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

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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