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Connection (CNXN) Reports First Quarter 2019 Results

Net Income Increases by 12.6% from Prior Q1

FIRST QUARTER SUMMARY:

  • Net income: $12.7 million, up 12.6% y/y
  • Gross profit: $99.3 million, up 3.1% y/y
  • Record gross margin: 15.7%, compared to 15.4%
  • Diluted EPS: $0.48, compared to $0.42 y/y, up 14.3%
  • Cash balance: $93.5 million

 

MERRIMACK, N.H.--(BUSINESS WIRE)--May 2, 2019-- Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the first quarter ended March 31, 2019. Net sales for the quarter ended March 31, 2019 increased by 1.3% to $632.9 million, compared to $624.9 million for the prior year quarter. Our average daily sales during the quarter increased by 2.9%, compared to the prior year quarter. During the quarter, there was downward pressure on net sales growth, because a greater portion of our software sales were recognized on a net basis. Net income for the first quarter ended March 31, 2019 increased by 12.6% to $12.7 million, or $0.48 per diluted share, compared to net income of $11.3 million, or $0.42 per diluted share for the prior year quarter.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $108.1 million for the twelve months ended March 31, 2019, compared to $98.6 million for the twelve months ended March 31, 2018.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment decreased by 3.9% to $252.9 million in the first quarter of 2019, compared to the prior year quarter. We experienced strong growth in sales of mobility and software products in the quarter. Our software growth was driven by increases in cloud-based and security software sales, which are recognized on a net basis. The recognition of sales on a net basis can result in downward pressure on net sales, but will result in higher gross margins. Gross margin increased by 23 basis points to 17.8% due to increased sales of cloud-based and security software, partially offset by changes in hardware product mix.
  • Net sales for the Public Sector Solutions segment decreased slightly to $104.4 million in the first quarter of 2019, compared to the prior year quarter. Sales to the federal government increased by 3.3%, compared to the prior year, while sales to state and local government and educational institutions decreased by 1.7%. Gross margin decreased by 29 basis points to 12.6% primarily due to changes in hardware product mix, partially offset by increases resulting from higher cloud-based and security software sales.
  • Net sales for the Enterprise Solutions segment increased by 7.2% to $275.6 million in the first quarter of 2019, compared to the prior year quarter primarily due to continued strong demand by our Enterprise customers. Gross margin increased by 69 basis points to 15.0% primarily due to an increase in sales of cloud-based and security software and improved invoice selling margins.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company’s largest product category, increased by 10% year over year and accounted for 28% of net sales in the first quarter of 2019, compared to 26% of net sales in the prior year quarter. All three selling segments experienced strong year-over-year growth in notebook sales.
  • Accessories sales increased by 20% year over year and accounted for 14% of net sales in the first quarter of 2019, compared to 12% of net sales in the prior year quarter. The Enterprise Solutions segment experienced year-over-year growth in accessories sales due to timing of large project rollouts, compared to the prior year quarter.
  • Desktop sales increased by 6% year over year and accounted for 12% of net sales in the first quarter of 2019, compared to 11% of net sales in the prior year quarter. The Enterprise Solutions and Public Sector Solutions segments experienced strong year-over-year growth in desktop sales.
  • Software sales increased by 3% year over year and accounted for 11% of net sales in the first quarter of 2019 and 2018. The growth in software sales was largely driven by increased sales of cloud-based offerings, security, and maintenance software across all three segments.

Selling, general and administrative (“SG&A”) expenses increased in the first quarter of 2019 to $81.2 million from $80.9 million in the prior year quarter, but decreased 11 basis points as a percentage of net sales.

In addition, the first quarter 2019 results include $0.7 million of restructuring and other related costs associated with severance and other exit costs associated with the closing of an office facility.

Cash and cash equivalents were $93.5 million at March 31, 2019, compared to $91.7 million at December 31, 2018. In January 2019, we paid a $0.32 cent per share special dividend to shareholders, which totaled $8.5 million. During the first quarter of 2019, the Company repurchased 42,537 shares of stock for $1.3 million.

“The Company achieved record gross margin this quarter. We saw strong demand in mobility, software, cloud and security solutions. We are pleased with the growth in our Enterprise segment and in our retail and healthcare vertical markets,” said Tim McGrath, President and Chief Executive Officer. “Our increased productivity and improved execution allowed us to deliver a 12.6% increase in net income,” concluded Mr. McGrath.

Conference Call and Webcast

Connection will host a conference call and live web cast today, May 2, 2019 at 4:30 p.m. ET to discuss its first quarter financial results. To access the conference call (audio only), please dial 877-776-4016 (US) or 973-638-3231 (International). A web-cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, can be accessed on Connection’s website at ir.connection.com. For those unable to participate in the live call, a replay of the webcast will be available at ir.connection.com approximately 90 minutes after the completion of the call and will be accessible on the site for approximately one year.

Non-GAAP Financial Information

Adjusted EBITDA, Adjusted EPS and Adjusted Net Income are non-GAAP financial measures. 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. A reconciliation to the most directly comparable GAAP measure is available in the tables at the end of this release.

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 9001:2015 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure it can solve the most complex issues of its 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.connection.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 – 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.

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.

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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, product availability and market acceptance, new products, continuation of key vendor and customer relationships and support programs, the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, fluctuations in operating results and the ability of the Company to manage personnel levels in response to fluctuations in revenue, the ability of the Company to hire and retain qualified sales representatives and other essential personnel, the impact of changes in accounting requirements, 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, 2018. 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 March 31,     2019   2018    
                                  %
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)                     Change
                                   
Operating Data:                                  
Net sales     $ 632,921             $ 624,895             1%
Diluted earnings per share     $ 0.48             $ 0.42             14%
                                   
Gross margin     15.7%             15.4%              
Operating margin     2.8%             2.5%              
Return on equity (1)     12.7%             12.5%              
                                   
Inventory turns     17             23              
Days sales outstanding     55             53              
                                   
      % of             % of              
Product Mix:     Net Sales             Net Sales              
Notebooks/Mobility     28%             26%              
Accessories     14             12              
Desktops     12             11              
Software     11             11              
Servers/Storage     9             12              
Displays     9             9              
Net/Com Products     7             8              
Other Hardware/Services     10             11              
Total Net Sales     100%             100%              
                                   
                                   
Stock Performance Indicators:                                  
Actual shares outstanding     26,356             26,737              
Total book value per share     $20.40             $18.40              
Tangible book value per share     $17.25             $15.25              
Closing price     $36.67             $25.00              
Market capitalization     $966,475             $668,425              
Trailing price/earnings ratio     14.8             11.4              
LTM Adjusted EBITDA (2)     $108,117             $98,551              
Adjusted market capitalization/LTM Adjusted EBITDA (3)     8.1             6.1              
(1)   Calculated as the trailing twelve months' of net income divided by the average trailing twelve months' of equity.
(2)   Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation and restructuring and other related charges.
(3)   Adjusted market capitalization is defined as gross market capitalization less cash balance.
     
                   
REVENUE AND MARGIN INFORMATION                  
For the Three Months Ended March 31,     2019   2018
      Net   Gross   Net   Gross
(amounts in thousands)     Sales   Margin   Sales   Margin
                   
Business Solutions     $ 252,932   17.8 %   $ 263,278   17.6 %
Enterprise Solutions       275,635   15.0       257,244   14.3  
Public Sector Solutions       104,354   12.6       104,373   12.9  
Total     $ 632,921   15.7 %   $ 624,895   15.4 %

 

           
CONDENSED CONSOLIDATED STATEMENTS OF INCOME          
      Three Months Ended March 31,
(amounts in thousands, except per share data)     2019   2018
           
Net sales     $ 632,921     $ 624,895  
Cost of sales       533,574       528,523  
Gross profit       99,347       96,372  
           
Selling, general and administrative expenses       81,235       80,900  
Restructuring and other charges       703       -  
Income from operations       17,409       15,472  
           
Other income/(expense), net       198       116  
Income tax provision       (4,880 )     (4,288 )
Net income     $ 12,727     $ 11,300  
           
Earnings per common share:          
Basic     $ 0.48     $ 0.42  
Diluted     $ 0.48     $ 0.42  
           
Shares used in the computation of earnings per common share:          
Basic       26,359       26,835  
Diluted       26,525       26,916  

 

           
      March 31   December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS    

2019

  2018
(amounts in thousands)          
           
ASSETS          
Current Assets:          
Cash and cash equivalents     $ 93,470     $ 91,703  
Accounts receivable, net       433,948       447,698  
Inventories, net       137,665       119,195  
Income taxes receivable       -       922  
Prepaid expenses and other current assets       7,261       9,661  
Total current assets       672,344       669,179  
Property and equipment, net       55,438       51,799  
Right-of-use assets, net       16,750       -  
Goodwill       73,602       73,602  
Intangibles assets, net       9,223       9,564  
Other assets       1,092       1,211  
Total Assets     $ 828,449     $ 805,355  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable     $ 204,196     $ 201,640  
Accrued payroll       18,066       24,319  
Accrued expenses and other liabilities       36,619       33,840  
Total current liabilities       258,881       259,799  
Deferred income taxes       17,184       17,184  
Operating lease liability       13,215       -  
Other liabilities       1,577       2,469  
Total Liabilities       290,857       279,452  
Stockholders’ Equity:          
Common stock       288       288  
Additional paid-in capital       116,098       115,842  
Retained earnings       453,737       441,010  
Treasury stock at cost       (32,531 )     (31,237 )
Total Stockholders’ Equity       537,592       525,903  
Total Liabilities and Stockholders’ Equity     $ 828,449     $ 805,355  

 

           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
      Three Months Ended March 31,
(amounts in thousands)     2019   2018
Cash Flows from Operating Activities:          
Net income     $ 12,727     $ 11,300  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization       3,709       3,300  
Stock-based compensation expense       269       207  
Provision for doubtful accounts       256       417  
Deferred income taxes       -       429  
           
Changes in assets and liabilities:          
Accounts receivable       13,494       57,389  
Inventories       (18,470 )     10,302  
Prepaid expenses and other current assets       3,322       2,721  
Other non-current assets       119       (1,880 )
Accounts payable       2,121       (42,521 )
Accrued expenses and other liabilities       551       (4,420 )
Net cash provided by operating activities       18,098       37,244  
           
Cash Flows from Investing Activities:          
Purchases of equipment       (6,572 )     (5,007 )
Net cash used in investing activities       (6,572 )     (5,007 )
           
Cash Flows from Financing Activities:          
Proceeds from short-term borrowings       -       859  
Dividend payment       (8,452 )     (9,122 )
Purchase of treasury shares       (1,294 )     (2,997 )
Issuance of stock under Employee Stock Purchase Plan       (13 )     -  
Net cash used in financing activities       (9,759 )     (11,260 )
Increase (decrease) in cash and cash equivalents       1,767       20,977  
Cash and cash equivalents, beginning of period       91,703       49,990  
Cash and cash equivalents, end of period     $ 93,470     $ 70,967  
           
Non-cash Investing Activities:          
Accrued capital expenditures     $ 1,987     $ 1,140  
           
Supplemental Cash Flow Information:          

Income taxes paid

    $ 291     $ 320  

 

 

EBITDA AND ADJUSTED EBITDA

 
A reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure is detailed below. Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for restructuring and other charges, favorable resolution of a contract dispute, and 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. 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 similar titled measures of other companies.
                           
(amounts in thousands)     Three Months Ended March 31,   LTM Ended March 31, (1)
      2019   2018   % Change   2019   2018   % Change
Net income     $ 12,727   $ 11,300   13%   $ 66,019   $ 58,725   12%
Depreciation and amortization       3,709     3,301   12%     14,472     12,285   18%
Income tax expense       4,880     4,288   14%     24,664     23,017   7%
Interest expense       30     25   20%     150     123   22%
EBITDA       21,346     18,914   13%     105,305     94,150   12%
Restructuring and other charges (2)       703     -   100%     1,670     3,636   (54%)
Stock-based compensation       269     207   30%     1,142     765   49%
Adjusted EBITDA     $ 22,318   $ 19,121   17%   $ 108,117   $ 98,551   10%
(1)   LTM: Last twelve months
(2)   Restructuring and other charges in 2019 consist of severance and other charges related to internal restructuring activities. Restructuring and other charges in LTM 2018 consist of a 2017 fourth quarter one-time bonus paid to all employees except executive officers as well as severance and relocation costs for our Softmart facility incurred in the second quarter 2017.

 

 

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 restructuring and other charges, 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 March 31,
      2019   2018   % Change
Net income     $ 12,727   $ 11,300    
Restructuring and other charges, net of tax (1)       508     -    
Adjusted Net Income     $ 13,235   $ 11,300   17%
Diluted shares       26,525     26,916    
Adjusted Diluted Earnings per Share     $ 0.50   $ 0.42   19%
               
(1)   Restructuring and other charges in 2019 consist of severance and other charges related to internal restructuring activities.

 

Source: Connection

Tom Baker, 603.683.2505
Tom.Baker@connection.com

 




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