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PC Connection, Inc. Reports Second Quarter 2016 Results

07/28/16

SECOND QUARTER SUMMARY:

  • Net sales up 8% y/y
  • Gross margin 13.9%, an increase of 70 basis points
  • Diluted EPS: $0.47, up 7% y/y
  • Adjusted EPS excluding special charges: $0.49, up 11% y/y
  • Completed Softmart acquisition

MERRIMACK, N.H.--(BUSINESS WIRE)-- PC Connection, Inc.(NASDAQ: PCCC), a national provider of a full range of information technology (IT) solutions to business, government, healthcare, and education markets, today announced results for the quarter ended June 30, 2016. The Q2 results include one month of activity for Softmart, Inc. which was acquired on May 27, 2016. Softmart is a national solution provider of hardware, software, and services, and annual revenues are approximately $200 million. Softmart has significant expertise with Microsoft, and has built a team of cloud experts, in addition to having attained Microsoft Tier 1 Cloud Solution Provider status.

Net sales for the second quarter of 2016 increased by 7.7% to $676.2 million, compared to $627.6 million for the prior year quarter. Gross profit increased by 13.1% from $83.0 million to $93.9 million primarily due to an increase in gross margin from 13.2% to 13.9% in the second quarter of 2016. Net income for the quarter ended June 30, 2016 increased by 7.1% to $12.5 million, or $0.47 per diluted share, compared to net income of $11.6 million, or $0.44 per diluted share for the prior year quarter.

The second quarter 2016 results include $0.8 million of acquisition and restructuring costs. This charge includes professional fees related to the Softmart acquisition, severance related to internal restructuring activities, and duplicate costs incurred in our office move from Itasca, Illinois to Schaumburg, Illinois. The Company will continue to evaluate additional restructuring in the third quarter. In addition, the Company will break out amortization of acquired intangible assets in the income statement, which is estimated to be approximately $0.3 million per quarter. Earnings per share, adjusted for acquisition costs, restructuring charges, and amortization of acquired intangibles, increased to $0.49 cents per share for the quarter ended June 30, 2016, compared to $0.44 cents per share for the prior year quarter.

Net sales for the six months ended June 30, 2016 were $1,248.6 million, an increase of $39.7 million or 3.3%, compared to $1,208.9 million for the six months ended June 30, 2015. Net income for the six months ended June 30, 2016 increased by 6.5% to $21.5 million, or $0.81 per diluted share, compared to net income of $20.2 million, or $0.76 per diluted share, for the six months ended June 30, 2015. Earnings before interest, taxes, acquisition and restructuring costs, depreciation and amortization, and stock-based compensation expense ("Adjusted EBITDA") totaled $93.1 million for the twelve months ended June 30, 2016, compared to $84.1 million for the twelve months ended June 30, 2015.

Quarterly Performance by Segment:

  • Net sales for the SMB segment increased by 8.3% to $280.8 million in the second quarter of 2016, compared to the prior year quarter. Softmart's revenues for June are included in SMB since most of their customer base falls into this segment. Gross margin increased by 78 basis points to 16.2% due to strong performance in advanced technology solution categories, which contributed to a 13.8% increase in gross profit.
  • Net sales for the Large Account segment increased by 12.0% to $259.6 million in the second quarter of 2016, compared to the prior year quarter. Strong performance in software generated most of the increase.
  • Net sales to the Public Sector segment were basically unchanged at $135.7 million in the second quarter of 2016, compared to the prior year quarter. Gross margin improved by 149 basis points due to increased software and net/com sales; this resulted in a 13.7% increase in gross profit.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company's largest product category, increased by 6% year over year and accounted for 23% of net sales in the second quarter of 2016 compared to 24% of net sales in the prior year quarter. Mobility continues to be a strategic focus area for customers in each of our three segments.
  • Software sales increased by 35% year over year and accounted for 22% of net sales in the second quarter of 2016 compared to 18% of net sales in the prior year quarter. We experienced growth in cloud-based offerings, security, and virtualization.

Overall gross profit increased by $10.9 million, or 13.1%, in the second quarter of 2016, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, increased to 13.9% for the second quarter of 2016, compared to 13.2% for the prior year quarter.

Selling, general and administrative expenses, excluding acquisition costs, restructuring charges, and amortization of acquired intangibles, increased in the second quarter of 2016 to $71.9 million from $63.1 million in the prior year quarter, with variable cost increasing due to higher levels of gross profit. 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 $47.3 million at June 30, 2016, compared to $80.2 million at December 31, 2015. The primary cause of the decline was the $34 million acquisition price for Softmart. Days sales outstanding were 45 days at June 30, 2016, and inventory turns were 22 turns in the second quarter of 2016.

"The Softmart acquisition solidifies our position as one of Microsoft's largest partners, and it provides us with enhanced cloud and services capabilities," said Timothy McGrath, President and Chief Executive Officer. "Our strong revenue and gross profit performance drove significant growth in net income this quarter. We believe our team and the strategies we have in place position us well to gain market share and increase long-term shareholder value."

Non-GAAP Financial Information

Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures. This information is included to provide information with respect to the Company's operating performance and earnings.

About PC Connection, Inc.

PC Connection, Inc., a Fortune 1000 company, has three wholly owned sales subsidiaries: PC Connection Sales Corporation, MoreDirect, Inc., and GovConnection, Inc., headquartered in Merrimack, NH; Boca Raton, FL; and Rockville, MD; respectively. All three companies can deliver custom-configured computer systems overnight from our ISO 9001:2008 certified technical configuration lab at our distribution center in Wilmington, OH. In addition, the company has over 2,500 technical certifications to ensure that we can solve the most complex issues of our customers. Investors and media can find more information about PC Connection, Inc. at http://ir.pcconnection.com.

PC Connection Sales Corporation (800-800-5555), the original business of PC Connection, Inc. serving primarily the small- and medium-sized business sector, is a rapid-response provider of IT products and services. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers, catalogs, publications, and its website at www.pcconnection.com. This company also serves consumer and small office users and is, under its MacConnection brand (800-800-2222), one of Apple's largest authorized online resellers at www.macconnection.com.

MoreDirect, Inc. (561-237-3300), www.moredirect.com, 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™, our proprietary cloud-based eProcurement system. MoreDirect's team of engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

GovConnection, Inc. (800-800-0019) is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, catalogs, publications, and online at www.govconnection.com.

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"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but 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, fluctuations in operating results, and the ability of the Company to manage costs in response to fluctuations in revenue, and other risks that could cause actual results to differ materially from expectations, including those detailed 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, 2015. 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 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 disclaims any 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.

         
                     
CONSOLIDATED SELECTED FINANCIAL INFORMATION
At or for the Three Months Ended June 30,   2016   2015    
% of % of %
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)       Net Sales     Net Sales Change
 
Operating Data:
Net sales $ 676,165 $ 627,622 8 %
Diluted earnings per share $ 0.47 $ 0.44 7 %
 
Gross margin 13.9 % 13.2 %
Operating margin 3.1 % 3.1 %
Return on equity (1) 12.3 % 12.4 %
 
Inventory turns 22 24
Days sales outstanding (2) 45 43
 
% of % of
Product Mix: Net Sales Net Sales
Notebooks/Mobility 23 % 24 %
Software 22 18
Servers/Storage 10 12
Net/Com Products 7 8
Other Hardware/Services   38     38  
Total Net Sales   100 %   100 %
 
 
Stock Performance Indicators:
Actual shares outstanding 26,522 26,396
Total book value per share $ 15.65 $ 14.23
Tangible book value per share $ 12.63 $ 12.23
Closing price $ 23.80 $ 24.74
Market capitalization $ 631,224 $ 653,037
Trailing price/earnings ratio 13.1 14.8
LTM Adjusted EBITDA (3) $ 93,092 $ 84,084
Adjusted market capitalization/LTM Adjusted EBITDA (4) 6.3 6.9
 
(1) Based on last twelve months' net income.
(2) Excludes the impact of the Softmart acquisition.
(3) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation.
and acquisition and restructuring costs.
(4) Adjusted market capitalization is defined as gross market capitalization less cash balance.
 
                 
REVENUE AND MARGIN INFORMATION
For the Three Months Ended June 30,   2016   2015  
Net Gross Net Gross
(amounts in thousands) Sales   Margin Sales   Margin
 
SMB $ 280,814 16.2 % $ 259,346 15.4 %
Large Account 259,630 12.4 231,803 12.4
Public Sector   135,721   11.9   136,473   10.5
Total $ 676,165   13.9 % $ 627,622   13.2 %
 

       
                 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,   2016     2015  
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 676,165 100.0 % $ 627,622 100.0 %
Cost of sales   582,291   86.1     544,635   86.8  
Gross profit 93,874 13.9 82,987 13.2
 
Acquisition and restructuring costs 841 0.1 271 -
Amortization of acquired intangible assets 83 - - -
Selling, general and administrative expenses, other   71,940   10.7     63,093   10.1  
Income from operations 21,010 3.1 19,623 3.1
 
Interest/other expense, net (12 ) - (39 ) -
Income tax provision   (8,540 ) (1.3 )   (7,955 ) (1.2 )
Net income $ 12,458   1.8 % $ 11,629   1.9 %
 
Earnings per common share:
Basic $ 0.47   $ 0.44  
Diluted $ 0.47   $ 0.44  
 
Shares used in the computation of earnings per common share:
Basic   26,501     26,363  
Diluted   26,691     26,616  
 
 
                 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30,   2016     2015  
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 1,248,559 100.0 % $ 1,208,881 100.0 %
Cost of sales   1,072,492   85.9     1,048,281   86.7  
Gross profit 176,067 14.1 160,600 13.3
 
Acquisition and restructuring costs 841 0.1 271 -
Amortization of acquired intangible assets 83 - - -
Selling, general and administrative expenses, other   138,969   11.1     126,527   10.5  
Income from operations 36,174 2.9 33,802 2.8
 
Interest/other expense, net (26 ) - (38 ) -
Income tax provision   (14,627 ) (1.2 )   (13,551 ) (1.1 )
Net income $ 21,521   1.7 % $ 20,213   1.7 %
 
Earnings per common share:
Basic $ 0.81   $ 0.77  
Diluted $ 0.81   $ 0.76  
 
Shares used in the computation of earnings per common share:
Basic   26,500     26,354  
Diluted   26,681     26,605  
 

           
                         
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)
2016 2015 % Change 2016 2015 % Change
Net income $ 12,458 $ 11,629 $ 48,135 $ 44,334
Depreciation and amortization 2,388 2,179 9,394 8,599
Income tax expense 8,540 7,955 32,716 29,886
Interest/other expense, net 12 39 75 88
EBITDA 23,398 21,802 90,320 82,907
Acquisition and restructuring costs (2) 841 271 1,596 271
Stock-based compensation 356 225   1,176 906  
Adjusted EBITDA $ 24,595 $ 22,298 10% $ 93,092 $ 84,084 11%
 
(1) LTM: Last twelve months

(2) Acquisition and restructuring costs consist of professional fees related to the Softmart acquisition, severance related to internal restructuring activities, duplicate costs incurred in our office move of our Chicago-area office, and in 2015, duplicate costs incurred in the transition to a new distribution center.

 
           
                         
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 Amortization of Acquired Intangible Assets and 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,
  2016   2015 % Change     2016   2015 % Change  
Net income $ 12,458 $ 11,629 $ 21,521 $ 20,213
Acquisition and restructuring costs, net of tax (1) 499 161 499 161
Amortization of acquired intangible assets, net of tax (2)   49   -   49   -
Adjusted Net Income $ 13,006 $ 11,790 $ 22,069 $ 20,374
Diluted shares   26,691   26,616     26,681   26,605  
Adjusted Diluted Earnings per Share $ 0.49 $ 0.44 10.0 % $ 0.83 $ 0.77 8 %
 
 

(1) Acquisition and restructuring costs consist of professional fees related to the Softmart acquisition, severance related to internal restructuring activities, duplicate costs incurred in our office move of our Chicago-area office, and in 2015, duplicate costs incurred in the transition to a new distribution center.

(2) Amortization of acquired intangible assets relates to intangible assets acquired from Softmart, including the existing customer base and other intangible assets.

 

   
         
June 30, December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS   2016     2015  
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 47,299 $ 80,188
Accounts receivable, net 387,975 356,145
Inventories 112,494 102,780
Deferred income taxes - 7,909
Prepaid expenses and other current assets 5,348 4,254
Income taxes receivable   2,119     1,575  
Total current assets 555,235 552,851
Property and equipment, net 33,765 32,227
Goodwill 67,510 51,276
Other intangibles, net 12,586 1,668
Other assets   1,078     1,052  
Total Assets $ 670,174   $ 639,074  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 191,183 $ 166,516
Accrued expenses and other liabilities 27,502 36,207
Accrued payroll   19,840     19,280  
Total current liabilities 238,525 222,003
Deferred income taxes 13,733 21,615
Other liabilities   2,834     3,005  
Total Liabilities   255,092     246,623  
Stockholders' Equity:
Common stock 284 284
Additional paid-in capital 110,271 109,161
Retained earnings 320,389 298,868
Treasury stock at cost   (15,862 )   (15,862 )
Total Stockholders' Equity   415,082     392,451  
Total Liabilities and Stockholders' Equity $ 670,174   $ 639,074  
 

   
         
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,   2016 2015
(amounts in thousands)
Cash Flows from Operating Activities:
Net income $ 21,521 $ 20,213
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,803 4,370
Stock-based compensation expense 645 463
Provision for doubtful accounts 131 718
Deferred income taxes 27 61
Excess tax benefit from exercise of equity awards (32) (95)
 
Changes in assets and liabilities:
Accounts receivable (10,370) (40,590)
Inventories (9,558) (7,658)
Prepaid expenses and other current assets (1,192) (1,742)
Other non-current assets (26) (94)
Accounts payable 10,457 37,231
Accrued expenses and other liabilities 596 3,597
Net cash provided by operating activities 17,002 16,474
 
Cash Flows from Investing Activities:
Purchases of equipment (5,782) (5,752)
Purchase of Softmart (33,983) -
Net cash used for investing activities (39,765) (5,752)
 
Cash Flows from Financing Activities:
Dividend payment (10,591) -
Issuance of stock under Employee Stock Purchase Plan 473 435
Exercise of stock options - 379
Excess tax benefit from exercise of equity awards 32 95
Payment of payroll taxes on stock-based compensation through shares withheld (40) (43)
Net cash (used for) provided by financing activities (10,126) 866
(Decrease) increase in cash and cash equivalents (32,889) 11,588
Cash and cash equivalents, beginning of period 80,188 60,909
Cash and cash equivalents, end of period $ 47,299 $ 72,497
 
Non-cash Investing Activities:
Accrued capital expenditures $ 338 $ 455
 
Supplemental Cash Flow Information:
Income taxes paid $ 15,658 $ 16,500
 

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PC Connection, Inc.
Joseph Driscoll, 603-683-2505
Senior Vice President, Treasurer and Chief Financial Officer

Source: PC Connection, Inc.

News Provided by Acquire Media

 




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