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Connection (CNXN) Reports Fourth Quarter and Full Year Results

02/07/19

Operating Income Increases by 20% from Prior Q4

FOURTH QUARTER SUMMARY:

  • Gross profit: $106.8 million, up 7.3% y/y
  • Net income: $21.3 million, up 2.8% y/y
  • Diluted EPS: $0.80, compared to $0.77 y/y
  • Cash balance: $91.7 million

FULL YEAR SUMMARY:

  • Gross profit: $411.1 million, up 7.6% y/y
  • Net income: $64.6 million, up 17.7% y/y
  • Diluted EPS: $2.41, compared to $2.04 y/y
  • Operating cash flows: $86.8 million

MERRIMACK, N.H.--(BUSINESS WIRE)--Feb. 7, 2019-- Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the fourth quarter and year ended December 31, 2018. Net income for the fourth quarter ended December 31, 2018 increased by 2.8% to $21.3 million, or $0.80 per diluted share, compared to net income of $20.7 million, or $0.77 per diluted share for the prior year fourth quarter. This is being compared to Q4 2017 which benefited from a $7.8 million tax benefit resulting from the adoption of the Tax Cuts and Jobs Act. Net income growth adjusted for this and other non-recurring items was 39.1%.

As previously disclosed, effective January 1, 2018, the Company adopted a new revenue recognition standard but has not restated prior periods to reflect this new standard. Please note that the financial results for the fourth quarter ended December 31, 2018 presented in this release include both amounts, “as presented,” which reflect the implementation of the new revenue recognition standard, as well as amounts prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Starting in calendar year 2019, we will no longer present our financial results under the previous revenue recognition standard. For additional information and reconciliations of our financial results between the new and prior revenue recognition standards, please see the additional tables included in this press release.

Net sales as presented for the quarter ended December 31, 2018 were $709.5 million. Net sales prior to the impact of the new revenue recognition standard for the quarter ended December 31, 2018 increased by 7.3% to $817.6 million, compared to $762.3 million for the prior year fourth quarter.

Gross profit as presented for the quarter ended December 31, 2018 was $106.8 million. Gross profit prior to the impact of the new revenue recognition standard for the quarter ended December 31, 2018 was $106.7 million, compared to $99.5 million in the prior year fourth quarter, an increase of 7.2%.

Gross margin as presented for the quarter ended December 31, 2018 was 15.1%. Gross margin prior to the impact of the new revenue recognition standard was 13.1%, compared to 13.1% for the prior year fourth quarter.

Operating income as presented for the quarter ended December 31, 2018 was $26.3 million. Operating income prior to the impact of the new revenue recognition standard was $26.3 million, compared to $21.9 million in the prior year fourth quarter, an increase of 19.9%.

Net income as presented for the quarter ended December 31, 2018 was $21.3 million. Net income prior to the impact of the new revenue recognition standard was $21.3 million, compared to $20.7 million in the prior year fourth quarter, an increase of 2.6%.

Earnings per share (“EPS”) on a diluted basis as presented for the quarter ended December 31, 2018 was $0.80. EPS prior to the impact of the new revenue recognition standard was $0.79 per share, compared to $0.77 on a diluted basis in the prior year fourth quarter.

Net income, totaled $64.6 million for the year ended December 31, 2018, compared to $54.9 million for the year ended December 31, 2017. Earnings before interest, taxes, depreciation and amortization, adjusted for restructuring and other charges, favorable resolution of a contract dispute, and stock-based compensation expense (“Adjusted EBITDA”), a non-GAAP measure, totaled $102.6 million for the year ended December 31, 2018. Adjusted EBITDA prior to the impact of the new revenue recognition standard was $103.4 million, compared to $94.0 million for the year ended December 31, 2017.

Net sales as presented for the year ended December 31, 2018 were $2,699.5 million. Net sales prior to the impact of the new revenue recognition standard for the year ended December 31, 2018 increased by 6.6% to $3,104.2 million, compared to $2,911.9 million for the year ended December 31, 2017.

Gross profit as presented for the year ended December 31, 2018 was $411.1 million. Gross profit prior to the impact of the new revenue recognition standard for the year ended December 31, 2018 was $412.0 million, compared to $382.1 million for the year ended December 31, 2017, an increase of 7.8%.

Gross margin as presented for the year ended December 31, 2018 was 15.2%. Gross margin prior to the impact of the new revenue recognition standard was 13.3%, compared to 13.1% for the year ended December 31, 2017.

Operating income as presented for the year ended December 31, 2018 was $85.7 million. Operating income prior to the impact of the new revenue recognition standard was $86.4 million, compared to $77.5 million for the year ended December 31, 2017, an increase of 11.5%.

Net income as presented for the year ended December 31, 2018 was $64.6 million. Net income prior to the impact of the new revenue recognition standard was $65.1 million, compared to $54.9 million for the year ended December 31, 2017, an increase of 18.7%.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment, as presented, for the fourth quarter of 2018 were $249.7 million. Net sales prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 decreased by 0.3% to $297.2 million, compared to $298.0 million for the prior year’s quarter. Net/com and mobility products experienced solid growth during the quarter at 13% and 5%, respectively. Gross margin increased by 318 basis points to 18.7% primarily due to the adoption of the new revenue recognition standard and the increase in invoice selling margins. Gross margin prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 was 15.8%.
  • Net sales for the Public Sector Solutions segment, as presented, for the fourth quarter of 2018 were $118.4 million. Net sales prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 decreased by 17.1% to $128.9 million, compared to $155.4 million for the prior year’s quarter. Mobility and net/com products experienced strong revenue growth in this segment with an increase of 24% and 14%, respectively. Gross margin increased by 282 basis points to 13.7% primarily due to an increase invoice selling margins and the adoption of the new revenue recognition standard. Gross margin prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 was 12.5%.
  • Net sales for the Enterprise Solutions segment, as presented, for the fourth quarter of 2018 were $341.4 million. Net sales prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 increased by 26.8% to $391.5 million, compared to $308.8 million for the prior year’s quarter. Servers/storage, mobility and desktops experienced strong growth in this segment with an increase of 29%, 23%, and 15%, respectively. Gross margin increased by 110 basis points to 12.8% primarily due to the adoption of the new revenue recognition standard. Gross margin prior to the impact of the new revenue recognition standard for the fourth quarter of 2018 was 11.2%.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company’s largest product category, as presented, increased by 15% year over year and accounted for 26% of net sales in the fourth quarter of 2018, compared to 21% of net sales in the prior year quarter. Excluding the impact of the adoption of the new revenue recognition standard, notebook/mobility sales increased by 15% year over year and accounted for 22% of net sales in the fourth quarter of 2018, compared to 21% in the prior year quarter. All three selling segments experienced strong year-over-year growth in notebook sales.
  • Software sales, as presented, decreased by 53% year over year and accounted for 12% of net sales in the fourth quarter of 2018, compared to 24% of net sales in the prior year quarter. The as presented decrease in software sales was due to the adoption of the new revenue recognition standard. Excluding the impact of the adoption of the new revenue recognition standard, software sales increased by 6% year over year and accounted for 24% of net sales in the fourth quarter of 2018, compared to 24% of net sales in the prior year quarter. We experienced solid growth in cloud-based offerings, security, and office productivity.
  • Net/Com products, as presented, increased by 10% year over year and accounted for 8% of net sales in the fourth quarter of 2018, compared to 7% of net sales in the prior year quarter. Excluding the impact of the adoption of the new revenue recognition standard, net/com product sales increased by 10% year over year and accounted for 7% of net sales in the fourth quarter of 2018, compared to 7% in the prior year quarter. The Business Solutions and Public Sector Solutions segments experienced strong year-over-year growth in net/com sales.

Selling, general and administrative (“SG&A”) expenses as presented, increased in the fourth quarter of 2018 to $79.5 million from $74.9 million in the prior year quarter. SG&A in the fourth quarter of 2018 prior to the impact of the new revenue recognition standard was $79.5 million. The increase was primarily the result of increased variable compensation associated with our higher gross profits. SG&A, as reported, as a percentage of net sales, was 11.2%, compared to 9.8% in the prior year quarter. However, SG&A in the fourth quarter of 2018, prior to the impact of the new revenue recognition standard, was 9.7%.

In addition, the fourth quarter 2018 results include $1.0 million of restructuring and other related costs. This charge includes severance related to internal restructuring activities. Included in other income (expense), net is $2.3 million related to the favorable resolution of a contract dispute.

Cash and cash equivalents were $91.7 million at December 31, 2018, compared to $50.0 million at December 31, 2017. In January 2019, we paid a $0.32 cent per share special dividend to shareholders, which totaled $8.5 million. During the fourth quarter of 2018, the Company repurchased 365,703 shares of stock for $11.0 million. Days sales outstanding were 51 days at December 31, 2018, up from 48 days in the prior year quarter; excluding the impact of the new revenue recognition standard, days sales outstanding would have decreased to 45 days outstanding. Inventory turns were 21 turns in the fourth quarter of 2018, down from 24 turns in the prior year quarter; excluding the impact of the new revenue recognition standard, inventory turns would have increased to 25 turns.

“The Company achieved record operating income this quarter. We saw strong demand for Edge, Core, and Cloud technology solutions. In addition, we are pleased with the growth in our Enterprise segment and in our advanced technology solutions,” said Tim McGrath, President and Chief Executive Officer. “We believe that our team and the strategies that we have in place position us well to gain market share and increase long term shareholder value,” concluded Mr. McGrath.

Conference Call and Webcast

Connection will host a conference call and live web cast today, February 7, 2019 at 4:30 p.m. ET to discuss its fourth 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, along with supplemental slides used during the call, 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, 2017. 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,         2018 2017  

%
Change

(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)        
 
Operating Data:
Net sales $ 709,520 $ 762,267 (7 %)
Diluted earnings per share $ 0.80 $ 0.77 4 %
 
Gross margin 15.1 % 13.1 %
Operating margin 3.7 % 2.9 %
Return on equity (1) 12.7 % 12.0 %
 
Inventory turns 21 24
Days sales outstanding 51 48
 
% of
Net Sales
% of
Net Sales
Product Mix:
Notebooks/Mobility 26 % 21 %
Accessories 14 9
Software 12 24
Desktops 10 11
Servers/Storage 10 9
Displays 9 9
Net/Com Products 8 7
Other Hardware/Services   11     10  
Total Net Sales   100 %   100 %
 
 
Stock Performance Indicators:
Actual shares outstanding 26,396 26,853
Total book value per share $ 19.92 $ 17.96
Tangible book value per share $ 16.77 $ 14.81
Closing price $ 29.73 $ 26.21
Market capitalization $ 784,753 $ 703,817
Trailing price/earnings ratio 12.3 12.9
LTM Adjusted EBITDA (2) $ 102,620 $ 93,967
Adjusted market capitalization/LTM Adjusted EBITDA (3) 6.8 7.0
 
(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 December 31,         2018 2017
(amounts in thousands)

Net
Sales

    Gross
Margin
Net
Sales
    Gross
Margin
 
Business Solutions $ 249,726 18.7 % $ 298,017 15.6 %
Enterprise Solutions 341,356 12.8 308,806 11.7
Public Sector Solutions   118,438 13.7   155,444 10.9
Total $ 709,520 15.1 % $ 762,267 13.1 %
 

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME                    
          Three Months Ended December 31, Years Ended December 31,
(amounts in thousands, except per share data) 2018

2017 (1)

2018

2017 (1)

 
Net sales $ 709,520 $ 762,267 $ 2,699,489 $ 2,911,883
Cost of sales   602,718     662,737     2,288,403     2,529,807  
Gross profit 106,802 99,530 411,086 382,076
 
Selling, general and administrative expenses 79,518 74,939 324,433 300,913
Restructuring and other charges   967     2,695     967     3,636  
Income from operations 26,317 21,896 85,686 77,527
 
Other income/(expense), net 2,566 78 2,978 98
Income tax provision   (7,583 )   (1,251 )   (24,072 )   (22,768 )
Net income $ 21,300   $ 20,723   $ 64,592   $ 54,857  
 
Earnings per common share:
Basic $ 0.80   $ 0.77   $ 2.42   $ 2.05  
Diluted $ 0.80   $ 0.77   $ 2.41   $ 2.04  
 
Shares used in the computation of earnings per common share:
Basic   26,632     26,822     26,717     26,771  
Diluted   26,766     26,907     26,854     26,891  
 

(1) Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during the relevant reporting period.

 

             
       

December 31,
2018

   

December 31,
2017 (1)

CONDENSED CONSOLIDATED BALANCE SHEETS      
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 91,703 $ 49,990
Accounts receivable, net 447,698 449,682
Inventories, net 119,195 106,753
Income taxes receivable 922 3,933
Prepaid expenses and other current assets   9,661     5,737  
Total current assets 669,179 616,095
Property and equipment, net 51,799 41,491
Goodwill 73,602 73,602
Intangibles assets, net 9,564 11,025
Other assets   1,211     5,638  
Total Assets $ 805,355   $ 747,851  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 201,640 $ 194,257
Accrued payroll 24,319 22,662
Accrued expenses and other liabilities   33,840     31,096  
Total current liabilities 259,799 248,015
Deferred income taxes 17,184 15,696
Other liabilities   2,469     1,888  
Total Liabilities   279,452     265,599  
Stockholders’ Equity:
Common stock 288 287
Additional paid-in capital 115,842 114,154
Retained earnings 441,010 383,673
Treasury stock at cost   (31,237 )   (15,862 )
Total Stockholders’ Equity   525,903     482,252  
Total Liabilities and Stockholders’ Equity $ 805,355   $ 747,851  
 
(1) Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during the relevant reporting period.
 

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                    
          Three Months Ended December 31, Years Ended December 31,
(amounts in thousands) 2018

2017 (1)

2018

2017 (1)

Cash Flows from Operating Activities:
Net income $ 21,300 $ 20,723 $ 64,592 $ 54,857
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 3,701 3,194 14,063 11,839
Provision for doubtful accounts 252 542 1,680 1,658
Stock-based compensation expense 342 181 1,080 741
Deferred income taxes 1,059 (4,070 ) 1,488 (3,906 )
Loss on disposal of fixed assets - 24 51 24
 
Changes in assets and liabilities:
Accounts receivable (49,009 ) (67,558 ) 14,872 (39,457 )
Inventories (13,912 ) (29 ) (23,311 ) (16,218 )
Prepaid expenses and other current assets (1,857 ) 94 (1,045 ) (2,097 )
Other non-current assets 2,121 (320 ) 2,403 (4,265 )
Accounts payable 35,083 28,969 5,722 15,807
Accrued expenses and other liabilities   6,506     9,209     5,244     337  
Net cash provided by (used in) operating activities   5,586     (9,041 )   86,839     19,320  
 
Cash Flows from Investing Activities:
Purchases of equipment   (5,597 )   (3,859 )   (21,238 )   (11,803 )
Net cash used in investing activities   (5,597 )   (3,859 )   (21,238 )   (11,803 )
 
Cash Flows from Financing Activities:
Proceeds from short-term borrowings - - 859 -
Repayment of short-term borrowings - - (859 ) -
Purchase of treasury shares (10,991 ) - (15,375 ) -
Dividend payment - - (9,122 ) (9,041 )
Exercise of stock options - 71 - 1,750
Issuance of stock under Employee Stock Purchase Plan 642 594 1,247 1,197
Payment of payroll taxes on stock-based compensation through shares withheld   (180 )   (113 )   (638 )   (613 )
Net cash (used in) provided by financing activities   (10,529 )   552     (23,888 )   (6,707 )
Increase (decrease) in cash and cash equivalents (10,540 ) (12,348 ) 41,713 810
Cash and cash equivalents, beginning of period   102,243     62,338     49,990     49,180  
Cash and cash equivalents, end of period $ 91,703   $ 49,990   $ 91,703   $ 49,990  
 
Non-cash Investing Activities:
Dividend declaration $ 8,452 $ 9,122 $ 8,452 $ 9,122
Accrued capital expenditures 2,422 699 2,422 699
 
Supplemental Cash Flow Information:
Income taxes paid $ 4,811 $ 4,634 $ 19,945 $ 28,927
 
(1) Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during the relevant reporting period.
 

 
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 December 31,

Years Ended December 31,

2018     2017     % Change 2018     2017     % Change
Net income $ 21,300 $ 20,723 3% $ 64,592 $ 54,857 18%
Depreciation and amortization 3,701 3,194 16% 14,064 11,839 19%
Income tax expense 7,583 1,251 506% 24,072 22,768 6%
Interest expense   41     38 8%   145     126 15%
EBITDA 32,625 25,206 29% 102,873 89,590 15%
Restructuring and other charges (2) 967 2,695 (64%) 967 3,636 (73%)
Favorable resolution of a contract dispute, net (3) (2,300 ) - (100%) (2,300 ) - (100%)
Stock-based compensation   342     181 89%   1,080     741 46%
Adjusted EBITDA $ 31,634   $ 28,082 13% $ 102,620   $ 93,967 9%
 
(1) LTM: Last twelve months

(2) Restructuring and other charges in 2018 consist of severance related to internal restructuring activities. Restructuring and other 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.

(3) The Company recorded $2.3 million of income in other income/(expense), net as a result of a favorable resolution of a contract dispute.
 

 
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, less the favorable resolution of a contract dispute, net of tax, and the impact of the Tax Cuts and Jobs Act of 2017. 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,
2018     2017     % Change 2018     2017     % Change
Net income $ 21,300 $ 20,723 $ 64,592 $ 54,857
Restructuring and other charges, net of tax (1) 713 1,598 705 2,211
Favorable resolution of a contract dispute, net of tax (2) (1,662 ) - (1,644 ) -
Reduction of federal income tax expense (3)   -     (7,689 )   -     (7,689 )
Adjusted Net Income $ 20,351 $ 14,632 39% $ 63,653 $ 49,379 29%
Diluted shares   26,766     26,907       26,854     26,891    
Adjusted Diluted Earnings per Share $ 0.76   $ 0.54   40% $ 2.37   $ 1.84   29%
 

(1) Restructuring and other charges in 2018 consist severance related to internal restructuring activities. Restructuring and other 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.

(2) The Company recorded $2.3 million of income in other income/(expense), net as a result of a favorable resolution of a contract dispute.
(3) 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.
 

 
RECONCILIATION OF CHANGES IN REVENUE STANDARD

(Unaudited, in thousands, except per share amounts)

                                           
    ChangeAs Presented

Change
Previous Revenue Standard

Three Months Ended December 31,
2018 2017 Amount Percent Amount Percent

As
Presented

% of Net Sales

Impact of New
Revenue Standard

Previous Revenue Standard
    Amount     % of Net Sales Amount     % of Net Sales
Net sales $ 709,520 100.0 % $ 108,107 $ 817,627 100.0 % $ 762,267 100.0 % $ (52,747 ) (6.9 %) $ 55,360 7.3 %
Cost of sales   602,718       84.9 %   108,197     710,915       86.9 %   662,737       86.9 %   (60,019 ) (9.1 %)   48,178   7.3 %
Gross profit 106,802 15.1 % (90 ) 106,712 13.1 % 99,530 13.1 % 7,272 7.3 % 7,182 7.2 %
 
 
Selling, general and administrative expenses 79,518 11.2 % (32 ) 79,486 9.7 % 74,939 9.8 % 4,579 6.1 % 4,547 6.1 %
Restructuring and other charges   967       0.1 %   -     967       0.1 %   2,695       0.4 %   (1,728 ) (64.1 %)   (1,728 ) (64.1 %)
Income from operations 26,317 3.7 % (58 ) 26,259 3.2 % 21,896 2.9 % 4,421 20.2 % 4,363 19.9 %
 
Other income/(expense), net 2,566 - - 2,566 - 78 - 2,488 3,189.7 % 2,488 3,189.7 %
Income tax provision   (7,583 )     (1.1 %)   14     (7,569 )     (0.9 %)   (1,251 )     (0.2 %)   (6,332 ) 506.2 %   (6,318 ) 505.0 %
Net income $ 21,300   3.0 % $ (44 ) $ 21,256   2.6 % $ 20,723   2.7 % $ 577   2.8 % $ 533   2.6 %
 
Earnings per common share:
Basic $ 0.80   $ - $ 0.80   $ 0.77   $ 0.03 3.9 % $ 0.03 3.9 %
Diluted $ 0.80   $ (0.01 ) $ 0.79   $ 0.77   $ 0.03 3.9 % $ 0.02 2.6 %
 
Shares used in the computation of earnings per common share
Basic   26,632     26,632     26,822  
Diluted   26,766     26,766     26,907  
 
 
RECONCILIATION OF CHANGES IN REVENUE STANDARD
(Unaudited, in thousands, except per share amounts)

Change
As Presented

Change
Previous Revenue Standard

Years Ended December 31,
2018 2017 Amount Percent Amount Percent

As
Presented

% of Net Sales

Impact of New
Revenue Standard

Previous Revenue Standard
    Amount     % of Net Sales Amount     % of Net Sales
Net sales $ 2,699,489 100.0 % $ 404,690 $ 3,104,179 100.0 % $ 2,911,883 100.0 % $ (212,394 ) (7.3 %) $ 192,296 6.6 %
Cost of sales   2,288,403       84.8 %   403,737     2,692,140       86.7 %   2,529,807       86.9 %   (241,404 ) (9.5 %)   162,333   6.4 %
Gross profit 411,086 15.2 % 953 412,039 13.3 % 382,076 13.1 % 29,010 7.6 % 29,963 7.8 %
 
Selling, general and administrative expenses 324,433 12.0 % 203 324,636 10.5 % 300,913 10.3 % 23,520 7.8 % 23,723 7.9 %
Restructuring and other charges   967       0.1 %   -     967       0.1 %   3,636       0.1 %   (2,669 ) (73.4 %)   (2,669 ) (73.4 %)
Income from operations 85,686 3.2 % 953 86,436 2.9 % 77,527 2.7 % 8,159 10.5 % 8,909 11.5 %
 
Other income/(expense), net 2,978 - - 2,978 0.1 % 98 0.0 % 2,880 2,938.8 % 2,880 2,938.8 %
Income tax provision   (24,072 )     (0.9 %)   (210 )   (24,282 )     (0.8 %)   (22,768 )     (0.8 %)   (1,304 ) 5.7 %   (1,514 ) 6.6 %
Net income $ 64,592   2.4 % $ 743   $ 65,132   2.1 % $ 54,857   1.9 % $ 9,735   17.7 % $ 10,275   18.7 %
 
Earnings per common share:
Basic $ 2.42   $ 0.02 $ 2.44   $ 2.05   $ 0.37 18.0 % $ 0.39 19.0 %
Diluted $ 2.41   $ 0.02 $ 2.43   $ 2.04   $ 0.37 18.1 % $ 0.39 19.1 %
 
Shares used in the computation of earnings per common share
Basic   26,717     26,717     26,771  
Diluted   26,854     26,854     26,891  
 

 
CONSOLIDATED SELECTED FINANCIAL INFORMATION UNDER PREVIOUS REVENUE RECOGNITION STANDARD
             
2018 2017

As
Presented

  Impact of New
Revenue Standard
 
  Previous Revenue Standard
Inventory turns 21 4 25 24
Days sales outstanding 51 (6 ) 45 48
 
% of
Net Sales
% of
Net Sales
% of
Net Sales
Product Mix:
Notebooks/Mobility

26

%

 

(4 )

22

%

 

21

%

Accessories 14 (2 ) 12 9
Software 12 12 24 24
Desktops 10 (1 ) 9 11
Servers/Storage 10 (1 ) 9 9
Displays 9 (1 ) 8 9
Net/Com Products 8 (1 ) 7 7
Other Hardware/Services 11   (2 ) 9   10  
Total Net Sales

100

%

 

100

%

 

100

%

 

 
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT NET SALES
(Unaudited, in thousands)                                    
Change
As Presented
Change
Previous Revenue Standard
Three Months Ended December 31,
2018 2017 Amount Percent Amount Percent
 
As
Presented
Impact of New
Revenue Standard
Net sales Previous Revenue Standard
Business Solutions $ 249,726 $ 47,496 $ 297,222 $ 298,017 $ (48,291 ) (16.2 %) $ (795 ) (0.3 %)
Enterprise Solutions 341,356 50,150 391,506 308,806 32,550 10.5 % 82,700 26.8 %
Public Sector Solutions   118,438     10,461     128,899     155,444     (37,006 ) (23.8 %)   (26,545 ) (17.1 %)
Total $ 709,520   $ 108,107   $ 817,627   $ 762,267   $ (52,747 ) (6.9 %) $ 55,360   7.3 %
 
 
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT GROSS PROFITS
(Unaudited, in thousands)
Change
As Presented
Change
Previous Revenue Standard
Three Months Ended December 31,
2018 2017 Amount Percent Amount Percent
 
As
Presented
Impact of New
Revenue Standard
Gross profits Previous Revenue Standard
Business Solutions $ 46,772 $ 141 $ 46,913 $ 46,353 $ 419 0.9 % $ 560 1.2 %
Enterprise Solutions 43,765 (104 ) 43,661 36,210 7,555 20.9 % 7,451 20.6 %
Public Sector Solutions   16,265     (127 )   16,138     16,967     (702 ) (4.1 %)   (829 ) (4.9 %)
Total $ 106,802   $ (90 ) $ 106,712   $ 99,530   $ 7,272   7.3 % $ 7,182   7.2 %
 
 
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT GROSS MARGINS
(Unaudited, in thousands)
Change
As Presented
Change
Previous Revenue Standard
Three Months Ended December 31,
2018 2017 Amount Amount
 
As
Presented
Impact of New
Revenue Standard
Gross margins Previous Revenue Standard
 
Business Solutions 18.7 % (295 ) 15.8 % 15.6 % 318 23
Enterprise Solutions 12.8 % (167 ) 11.2 % 11.7 % 110 (57 )
Public Sector Solutions 13.7 % (121 ) 12.5 % 10.9 % 282 160
Total 15.1 % (200 ) 13.1 % 13.1 % 200 (1 )
 

 
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT NET SALES
(Unaudited, in thousands)                                    
Change
As Presented
Change
Previous Revenue Standard
Years Ended December 31,
2018 2017 Amount Percent Amount Percent
 
As
Presented
Impact of New
Revenue Standard
Net sales

 

Previous Revenue Standard
Business Solutions $ 1,027,918 $ 173,479 $ 1,201,397 $ 1,158,639 $ (130,721 ) (11.3 %) $ 42,758 3.7 %
Enterprise Solutions 1,165,142 169,184 1,334,326 1,131,823 33,319 2.9 % 202,503 17.9 %
Public Sector Solutions   506,429     62,027     568,456     621,421     (114,992 ) (18.5 %)   (52,965 ) (8.5 %)
Total $ 2,699,489   $ 404,690   $ 3,104,179   $ 2,911,883   $ (212,394 ) (7.3 %) $ 192,296   6.6 %
 
   
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT GROSS PROFITS  
(Unaudited, in thousands)
Change
As Presented
Change
Previous Revenue Standard
Years Ended December 31,
2018 2017 Amount Percent Amount Percent
 
As
Presented
Impact of New
Revenue Standard
Gross profits Previous Revenue Standard
Business Solutions $ 184,922 $ 1,099 $ 186,021 $ 177,814 $ 7,108 4.0 % $ 8,207 4.6 %
Enterprise Solutions 161,595 94 161,689 139,010 22,585 16.2 % 22,679 16.3 %
Public Sector Solutions   64,569     (240 )   64,329     65,252     (683 ) (1.0 %)   (923 ) (1.4 %)
Total $ 411,086   $ 953   $ 412,039   $ 382,076   $ 29,010   7.6 % $ 29,963   7.8 %
 
   
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR SEGMENT GROSS MARGINS  
(Unaudited, in thousands)
Change
As Presented
Change
Previous Revenue Standard
Years Ended December 31,
2018 2017 Amount Amount
 
As
Presented
Impact of New
Revenue Standard
Gross margins Previous Revenue Standard
 
Business Solutions 18.0 % (251 ) 15.5 % 15.3 % 264 14
Enterprise Solutions 13.9 % (175 ) 12.1 % 12.3 % 159 (16 )
Public Sector Solutions 12.7 % (143 ) 11.3 % 10.5 % 225 82
Total 15.2 % (195 ) 13.3 % 13.1 % 211 15
 

 
RECONCILIATION OF CHANGES IN REVENUE STANDARD FOR 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.

                           
Change
As Presented
Change
Previous Revenue Standard
(amounts in thousands) Three Months Ended December 31,
2018 2017 Percent Percent
As
Presented
Impact of New
Revenue Standard
Previous Revenue Standard
Net income $ 21,300 $ (44 ) $ 21,256 $ 20,723 3 % 3 %
Depreciation and amortization 3,701 - 3,701 3,194 16 % 16 %
Income tax expense 7,583 (14 ) 7,569 1,251 506 % 505 %
Interest expense   41     -     41     38 8 % 8 %
EBITDA 32,625 (58 ) 32,567 25,206 29 % 29 %
Restructuring and other charges (2) 967 - 967 2,695 (64 %) (64 %)
Favorable resolution of a contract dispute, net (3) (2,300 ) - (2,300 ) - (100 %) 0 %
Stock-based compensation   342     -     342     181 89 % 89 %
Adjusted EBITDA $ 31,634   $ (58 ) $ 31,576   $ 28,082 13 % 12 %
 
 
Change
As Presented
Change
Previous Revenue Standard
(amounts in thousands) Years Ended December 31, (1)
2018 2017 Percent Percent
As
Presented
Impact of New
Revenue Standard
Previous Revenue Standard
Net income $ 64,592 $ 540 $ 65,132 $ 54,857 18 % 19 %
Depreciation and amortization 14,064 - 14,064 11,839 19 % 19 %
Income tax expense 24,072 210 24,282 22,768 6 % 7 %
Interest expense   145     -     145     126 15 % 15 %
EBITDA 102,873 750 103,623 89,590 15 % 16 %
Restructuring and other charges (2) 967 - 967 3,636 (73 %) (73 %)
Favorable resolution of a contract dispute, net (3) (2,300 ) - (2,300 ) - (100 %) 0 %
Stock-based compensation   1,080     -     1,080     741 46 % 46 %
Adjusted EBITDA $ 102,620   $ 750   $ 103,370   $ 93,967 9 %

10

%
 
(1) LTM: Last twelve months

(2) Restructuring and other charges in 2018 consist of severance related to internal restructuring activities. Restructuring and other 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.

(3) The Company recorded $2.3 million of income in other income/(expense), net as a result of a favorable resolution of a contract dispute.
 

cnxn-g

Source: Connection

Investor Relations Contact:
Steve Sarno, 603.683.2505
Steve.Sarno@connection.com

 




Stock Information

(NASDAQ)
 
02/22/19 11:27 am EST

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