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Connection (CNXN) Reports Record Second Quarter 2019 Results

08/01/19

Net Income Increases by 29.9% From Prior Q2

SECOND QUARTER SUMMARY:

  • Record net income: $23.7 million, up 29.9% y/y
  • Record gross profit: $117.0 million, up 8.9% y/y
  • Record gross margin: 15.8%, compared to 15.2% y/y
  • Record diluted EPS: $0.89, compared to $0.68 y/y, up 31.3%
  • Cash balance: $69.7 million

MERRIMACK, N.H.--(BUSINESS WIRE)--Aug. 1, 2019-- Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the second quarter ended June 30, 2019. Net sales for the quarter ended June 30, 2019 increased by 4.9% to $741.1 million, compared to $706.6 million for the prior year quarter. Net income for the second quarter ended June 30, 2019 increased by 29.9% to $23.7 million, or $0.89 per diluted share, compared to net income of $18.2 million, or $0.68 per diluted share for the prior year quarter.

Net sales for the six months ended June 30, 2019 increased by 3.2% to $1,374 million, compared to $1,331.5 million for the six months ended June 30, 2018. Our average daily sales during the six months ended June 30, 2019 increased by 4.0%, compared to the six months ended June 30, 2018. Net income for the six months ended June 30, 2019 increased by 23.3% to $36.4 million, or $1.37 per diluted share, compared to net income of $29.5 million, or $1.10 per diluted share for the six months ended June 30, 2018.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $115.7 million for the twelve months ended June 30, 2019, compared to $100.9 million for the twelve months ended June 30, 2018.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment increased to $271.1 million in the second quarter of 2019, compared to $270.0 million in the prior year quarter. We experienced strong growth in sales of desktops, servers/storage, and software products in the quarter. Gross margin increased by 201 basis points to 19.5% due to improved hardware margins and increased sales of cloud-based and security software, which is 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.
  • Net sales for the Public Sector Solutions segment increased by 12.2% to $152.0 million in the second quarter of 2019, compared to the prior year quarter. Sales to the federal government increased by 21.5%, compared to the prior year, while sales to state and local government and educational institutions increased by 8.8%. Gross margin decreased by 49 basis points to 12.0% primarily due to changes in customer mix.
  • Net sales for the Enterprise Solutions segment increased by 5.6% to $318.0 million in the second quarter of 2019, compared to the prior year quarter primarily due to strong performance in the retail and manufacturing verticals. Gross margin increased by 4 basis points to 14.4% primarily due to an increase in sales of cloud-based and security software.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company’s largest product category, increased by 14% year over year and accounted for 29% of net sales in the second quarter of 2019, compared to 26% of net sales in the prior year quarter. The Enterprise Solutions segment experienced strong year-over-year growth in notebook/mobility sales.
  • Accessories sales increased by 6% year over year and accounted for 13% of net sales in the second quarter of 2019 and 2018. 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 20% year over year and accounted for 13% of net sales in the second quarter of 2019, compared to 11% of net sales in the prior year quarter. The Enterprise Solutions and Business Solutions segments experienced strong year-over-year growth in desktop sales.
  • Software sales increased by 10% year over year and accounted for 13% of net sales in the second quarter of 2019, compared to 12% of net sales in the prior year quarter. The Public Sector Solutions segment experienced strong year-over-year growth in software sales.

Selling, general and administrative (“SG&A”) expenses increased in the second quarter of 2019 to $84.7 million from $82.5 million in the prior year quarter, but decreased 25 basis points as a percentage of net sales.

Cash and cash equivalents were $69.7 million at June 30, 2019, compared to $91.7 million at December 31, 2018. During the second quarter of 2019, the Company repurchased 65,909 shares of stock for $2.2 million.

“Our increased productivity and improved execution allowed us to deliver a 31.3% increase in diluted earnings per share,” said Tim McGrath, President and Chief Executive Officer. “The Company achieved record gross profit, gross margin, and net income this quarter. Our success is attributed to our continued focus and strategic plan to help our customers build out solutions for software defined datacenter, hybrid cloud, and the digital workplace,” concluded Mr. McGrath.

Conference Call and Webcast

Connection will host a conference call and live web cast today, August 1, 2019 at 4:30 p.m. ET to discuss its second 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.

cnxn-g

"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 June 30,

2019

2018

%

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

Change

 
Operating Data:
Net sales

$

741,076

$

706,570

5

%

Diluted earnings per share

$

0.89

$

0.68

31

%

 
Gross margin

 

15.8%

 

15.2%

Operating margin

 

4.4%

 

3.5%

Return on equity (1)

 

13.5%

 

13.1%

 
Inventory turns

 

17

 

26

Days sales outstanding

 

55

 

53

 

% of

% of

Product Mix:

Net Sales

Net Sales

Notebooks/Mobility

 

29%

 

26%

Accessories

 

13

 

13

Desktops

 

13

 

11

Software

 

13

 

12

Servers/Storage

 

9

 

10

Displays

 

8

 

10

Net/Com Products

 

7

 

9

Other Hardware/Services

 

8

 

9

Total Net Sales

 

100%

 

100%

 
 
Stock Performance Indicators:
Actual shares outstanding

26,318

26,703

Total book value per share

$21.28

$19.09

Tangible book value per share

$18.15

$15.94

Closing price

$34.98

$33.20

Market capitalization

$920,604

$886,540

Trailing price/earnings ratio

12.5

14.1

LTM Adjusted EBITDA (2)

$115,733

$100,918

Adjusted market capitalization/LTM Adjusted EBITDA (3)

7.4

8.1

 

(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 June 30,

2019

 

2018

Net

 

Gross

 

Net

 

Gross

(amounts in thousands)

Sales

 

Margin

 

Sales

 

Margin

 
Business Solutions

$

271,052

19.5

%

$

270,042

17.5

%

Enterprise Solutions

 

318,039

14.4

 

 

301,065

14.4

 

Public Sector Solutions

 

151,985

12.0

 

 

135,463

12.5

 

Total

$

741,076

15.8

%

$

706,570

15.2

%

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended June 30,

 

Six Months Ended June 30,

(amounts in thousands, except per share data)

2019

 

2018

 

2019

 

2018

 
Net sales

$

741,076

 

$

706,570

 

$

1,373,997

 

$

1,331,465

 

Cost of sales

 

624,089

 

 

599,102

 

 

1,157,663

 

 

1,127,625

 

Gross profit

 

116,987

 

 

107,468

 

 

216,334

 

 

203,840

 

 
Selling, general and administrative expenses

 

84,664

 

 

82,521

 

 

165,899

 

 

163,421

 

Restructuring and other charges

 

-

 

 

-

 

 

703

 

 

-

 

Income from operations

 

32,323

 

 

24,947

 

 

49,732

 

 

40,419

 

 
Other income/(expense), net

 

184

 

 

182

 

 

382

 

 

298

 

Income tax provision

 

(8,839

)

 

(6,903

)

 

(13,719

)

 

(11,191

)

Net income

$

23,668

 

$

18,226

 

$

36,395

 

$

29,526

 

 
Earnings per common share:
Basic

$

0.90

 

$

0.68

 

$

1.38

 

$

1.10

 

Diluted

$

0.89

 

$

0.68

 

$

1.37

 

$

1.10

 

 
Shares used in the computation of earnings per common share:
Basic

 

26,337

 

 

26,686

 

 

26,348

 

 

26,760

 

Diluted

 

26,494

 

 

26,820

 

 

26,506

 

 

26,868

 

June 30,

 

December 31,

CONDENSED CONSOLIDATED BALANCE SHEETS

2019

 

2018

(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents

$

69,739

$

91,703

Accounts receivable, net

 

500,912

 

447,698

Inventories, net

 

175,904

 

119,195

Income taxes receivable

 

56

 

922

Prepaid expenses and other current assets

 

7,054

 

9,661

Total current assets

 

753,665

 

669,179

Property and equipment, net

 

59,468

 

51,799

Right-of-use assets, net

 

15,169

 

-

Goodwill

 

73,602

 

73,602

Intangibles assets, net

 

8,918

 

9,564

Other assets

 

980

 

1,211

Total Assets

$

911,802

$

805,355

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable

$

260,162

$

201,640

Accrued payroll

 

26,037

 

24,319

Accrued expenses and other liabilities

 

35,036

 

33,840

Total current liabilities

 

321,235

 

259,799

Deferred income taxes

 

17,194

 

17,184

Operating lease liability

 

11,727

 

-

Other liabilities

 

1,479

 

2,469

Total Liabilities

 

351,635

 

279,452

Stockholders’ Equity:
Common stock

 

288

 

288

Additional paid-in capital

 

117,212

 

115,842

Retained earnings

 

477,405

 

441,010

Treasury stock at cost

 

(34,738)

 

(31,237)

Total Stockholders’ Equity

 

560,167

 

525,903

Total Liabilities and Stockholders’ Equity

$

911,802

$

805,355

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended June 30,

 

Six Months Ended June 30,

(amounts in thousands)

2019

 

2018

 

2019

 

2018

Cash Flows from Operating Activities:
Net income

$

23,668

 

$

18,226

 

$

36,395

 

$

29,526

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization

 

3,368

 

 

3,429

 

 

7,077

 

 

6,729

 

Stock-based compensation expense

 

564

 

 

258

 

 

833

 

 

465

 

Provision for doubtful accounts

 

(602

)

 

277

 

 

(346

)

 

694

 

Deferred income taxes

 

10

 

 

-

 

 

10

 

 

429

 

Loss on disposal of fixed assets

 

118

 

 

-

 

 

118

 

 

-

 

 
Changes in assets and liabilities:
Accounts receivable

 

(66,362

)

 

(55,937

)

 

(52,868

)

 

1,452

 

Inventories

 

(38,239

)

 

(21,867

)

 

(56,709

)

 

(11,565

)

Prepaid expenses and other current assets

 

151

 

 

(395

)

 

3,473

 

 

2,326

 

Other non-current assets

 

112

 

 

(117

)

 

231

 

 

(1,997

)

Accounts payable

 

56,060

 

 

48,684

 

 

58,181

 

 

6,163

 

Accrued expenses and other liabilities

 

6,383

 

 

11,716

 

 

6,934

 

 

7,296

 

Net cash provided by (used in) operating activities

 

(14,769

)

 

4,274

 

 

3,329

 

 

41,518

 

 
Cash Flows from Investing Activities:
Purchases of equipment

 

(7,305

)

 

(4,920

)

 

(13,877

)

 

(9,927

)

Net cash used in investing activities

 

(7,305

)

 

(4,920

)

 

(13,877

)

 

(9,927

)

 
Cash Flows from Financing Activities:
Proceeds from short-term borrowings

 

-

 

 

-

 

 

-

 

 

859

 

Repayment of short-term borrowings

 

-

 

 

(859

)

 

-

 

 

(859

)

Dividend payment

 

-

 

 

-

 

 

(8,452

)

 

(9,122

)

Purchase of treasury shares

 

(2,207

)

 

(1,387

)

 

(3,501

)

 

(4,384

)

Issuance of stock under Employee Stock Purchase Plan

 

622

 

 

605

 

 

609

 

 

605

 

Payment of payroll taxes on stock-based compensation through shares withheld

 

(72

)

 

-

 

 

(72

)

 

-

 

Net cash used in financing activities

 

(1,657

)

 

(1,641

)

 

(11,416

)

 

(12,901

)

Increase (decrease) in cash and cash equivalents

 

(23,731

)

 

(2,287

)

 

(21,964

)

 

18,690

 

Cash and cash equivalents, beginning of period

 

93,470

 

 

70,967

 

 

91,703

 

 

49,990

 

Cash and cash equivalents, end of period

$

69,739

 

$

68,680

 

$

69,739

 

$

68,680

 

 
Non-cash Investing Activities:
Accrued capital expenditures

$

2,081

 

$

1,281

 

 

2,081

 

 

1,281

 

 
Supplemental Cash Flow Information:
Income taxes paid

$

11,671

 

$

7,990

 

$

11,962

 

$

8,309

 

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 June 30,

 

LTM Ended June 30, (1)

2019

 

2018

 

% Change

 

2019

 

2018

 

% Change

Net income

$

23,668

$

18,226

30

%

$

71,461

$

63,366

13

%

Depreciation and amortization

 

3,368

 

3,428

(2

%)

 

14,412

 

12,858

12

%

Income tax expense

 

8,839

 

6,903

28

%

 

26,600

 

21,056

26

%

Interest expense

 

20

 

28

(29

%)

 

142

 

121

17

%

EBITDA

 

35,895

 

28,585

26

%

 

112,615

 

97,401

16

%

Restructuring and other charges (2)

 

-

 

-

100

%

 

1,670

 

2,695

(38

%)

Stock-based compensation

 

564

 

258

119

%

 

1,448

 

822

76

%

Adjusted EBITDA

$

36,459

$

28,843

26

%

$

115,733

$

100,918

15

%

 
(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 June 30,

 

Six Months Ended June 30,

2019

 

2018

 

% Change

 

2019

 

2018

 

% Change

Net income

$

23,668

$

18,226

$

36,395

$

29,526

Restructuring and other charges, net of tax (1)

 

-

 

-

 

510

 

-

Adjusted Net Income

$

23,668

$

18,226

30

%

$

36,905

$

29,526

25

%

Diluted shares

 

26,494

 

26,820

 

26,506

 

26,868

Adjusted Diluted Earnings per Share

$

0.89

$

0.68

31

%

$

1.39

$

1.10

27

%

 
 
(1) Restructuring and other charges in 2019 consist of severance and other charges related to internal restructuring activities.

 

Source: Connection

Investor Relations Contact:
Tom Baker, 603.683.2505
Tom.Baker@connection.com

 




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