were 22 turns in the second quarter of 2017.

“We are pleased with our record sales and gross profit for the quarter and with our ability to execute well in all three sales segments in this hyper-competitive demand environment. The Company achieved strong growth in software, networking communications, and services,” said Tim McGrath, President and Chief Executive Officer. “We believe our team and the strategies we have in place position Connection well to gain market share and increase shareholder value,” concluded Mr. McGrath.

Non-GAAP Financial Information

Adjusted EBITDA and Adjusted EPS are non-GAAP financial measure. This information is included to provide information with respect to the Company’s operating performance and earnings. Non-GAAP measures are not a substitute for GAAP measures and should be considered together with the GAAP financial measures. Our non-GAAP financial measures may not be comparable to other similarly titled measures of other companies.

About Connection

PC Connection, Inc. and its subsidiaries, dba Connection, (www.connection.com; NASDAQ: CNXN) is a Fortune 1000 company headquartered in Merrimack, NH. With offices throughout the United States, Connection delivers custom-configured computer systems overnight from its ISO 9001:2008 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure that they can solve the most complex issues of their customers. Connection also services international customers through its GlobalServe subsidiary, a global IT procurement and service management company. Investors and media can find more information about Connection at http://ir.pcconnection.com.

Connection – Business Solutions (800-800-5555), (the original business of PC Connection,) operating through our PC Connection Sales Corp. subsidiary, is a rapid-response provider of IT products and services serving primarily the small- and medium-sized business sector. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection – Public Sector Solutions (800-800-0019), operating through our GovConnection, Inc. subsidiary, is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

Connection – Enterprise Solutions (561-237-3300), www.connection.com/enterprise, operating through our MoreDirect, Inc. subsidiary, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and access to over 300,000 products and 1,600 vendors through TRAXX™, a proprietary cloud-based eProcurement system. The team’s engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

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"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are based on currently available information, operating plans, and projections about future events and trends. Terms such as "believe," "expect," "intend," "plan," "estimate," "anticipate," "may," "should," "will," or similar statements or variations of such terms are intended to identify forward-looking statements, although not all forward-looking statements include such terms. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties, include, but are not limited to, the impact of changes in market demand and the overall level of economic activity and environment, or in the level of business investment in information technology products, competitive products and pricing, product availability and market acceptance, new products, market acceptance of the Company's new branding, fluctuations in operating results, the ability of the Company to manage personnel levels in response to fluctuations in revenue, and other risks detailed in the Company's filings with the Securities and Exchange Commission, including under the caption "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2016. More specifically, the statements in this release concerning the Company's outlook for selling, general, and administrative expenses, the Company's efforts in improving efficiencies and streamlining its business and other statements of a non-historical basis (including statements regarding the Company's ability to increase market share and enhance long-term shareholder value, and integrate its two acquisitions in an effective manner, and the Company's continuing investments in technical solution sales capabilities) are forward-looking statements that involve certain risks and uncertainties. Such risks and uncertainties include the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, the continued acceptance of the Company's distribution channel by vendors and customers, continuation of key vendor and customer relationships and support programs, the ability of the Company to gain or maintain market share, and the ability of the Company to hire and retain qualified sales representatives and other essential personnel. The Company assumes no obligation to update the information in this press release or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise, except as required by law.

                               
CONSOLIDATED SELECTED FINANCIAL INFORMATION                    
At or for the Three Months Ended June 30,     2017 2016  
%
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)                     Change
 
Operating Data:
Net sales $ 749,792 $ 676,165 11%
Diluted earnings per share $ 0.51 $ 0.47 9%
Adjusted diluted earnings per share $ 0.53 $ 0.49 8%
 
Gross margin 13.3% 13.9%
Operating margin 3.0% 3.1%
Return on equity (1) 11.0% 12.3%
 
Inventory turns 22 22
Days sales outstanding 47 45
 
% of % of
Product Mix: Net Sales Net Sales
Software 23% 22%
Notebooks/Mobility 21 23
Servers/Storage 9 10
Net/Com Products 8 7
Other Hardware/Services   39   38
Total Net Sales   100%   100%
 
 
Stock Performance Indicators:
Actual shares outstanding 26,785 26,522
Total book value per share $ 17.07 $15.65
Tangible book value per share $ 13.88 $ 12.63
Closing price $ 27.06 $ 23.80
Market capitalization $ 724,802 $ 631,224
Trailing price/earnings ratio 15.1 13.1
LTM Adjusted EBITDA (2) $94,017 $ 93,092
Adjusted market capitalization/LTM Adjusted EBITDA (3) 7.4 6.3

 

(1) Based on last twelve months' net income.
(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for acquisition, rebranding, and restructuring costs, and stock-based compensation.
(3) Adjusted market capitalization is defined as gross market capitalization less cash balance.

                         
REVENUE AND MARGIN INFORMATION                
For the Three Months Ended June 30,     2017 2016
Net Gross Net Gross
(amounts in thousands) Sales     Margin Sales     Margin
 
Business Solutions (SMB) (1) $ 296,420 15.6% $ 270,962 16.1%
Enterprise Solutions (Large Account) (1) 302,077 12.3 269,482 12.7
Public Sector Solutions   151,295 10.8   135,721 11.9
Total $ 749,792 13.3% $ 676,165 13.9%
 

(1) The Q2 2016 results for the Business Solutions and Enterprise Solutions have been updated to reflect our segment methodology used in our 2016 10-K, which divides operating results for Softmart between our SMB and Large Account segments. Our previously reported Q2 2016 results reported all of the operating results of Softmart in our SMB segment. Accordingly, in comparison to our previously reported Q2 2016 results, the above Q2 2016 results reflect the reclassification of net sales of $9,852 and gross profit of $1,979 from our SMB segment to our Large Account segment attributable to Softmart.

                           
CONDENSED CONSOLIDATED STATEMENTS OF INCOME            
Three Months Ended June 30,   2017     2016
(amounts in thousands, except per share data)   Amount

% of Net Sales

Amount % of Net Sales
 
Net sales $ 749,792 100.0 % $ 676,165 100.0 %
Cost of sales   650,122   86.7       582,291   86.1  
Gross profit 99,670 13.3 93,874 13.9
 
Restructuring and acquisition costs 941 0.1 841 0.1
Selling, general and administrative expenses, other   76,289   10.2       72,023   10.7  
Income from operations 22,440 3.0 21,010 3.1
 
Interest/other expense, net 9 (12 )
Income tax provision   (8,864 ) (1.2 )     (8,540 ) (1.3 )
Net income $ 13,585   1.8 %   $ 12,458   1.8 %
 
Earnings per common share:
Basic $ 0.51   $ 0.47  
Diluted $ 0.51   $ 0.47  
 
Shares used in the computation of earnings per common share:
Basic   26,761     26,501  
Diluted   26,893     26,691  
 

                         
CONDENSED CONSOLIDATED STATEMENTS OF INCOME              
Six Months Ended June 30,   2017     2016
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 1,420,386 100.0 % $ 1,248,559 100.0 %
Cost of sales   1,233,983   86.9     1,072,492   85.9  
Gross profit 186,403 13.1 176,067 14.1
 
Restructuring and acquisition costs 941 0.1 841 0.1
Selling, general and administrative expenses, other   151,570   10.6     139,052   11.1  
Income from operations 33,892 2.4 36,174 2.9
 
Interest/other expense, net 28 (26 )
Income tax provision   (12,903 ) (0.9 )   (14,627 ) (1.2 )
Net income $ 21,017   1.5 % $ 21,521   1.7 %
 
Earnings per common share:
Basic $ 0.79   $ 0.81  
Diluted $ 0.78   $ 0.81  
 
Shares used in the computation of earnings per common share:
Basic   26,729     26,500  
Diluted   26,879     26,681  
 

                               
EBITDA AND ADJUSTED EBITDA                              
                       
A reconciliation of EBITDA and Adjusted EBITDA is detailed below. Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation. Both EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that either includes or excludes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. We believe that EBITDA and Adjusted EBITDA provide helpful information with respect to our operating performance including our ability to fund our future capital expenditures and working capital requirements. Adjusted EBITDA also provides helpful information as it is the primary measure used in certain financial covenants contained in our credit agreements.
 
(amounts in thousands) Three Months Ended June 30, LTM Ended June 30, (1)
2017 2016

% Change

2017 2016 % Change
Net income $ 13,585 $ 12,458 $ 47,607 $ 48,135
Depreciation and amortization 2,855 2,388 11,359 9,394
Income tax expense 8,864 8,540 30,618 32,716
Interest/other expense, net   30   12   139   75
EBITDA 25,334 23,398 89,723 90,320
Restructuring and acquisition costs (2) 941 841 3,506 1,596
Stock-based compensation   201   356     788   1,176  
Adjusted EBITDA $ 26,476 $ 24,595 8% $ 94,017 $ 93,092 1%
 

(1) LTM: Last twelve months
(2) Restructuring and acquisition costs consist of severance, the relocation of our Softmart facility, and certain non-recurring Softmart charges, and in 2016, included our acquisition of Softmart, the rebranding of the Company, and duplicate costs incurred with the move of our Chicago-area facility.

                       
   
ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE  
 

A reconciliation from Net Income to Adjusted Net Income is detailed below. Adjusted Net Income is defined as Net Income plus the Acquisition and Restructuring Costs, net of tax. Adjusted Net Income and Adjusted Earnings Per Share are considered non-GAAP financial measures (see note above in Adjusted EBITDA for a description of non-GAAP financial measures). The Company believes that these non-GAAP disclosures provide helpful information with respect to the Company's operating performance.

 
(amounts in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30,
2017 2016 % Change 2017 2016 % Change
Net income $ 13,585 $ 12,458 $ 21,017 $ 21,521
Restructuring and acquisition costs, net of tax (1)   569   499   583   499
Adjusted Net Income $ 14,154 $ 12,957 $ 21,600 $ 22,020
Diluted shares   26,893   26,691     26,879   26,681  
Adjusted Diluted Earnings per Share $ 0.53 $ 0.49 8% $ 0.80 $ 0.83 -3%
 

(1) Restructuring and acquisition costs consist of severance, the relocation of our Softmart facility, and certain non-recurring Softmart charges, and in 2016, included our acquisition of Softmart, the rebranding of the Company, and duplicate costs incurred with the move of our Chicago-area facility.

             
    June 30,    

December 31,

CONDENSED CONSOLIDATED BALANCE SHEETS 2017 2016
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 28,131 $ 49,180
Accounts receivable, net 426,439 411,883
Inventories 118,226 90,535
Prepaid expenses and other current assets 5,517 5,453
Income taxes receivable   4,604     2,120  
Total current assets 582,917 559,171
Property and equipment, net 39,601 39,402
Goodwill 73,602 73,602
Other intangibles, net 11,759 12,586
Other assets   5,450     1,373  
Total Assets $ 713,329   $ 686,134  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 187,343 $ 177,862
Accrued expenses and other liabilities 27,358 31,047
Accrued payroll   19,669     21,345  
Total current liabilities 234,370 230,254
Deferred income taxes 19,766 19,602
Other liabilities   2,068     2,836  
Total Liabilities   256,204     252,692  
Stockholders’ Equity:
Common stock 286 285
Additional paid-in capital 113,746 111,081
Retained earnings 358,955 337,938
Treasury stock at cost   (15,862 )   (15,862 )
Total Stockholders’ Equity   457,125     433,442  
Total Liabilities and Stockholders’ Equity $ 713,329   $ 686,134  
 

             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30,     2017     2016
(amounts in thousands)    
Cash Flows from Operating Activities:
Net income $ 21,017 $ 21,521

Adjustments to reconcile net income to net cash (used for) provided by operating activities:

Depreciation and amortization 5,710 4,803
Provision for doubtful accounts 613 131
Stock-based compensation expense 385 645
Deferred income taxes 164 27
Excess tax benefit from exercise of equity awards - (32 )
 
Changes in assets and liabilities:
Accounts receivable (15,169 ) (10,370 )
Inventories (27,691 ) (9,558 )
Prepaid expenses and other current assets (2,548 ) (1,192 )
Other non-current assets (4,077 ) (26 )
Accounts payable 8,930 10,457
Accrued expenses and other liabilities   2,908     596  
Net cash (used for) provided by operating activities   (9,758 )   17,002  
 
Cash Flows from Investing Activities:
Purchases of equipment (4,531 ) (5,782 )
Purchase of Softmart   -     (33,983 )
Net cash used for investing activities   (4,531 )   (39,765 )
 
Cash Flows from Financing Activities:
Dividend payment (9,041 ) (10,591 )
Exercise of stock options 1,678 -
Issuance of stock under Employee Stock Purchase Plan 603 473
Excess tax benefit from exercise of equity awards - 32
Payment of payroll taxes on stock-based compensation through shares withheld   -     (40 )
Net cash used for financing activities   (6,760 )   (10,126 )
Decrease in cash and cash equivalents (21,049 ) (32,889 )
Cash and cash equivalents, beginning of period   49,180     80,188  
Cash and cash equivalents, end of period $ 28,131   $ 47,299  
 
Non-cash Investing Activities:
Accrued capital expenditures $ 662 $ 338
 
Supplemental Cash Flow Information:
Income taxes paid $ 15,705 $ 15,658
 
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###

Source: Connection

Connection
Investor Relations Contact:
William Schulze, 603-683-2262
Vice President, Interim Treasurer & Chief Financial Officer
william.schulze@connection.com

 




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08/18/17 11:52 pm EDT

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