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Connection (CNXN) Reports Fourth Quarter and Full Year 2017 Results

02/15/18

FOURTH QUARTER SUMMARY:

  • Record net sales: $762.3 million, up 3.6% y/y
  • Gross profit: $99.5 million, up 1.4% y/y
  • Diluted EPS: $0.77, compared to $0.49 for the prior year quarter
  • Adjusted EPS excluding tax benefit and special charges: $0.54, compared to $0.52 for the prior year quarter

FULL YEAR SUMMARY:

  • Record net sales: $2.9 billion, up 8.1% y/y
  • Record gross profit: $382.1 million, up 2.9% y/y
  • Diluted EPS: $2.04, compared to $1.80 for the prior year
  • Adjusted EPS excluding tax benefit and special charges: $1.84, compared to $1.88 for the prior year

MERRIMACK, N.H.--(BUSINESS WIRE)--Feb. 15, 2018-- Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the quarter and year ended December 31, 2017. Net sales for the quarter ended December 31, 2017 increased by 3.6% to $762.3 million, compared to $735.5 million for the prior year quarter. Net income for the quarter ended December 31, 2017 increased by 59.4% to $20.7 million, or $0.77 per diluted share, compared to net income of $13.0 million, or $0.49 per diluted share for the prior year quarter.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted, which among other changes, reduced the federal corporate income tax rate. This rate reduction took effect on January 1, 2018, and the Company expects its corporate income tax rate for 2018 to range from 27% to 29%. The Company was also required to adjust its net deferred tax balance, which resulted in the Company recording a non-cash income tax benefit of $7.7 million for the fourth quarter of 2017. In addition, the Company recorded in the fourth quarter of 2017, a special charge of $2.7 million related to a one-time cash bonus paid to all non-executive employees. Earnings per share, adjusted for the reduction of federal income tax expense and the special bonus described above, was $0.54 cents per share for the quarter ended December 31, 2017, compared to $0.52 cents per share for the prior year quarter.

Net sales for the year ended December 31, 2017 were $2.9 billion, an increase of $219.3 million or 8.1%, compared to $2.7 billion for the year ended December 31, 2016. Net income for the year ended December 31, 2017 was $54.9 million, or $2.04 per diluted share, compared to net income of $48.1 million, or $1.80 per diluted share, for the year ended December 31, 2016. Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and rebranding, acquisition and restructuring costs (“Adjusted EBITDA”), a non-GAAP measure, totaled $94.0 million for the year ended December 31, 2017, compared to $95.5 million for the year ended December 31, 2016.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions (SMB) segment increased by 7.6% to $298.0 million in the fourth quarter of 2017, compared to the prior year quarter. Desktop, servers, and software products experienced strong revenue growth in this segment with an increase of 31%, 26%, and 15%, respectively. Gross margin decreased by 17 basis points due to an increase in sales of velocity products, such as desktops and notebooks.
  • Net sales for the Enterprise Solutions (Large Account) segment increased by 7.2% to $308.8 million in the fourth quarter of 2017, compared to the prior year quarter. Storage, software, and servers experienced solid growth during the quarter at 37%, 16%, and 8%, respectively. Gross margin decreased by 43 basis points primarily due to a continued competitive market environment.
  • Net sales to the Public Sector Solutions segment decreased by 8.8% to $155.4 million in the fourth quarter of 2017, compared to the prior year quarter. Sales to state and local government and educational institutions decreased by 5.1%, compared to the prior year quarter, and sales to the federal government decreased by 11.9%. Gross margin decreased by 56 basis points primarily due to an ongoing competitive market environment.

Quarterly Sales by Product Mix:

  • Software sales, the Company’s largest product category, increased by 20% year over year and accounted for 24% of net sales in the fourth quarter of 2017, compared to 21% of net sales in the prior year quarter. We experienced solid growth in cloud-based offerings, security, and office productivity.
  • Notebook/mobility sales decreased slightly year over year and accounted for 21% of net sales in the fourth quarter of 2017, compared to 22% of net sales in the prior year quarter. Sales of this product category grew year over year in Business Solutions and Enterprise Solutions, but were offset by lower notebook sales made under federal contracts in our Public Sector, compared to the prior year quarter.
  • Desktop sales increased slightly year over year and accounted for 11% of net sales in the fourth quarter of 2017 and 2016. Desktop sales to federal government customers in the Public Sector declined year over year but were offset by strong year-over-year growth in the Business Solutions segment.
  • Servers increased by 22% year over year and accounted for 5% of net sales in the fourth quarter of 2017, compared to 4% of net sales in the prior year quarter. Both Business Solutions and Enterprise Solutions experienced strong year-over-year growth in server sales.

Overall gross profit increased by $1.4 million, or 1.4%, in the fourth quarter of 2017, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased to 13.1% in the fourth quarter of 2017, compared to 13.3% for the prior year quarter. The decline in gross margin was attributed to higher sales of velocity products and an ongoing competitive marketplace.

Selling, general and administrative expenses increased slightly in the fourth quarter of 2017 to $77.6 million from $77.2 million in the prior year quarter due to increased variable compensation on our higher gross profits, as well as the one-time bonus discussed above. SG&A as a percentage of net sales was 10.2%, compared to 10.3% in the prior year 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 $50.0 million at December 31, 2017, compared to $49.2 million at December 31, 2016. In January 2018, we paid a 34 cent per share special dividend to shareholders, which totaled $9.1 million. Days sales outstanding were 48 days at December 31, 2017, unchanged from the prior year end, and inventory turns were 24 turns in the fourth quarter of 2017, up slightly from 22 days in the prior year quarter.

“I was pleased to see continued growth in our four strategic vertical markets; manufacturing, retail, healthcare, and finance. We also saw strong growth in software and workforce productivity during the quarter,” 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 long-term shareholder value,” concluded Mr. McGrath.

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. 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 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.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, 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, 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. 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 December 31,
    2017     2016    
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)   %
Change
       
Operating Data:
Net sales $ 762,267 $ 735,548 4 %
Diluted earnings per share $ 0.77 $ 0.49 57 %
Adjusted diluted earnings per share $ 0.54 $ 0.52 4 %
 
Gross margin 13.1 % 13.3 %
Operating margin 2.9 % 3.0 %
Return on equity (1) 12.0 % 11.7 %
 
Inventory turns 24 22
Days sales outstanding 48 48
 
Product Mix: % of
Net Sales
% of
Net Sales
Software 24 % 21 %
Notebooks/Mobility 21 22
Servers/Storage 9 9
Net/Com Products 7 9
Other Hardware/Services   39     39  
Total Net Sales   100 %   100 %
 
 
Stock Performance Indicators:
Actual shares outstanding 26,853 26,609
Total book value per share $ 17.96 $ 16.29
Tangible book value per share $ 14.81 $ 13.05
Closing price $ 26.21 $ 28.09
Market capitalization $ 703,817 $ 747,447
Trailing price/earnings ratio 12.9 15.6
LTM Adjusted EBITDA (2) $ 93,967 $ 95,468
Adjusted market capitalization/LTM Adjusted EBITDA (3) 7.0 7.3
 
(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 December 31,
    2017 2016
(amounts in thousands) Net
Sales
Gross
Margin
Net
Sales
Gross
Margin
 
Business Solutions (SMB) (1) $ 298,017 15.6 % $ 277,059 15.7 %
Enterprise Solutions (Large Account) (1) 308,806 11.7 288,126 12.2
Public Sector Solutions   155,444   10.9   170,363   11.5
Total $ 762,267   13.1 % $ 735,548   13.3 %
 

(1) The Q4 2016 results for Business and Enterprise Solutions have been updated to reflect segment methodology used in our 2016 Annual Report on Form 10-K, which allocated the operating results for Softmart between these two segments.

                     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31,
    2017     2016
(amounts in thousands, except per share data)     Amount   % of Net Sales     Amount   % of Net Sales
 
Net sales $ 762,267 100.0 % $ 735,548 100.0 %
Cost of sales   662,737   86.9     637,425   86.7  
Gross profit 99,530 13.1 98,123 13.3
 
Special charges 2,695 0.4 1,511 0.2
Selling, general and administrative expenses, other   74,939   9.8     74,711   10.1  
Income from operations 21,896 2.9 21,901 3.0
 
Interest/other expense, net 78 (14 )
Income tax provision   (1,251 ) (0.2 )   (8,890 ) (1.2 )
Net income $ 20,723   2.7 % $ 12,997   1.8 %
 
Earnings per common share:
Basic $ 0.77   $ 0.49  
Diluted $ 0.77   $ 0.49  
 
Shares used in the computation of earnings per common share:
Basic   26,822     26,569  
Diluted   26,907     26,738  
 
 
 
                     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
    2017     2016

(amounts in thousands, except per share data)

Amount

% of Net Sales

Amount

% of Net Sales

 
Net sales $ 2,911,883 100.0 % $ 2,692,592 100.0 %
Cost of sales   2,529,807   86.9     2,321,435   86.2  
Gross profit 382,076 13.1 371,157 13.8
 
Special charges 3,636 0.1 3,406 0.1
Selling, general and administrative expenses, other   300,913   10.3     287,231   10.7  
Income from operations 77,527 2.7 80,520 3.0
 
Interest/other expense, net 98 (67 )
Income tax provision   (22,768 ) (0.8 )   (32,342 ) (1.2 )
Net income $ 54,857   1.9 % $ 48,111   1.8 %
 
Earnings per common share:
Basic $ 2.05   $ 1.81  
Diluted $ 2.04   $ 1.80  
 
Shares used in the computation of earnings per common share:
Basic   26,771     26,528  
Diluted   26,891     26,719  
 

 
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 December 31, Years Ended December 31,  
2017 2016 % Change 2017 2016 % Change
Net income $ 20,723 $ 12,997 $ 54,857 $ 48,111
Depreciation and amortization 3,194 2,948 11,839 10,453
Income tax expense 1,251 8,890 22,768 32,342
Interest/other expense, net   38     54   126     107
EBITDA 25,206 24,889 89,590 91,013
Special charges (1) 2,695 1,511 3,636 3,406
Stock-based compensation   181     74     741     1,049  
Adjusted EBITDA $ 28,082   $ 26,474 6 % $ 93,967   $ 95,468 -2 %
 
(1) Special charges in 2017 consist of a 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. Special charges in 2016 consist of 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 less the impact of the Tax Cuts and Jobs Act of 2017, plus special 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 December 31, Years Ended December 31,  
2017 2016 % Change 2017 2016 % Change
Net income $ 20,723 $ 12,997 $ 54,857 $ 48,111
Reduction of federal income tax expense (1) (7,689 ) - (7,689 ) -
Special charges, net of tax (2)   1,598     898   2,211     2,037
Adjusted Net Income $ 14,632 $ 13,895 $ 49,379 $ 50,148
Diluted shares   26,907     26,738     26,891     26,719  
Adjusted Diluted Earnings per Share $ 0.54   $ 0.52 5 % $ 1.84   $ 1.88 -2 %
 

(1) The Company recorded a non-cash federal income tax benefit of $7.7 million as a result of the Tax Cuts and Jobs Act of 2017.
(2) Special charges in 2017 consist of a 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. Special charges in 2016 consist of our acquisition of Softmart, the rebranding of the Company, and duplicate costs incurred with the move of our Chicago-area facility.

           
CONDENSED CONSOLIDATED BALANCE SHEETS     December 31,
2017
  December 31,
2016
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 49,990 $ 49,180
Accounts receivable, net 449,682 411,883
Inventories 106,753 90,535
Prepaid expenses and other current assets 5,737 5,453
Income taxes receivable   3,933     2,120  
Total current assets 616,095 559,171
Property and equipment, net 41,491 39,402
Goodwill 73,602 73,602
Other intangibles, net 11,025 12,586
Other assets   5,638     1,373  
Total Assets $ 747,851   $ 686,134  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 203,379 $ 177,862
Accrued expenses and other liabilities 21,974 31,047
Accrued payroll   22,662     21,345  
Total current liabilities 248,015 230,254
Deferred income taxes 15,696 19,602
Other liabilities   1,888     2,836  
Total Liabilities   265,599     252,692  
Stockholders’ Equity:
Common stock 287 285
Additional paid-in capital 114,154 111,081
Retained earnings 383,673 337,938
Treasury stock at cost   (15,862 )   (15,862 )
Total Stockholders’ Equity   482,252     433,442  
Total Liabilities and Stockholders’ Equity $ 747,851   $ 686,134  
 
           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
    2017   2016
(amounts in thousands)    
Cash Flows from Operating Activities:
Net income $ 54,857 $ 48,111
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,839 10,453
Provision for doubtful accounts 1,658 360
Stock-based compensation expense 741 1,049
Deferred income taxes (3,906 ) 3,506
Loss on disposal of fixed assets 24 92
Excess tax benefit from exercise of equity awards - (513 )
 
Changes in assets and liabilities:
Accounts receivable (39,457 ) (33,835 )
Inventories (16,218 ) 12,401
Prepaid expenses and other current assets (2,097 ) (1,274 )
Other non-current assets (4,265 ) (321 )
Accounts payable 24,929 (3,012 )
Accrued expenses and other liabilities   (8,785 )   (3,431 )
Net cash provided by operating activities   19,320     33,586  
 
Cash Flows from Investing Activities:
Purchases of equipment (11,803 ) (11,885 )
Cash paid for acquisitions   -     (42,990 )
Net cash used for investing activities   (11,803 )   (54,875 )
 
Cash Flows from Financing Activities:
Dividend payment (9,041 ) (10,591 )
Exercise of stock options 1,750 135
Issuance of stock under Employee Stock Purchase Plan 1,197 961
Excess tax benefit from exercise of equity awards - 513
Payment of payroll taxes on stock-based compensation through shares withheld   (613 )   (737 )
Net cash used for financing activities   (6,707 )   (9,719 )
Increase (decrease) in cash and cash equivalents 810 (31,008 )
Cash and cash equivalents, beginning of period   49,180     80,188  
Cash and cash equivalents, end of period $ 49,990   $ 49,180  
 
Non-cash Investing Activities:
Dividend declaration $ 9,122 $ 9,041
Accrued capital expenditures $ 699 $ 109
 
Supplemental Cash Flow Information:
Income taxes paid $ 28,927 $ 29,740
 

cnxn-g

Source: Connection

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

 




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