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PC Connection, Inc. Reports Third Quarter 2013 Results

10/24/13

THIRD QUARTER SUMMARY:

  • Net sales: $580.4 million, up 3.4% year over year
  • Operating margin increased to 3.0% of net sales
  • Diluted earnings per share: $0.40, up 8.1% year over year
  • Cash balance increased to $77 million, from $40 million at December 31, 2012

MERRIMACK, N.H.--(BUSINESS WIRE)-- PC Connection, Inc.(NASDAQ: PCCC), a provider of a full range of information technology (IT) solutions to business, government, and education markets, today announced results for the quarter ended September 30, 2013. Net sales for the third quarter of 2013 were $580.4 million, an increase of 3.4% compared to $561.3 million for the third quarter of 2012. Net income for the quarter ended September 30, 2013 was $10.6 million, or $0.40 per diluted share, compared to net income of $9.9 million, or $0.37 per diluted share, for the corresponding prior year quarter.

Net sales for the nine months ended September 30, 2013 were $1,643.1 million, an increase of $40.4 million or 2.5%, compared to $1,602.6 million for the nine months ended September 30, 2012. Net income for the nine months ended September 30, 2013 was $25.8 million, or $0.98 per diluted share, compared to net income of $24.2 million, or $0.91 per diluted share, for the corresponding prior year period. Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense, and special charges ("Adjusted EBITDA") totaled $65.6 million for the twelve months ended September 30, 2013, as compared to $60.0 million for the twelve months ended September 30, 2012.

Quarterly Sales by Segment:

  • Net sales for the SMB segment increased by 7.3% in the quarter to $235.3 million, compared to net sales in the third quarter of 2012. Notebook/tablet and desktop/server sales had strong growth during the quarter of 11% and 14%, respectively. SMB software sales grew by 18% due to increased demand in security, virtualization, office productivity, and operating systems software.
  • Net sales for the Large Account segment totaled $193.1 million, an increase of 0.2%, compared to net sales in the third quarter of 2012. Storage had strong growth of 18% during the quarter. Commercial sales, which consists of SMB and Large Account sales, increased by 4.0% from the prior year quarter.
  • Net sales to government and education customers (Public Sector segment) increased by 1.8% year over year to $151.9 million. Sales to state and local government and educational institutions increased by 12.7% compared to last year. Sales to the federal government decreased by 18.1% as a result of the ongoing budgetary constraints.

Quarterly Sales by Product Mix:

  • Notebook/tablet sales, the Company's largest product category, increased by 7% year over year and accounted for 20% of net sales in the third quarter of 2013, compared to 19% of net sales in the third quarter of 2012. Both SMB and Public Sector experienced strong year-over-year growth in notebook/tablet sales.
  • Desktop/server sales accounted for 16% of net sales in the third quarter of 2013, compared to 15% of net sales in the third quarter of 2012. All three segments contributed to the 11% year-over-year growth in this category, with both SMB and Public Sector achieving double digit increases compared to prior year quarter.
  • Software sales increased by 7% year over year, accounting for 15% of net sales in the third quarters of 2013 and 2012. We experienced strong growth in security, virtualization, office productivity, and operating system software.
  • Net/Com Product sales increased by 8% year over year, accounting for 10% of net sales in the third quarters of 2013 and 2012. Strong growth in enterprise networking in the Public Sector segment contributed to the overall growth during the quarter.

Overall gross profit dollars increased by $4.3 million, or 6.0%, in the third quarter of 2013, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, increased to 13.2% in the third quarter of 2013, compared to 12.9% in the prior year quarter.

Total selling, general and administrative expenses increased in the third quarter of 2013 to $59.0 million from $55.9 million in the prior year quarter, and increased as a percentage of net sales to 10.2% from 10.0%. SG&A will increase by approximately $0.5 million per quarter starting in the fourth quarter of 2013, as the Company begins to depreciate the Customer Master Data Management project that was recently placed into service. We continue to invest in solution sales capabilities and expect SG&A expenses to rise accordingly as the year progresses. However, we are highly focused on improving efficiencies and streamlining wherever possible.

The Company generated significant positive cash flow in the nine months ended September 30, 2013. Total cash was $77.2 million at September 30, 2013, compared to $39.9 million at December 31, 2012. We currently estimate that the December 31, 2013 cash balance will be lower than the September 30, 2013 balance due to normal working capital fluctuations. Days sales outstanding were 37 days at September 30, 2013, compared to 41 days at September 30, 2012, and inventory turns remained consistent with 27 turns in the third quarters of 2013 and 2012.

"I am pleased with our results this quarter. We increased revenues, gross margin, operating margin, and earnings per share while improving our working capital metrics in a challenging environment. We continue to transform our business to provide higher value technology solutions that help our customers solve their business challenges," said Timothy McGrath, President and Chief Executive Officer. "We believe the strategies we have put in place will position us well to gain market share and enhance long-term shareholder value."

Non-GAAP Financial Information

Adjusted EBITDA, pro forma net income, and pro forma earnings per share are non-GAAP financial measures. This information is included to provide information with respect to the Company's operating performance and earnings. Reconciliations of Adjusted EBITDA, pro forma net income, and pro forma earnings per share to GAAP net income are provided in tables immediately following the Condensed Consolidated Statements of Income.

About PC Connection, Inc.

PC Connection, Inc., a Fortune 1000 company, has three sales companies: 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. 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 and telesales specialists, 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™, a cloud-based eProcurement system. Backed by over 500 technical certifications, 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 personnel levels and other costs in response to fluctuations in revenue, and other risks that could cause actual results to differ materially from 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, 2012. More specifically, the statements in this release concerning the Company's outlook for selling, general, and administrative expenses in 2013, the Company's efforts in improving efficiencies and streamlining its business, the Company's anticipated product growth categories, and other statements of a non-historical basis (including statements regarding areas of demand for the Company's products, the Company's ability to grow revenues, improve gross margins, increase market share, enhance long-term shareholder value and increase earnings per share) 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 September 30,       2013       2012      

(Amounts and shares in thousands, except
operating data, P/E ratio, and per share data)

           

% of
Net Sales

     

% of
Net Sales

%
Change

             
Operating Data:
Net sales $ 580,356 $ 561,294 3%
Diluted earnings per share $ 0.40 $ 0.37 8%
 
Gross margin 13.2% 12.9%
Operating margin 3.0% 2.9%
Return on equity (1) 11.1% 11.1%
 
Inventory turns 27 27
Days sales outstanding 37 41
 
 
Product Mix:
Notebook/Tablet $ 116,176 20% $ 108,474 19% 7%
Desktop/Server 93,440 16 84,061 15 11%
Software 87,519 15 81,902 15 7%
Net/Com Product 58,920 10 54,718 10 8%
Video, Imaging and Sound 51,948 9 51,907 9 -
Printer and Printer Supplies 37,649 7 41,227 7 (9%)
Storage 37,206 6 37,090 7 -
Memory and System Enhancement 19,275 3 18,829 3 2%
Accessory/Services/Other   78,223 14   83,086 15 (6%)
Total Net Sales $ 580,356 100% $ 561,294 100% 3%
 
 
Stock Performance Indicators:
Actual shares outstanding 26,169 26,463
Total book value per share $ 12.22 $ 11.28
Tangible book value per share $ 10.14 $ 9.18
Closing price $ 15.09 $ 11.51
Market capitalization $ 394,890 $ 304,589
Pro forma trailing price/earnings ratio 11.5 9.5
LTM Adjusted EBITDA (2) $ 65,583 $ 60,001
Adjusted market capitalization/LTM Adjusted EBITDA (3) 4.8 4.2
 

(1) Based on last twelve months' net income.

(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation and special charges.

(3) Adjusted market capitalization is defined as gross market capitalization less cash balance.

 
 
REVENUE AND MARGIN INFORMATION
For the Three Months Ended September 30,       2013       2012
      Net     Gross Net     Gross
(amounts in thousands) Sales Margin Sales Margin
 
SMB $ 235,285 15.6% $ 219,235 15.4%
Large Account 193,124 12.1 192,818 11.5
Public Sector   151,947 10.8   149,241 10.8
Total $ 580,356 13.2% $ 561,294 12.9%
 
 

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,       2013       2012
(amounts in thousands, except per share data)       Amount     % of Net Sales       Amount     % of Net Sales
 
Net sales $ 580,356 100.0% $ 561,294 100.0%
Cost of sales   503,803 86.8   489,088   87.1
Gross profit 76,553 13.2 72,206 12.9
 
Selling, general and administrative expenses   59,043 10.2   55,906   10.0
Income from operations 17,510 3.0 16,300 2.9
 
Interest/other expense, net (39) - (63) -
Income tax provision   (6,882) (1.2)   (6,336)   (1.1)
Net income $ 10,589 1.8% $ 9,901   1.8%
 
Earnings per common share:
Basic $ 0.40 $ 0.37
Diluted $ 0.40 $ 0.37
 
Shares used in the computation of earnings per share:
Basic   26,169   26,470
Diluted   26,399   26,660
 
 
                             
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30,       2013       2012
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 1,643,066 100.0% $ 1,602,626 100.0%
Cost of sales   1,425,759 86.8   1,392,238   86.9
Gross profit 217,307 13.2 210,388 13.1
 
Selling, general and administrative expenses 174,289 10.6 169,259 10.5
Special charges   - -   1,135   0.1
Income from operations 43,018 2.6 39,994 2.5
 
Interest/other expense, net (135) - (110) -
Income tax provision   (17,042) (1.0)   (15,682)   (1.0)
Net income $ 25,841 1.6% $ 24,202   1.5%
 
Earnings per common share:
Basic $ 0.99 $ 0.92
Diluted $ 0.98 $ 0.91
 
Shares used in the computation of earnings per share:
Basic   26,099   26,437
Diluted   26,351   26,586
 
 
                             
A RECONCILIATION BETWEEN GAAP AND PRO FORMA NET INCOME
Nine Months Ended September 30,                     2013     2012
(provided for comparison of our operating results without special charges, amounts in thousands)
GAAP net income $ 25,841 $ 24,202
Special charges (after tax)   -   681
Pro forma net income $ 25,841 $ 24,883
 
Pro forma diluted earnings per common share $ 0.98 $ 0.93
 
 

                                                     
EBITDA AND ADJUSTED EBITDA
                                       
A reconciliation of EBITDA and Adjusted EBITDA is detailed below. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA means EBITDA adjusted for certain items which are described in the table below. 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 excludes or includes 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 September 30, LTM Ended September 30, (1)
2013 2012 % Change 2013 2012 % Change
Net income $ 10,589 $ 9,901 $ 34,710 $ 31,629
Depreciation and amortization 1,675 1,670 7,055 6,429
Income tax expense 6,882 6,336 22,796 19,950
Interest/other expense, net   39   63   150   198
EBITDA 19,185 17,970 64,711 58,206
Stock-based compensation 452 157 872 1,502
Other special charges   -   -     -   293  
Adjusted EBITDA $ 19,637 $ 18,127 8% $ 65,583 $ 60,001 9%
 
(1) LTM: Last twelve months
 
 
               
      September 30,     December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS       2013 2012
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 77,181 $ 39,907
Accounts receivable, net 250,991 267,310
Inventories 76,373 69,637
Deferred income taxes 5,250 5,250
Prepaid expenses and other current assets 4,495 3,934
Income taxes receivable   30     434  
Total current assets 414,320 386,472
Property and equipment, net 26,773 26,104
Goodwill 51,276 51,276
Other intangibles, net 3,080 3,757
Other assets   731     714  
Total Assets $ 496,180   $ 468,323  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 187 $ 989
Accounts payable 125,214 126,110
Accrued expenses and other liabilities 21,956 22,562
Accrued payroll   15,680     13,824  
Total current liabilities 163,037 163,485
Deferred income taxes 10,388 10,514
Other liabilities   2,969     3,021  
Total Liabilities   176,394     177,020  
Stockholders' Equity:
Common stock 280 278
Additional paid-in capital 104,256 101,735
Retained earnings 231,112 205,271
Treasury stock at cost   (15,862 )   (15,981 )
Total Stockholders' Equity   319,786     291,303  
Total Liabilities and Stockholders' Equity $ 496,180   $ 468,323  
 
 

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,         2013       2012
(amounts in thousands)      
Cash Flows from Operating Activities:
Net income $ 25,841 $ 24,202
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,011 4,851
Provision for doubtful accounts 727 1,453
Deferred income taxes (126) 1,523
Stock-based compensation expense 753 1,376
Loss on disposal of fixed assets 7 80
Income tax benefit from stock-based compensation 505 213
Excess tax benefit from exercise of stock options (228) (15)
Fair value adjustment to contingent consideration - (44)
 
Changes in assets and liabilities:
Accounts receivable 15,592 23,427
Inventories (6,736) 11,959
Prepaid expenses and other current assets (157) 861
Other non-current assets (17) (82)
Accounts payable (963) (2,398)
Accrued expenses and other liabilities   1,198   (3,725)
Net cash provided by operating activities   41,407   63,681
 
Cash Flows from Investing Activities:
Purchases of property and equipment (4,943) (7,010)
Proceeds from sale of equipment   -   10
Net cash used for investing activities   (4,943)   (7,000)
 
Cash Flows from Financing Activities:
Repayment of short-term borrowings - (12,471)
Proceeds from short-term borrowings - 7,204
Exercise of stock options 1,654 872
Issuance of stock under Employee Stock Purchase Plan 307 260
Excess tax benefit from exercise of stock options 228 15
Repayment of capital lease obligation to affiliate (802) (718)
Payment of payroll taxes on stock-based compensation through shares withheld (577) (504)
Purchase of treasury shares - (1,466)
Payment of contingent consideration   -   (960)
Net cash provided by (used for) financing activities   810   (7,768)
Increase in cash and cash equivalents 37,274 48,913
Cash and cash equivalents, beginning of period   39,907   4,615
Cash and cash equivalents, end of period $ 77,181 $ 53,528
 
Non-cash Investing and Financing Activities:
Issuance of nonvested stock from treasury $ 403 $ 1,314
Accrued capital expenditures 320 388
 

 

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PC Connection, Inc.
Joseph Driscoll, 603-683-2322
Senior Vice President, Treasurer and Chief Financial Officer

Source: PC Connection, Inc.

News Provided by Acquire Media

 




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