PC Connection, Inc. Reports First Quarter 2014 Results

May 1, 2014




  • Diluted EPS: $0.27, up 17.4% year over year
  • Net sales: $559.8 million, up 10.8% year over year
  • Cash increased to $64.9 million, from $42.5 million at 12/31/2013

PC Connection, Inc. (NASDAQ: PCCC), a national provider of a full range of information technology (IT) solutions to business, government, healthcare, and education markets, today announced results for the quarter ended March 31, 2014. Net sales for the first quarter of 2014 increased by 10.8% to $559.8 million, compared to $505.4 million for the first quarter of 2013. Net income for the quarter ended March 31, 2014 increased by 16.9% to $7.1 million, or $0.27 per diluted share, compared to net income of $6.1 million, or $0.23 per diluted share for the prior year quarter.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense ("Adjusted EBITDA") totaled $69.5 million for the twelve months ended March 31, 2014, compared to $63.3 million for the twelve months ended March 31, 2013.

Quarterly Sales by Segment:

  • Net sales for the SMB segment increased by 7.5% to $253.5 million in the first quarter of 2014, compared to the prior year quarter. Software, desktops, and notebooks experienced strong year-over-year sales growth.
  • Net sales for the Large Account segment increased by 7.8% to $200.9 million in the first quarter of 2014, compared to the prior year quarter. Notebook and desktop sales were strong in this segment with an increase of 21.9% and 17.3%, respectively. Commercial sales, which consists of SMB and Large Account sales, increased by 7.7% from the prior year quarter.
  • Net sales to government and education customers (Public Sector segment) increased by 26.4% year over year to $105.4 million, compared to the prior year quarter. Sales to state and local government and educational institutions increased by 28.8%, compared to the prior year quarter, while sales to the federal government increased by 20.2%. Sales to the federal government represented 5% of total Q1 2014 net sales.

Quarterly Sales by Product Mix:

  • Notebook/tablet sales, the Company's largest product category, increased by 29% year over year and accounted for 22% of net sales in the first quarter of 2014 compared to 19% of net sales in the prior year quarter. The expiration of Windows XP and increased demand for Chromebooks resulted in strong year-over-year growth in this category in all three of our sales segments.
  • Desktop/Server, the Company's second largest product category, increased by 21% year over year and accounted for 16% of net sales in the first quarter of 2014 compared to 15% of net sales in the prior year quarter. We experienced significant sales growth in both our SMB and Large Account segments in this product category.
  • Software sales increased by 14% year over year and accounted for 15% of net sales in the first quarter of 2014 and 2013. We experienced strong growth in security, virtualization, office productivity, and operating system software.
  • Net/com product sales increased by 8% year over year and accounted for 10% of net sales in the first quarter of 2014 and 2013. Our Public Sector segment achieved strong sales growth compared to the prior year quarter due to increased demand for integration of multiple types of mobile devices.

Overall gross profit dollars increased by $6.0 million, or 9.0%, in the first quarter of 2014, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased to 13.0% in the first quarter of 2014, compared to 13.2% in the prior year quarter as a result of increased demand in notebooks and desktops which generate relatively lower margins.

Total selling, general and administrative dollars increased in the first quarter of 2014 to $61.1 million from $56.7 million in the prior year quarter, but decreased as a percentage of net sales to 10.9% due to leveraging our fixed costs over higher net sales. As noted in previous releases, approximately $0.5 million of this increase in SG&A is due to depreciation expense related to the Customer Master Data Management software project that we recently placed into service. Also, variable SG&A increased year over year due to the higher levels of sales and gross profit achieved in the first quarter. We continue to invest in technical solution sales capabilities, including our Cloud Connection team, and expect SG&A expenses to rise accordingly. However, we are highly focused on improving efficiencies and streamlining wherever possible.

The Company generated significant cash flow during the quarter ended March 31, 2014. Total cash was $64.9 million at March 31, 2014, compared to $42.5 million at December 31, 2013. Our March 31, 2014 cash balance was higher than our December 31, 2013 balance due to seasonally lower working capital requirements. Days sales outstanding were 39 days at March 31, 2014, and inventory turns were 27 turns in the first quarter of 2014.

"We are pleased with PC Connection's strong results this quarter," said Timothy McGrath, President and Chief Executive Officer. "Our long-term customer relationships allowed us to benefit from the Windows XP expiration, which drove significant refresh activity in categories such as notebooks and desktops. In addition, we increased technical solution sales, especially in software and networking, as we continued our transformation into higher value-added products and services. As a National Solutions Provider, our goal is to consistently invest in more complex solutions capabilities while delivering solid financial performance, and we were able to accomplish that in Q1 with our double-digit sales increase and 17% increase in earnings." Mr. McGrath concluded, "We believe the team and the strategies we have in place position PC Connection well to gain market share and increase long-term shareholder value."

Non-GAAP Financial Information

Adjusted EBITDA is a non-GAAP financial measure. This information is included to provide information with respect to the Company's operating performance and earnings.

About PC Connection, Inc.

PC Connection, Inc., a Fortune 1000 company, has three sales companies: PC Connection Sales Corporation, MoreDirect, Inc., and GovConnection, Inc., headquartered in Merrimack, NH; Boca Raton, FL; and Rockville, MD; respectively. All three companies can deliver custom-configured computer systems overnight from our ISO 9001:2008 certified technical configuration lab at our distribution center in Wilmington, OH. Investors and media can find more information about PC Connection, Inc. at http://ir.pcconnection.com.

PC Connection Sales Corporation (800-800-5555), the original business of PC Connection, Inc. serving primarily the small- and medium-sized business sector, is a rapid-response provider of IT products and services. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers and telesales specialists, catalogs, publications, and its website at www.pcconnection.com. This company also serves consumer and small office users and is, under its MacConnection brand (800-800-2222), one of Apple's largest authorized online resellers at www.macconnection.com.

MoreDirect, Inc. (561-237-3300), www.moredirect.com, 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™, our cloud-based eProcurement system. Backed by over 500 technical certifications, MoreDirect's team of engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

GovConnection, Inc. (800-800-0019) is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, catalogs, publications, and online at www.govconnection.com.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but 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, competitive products and pricing, product availability and market acceptance, new products, fluctuations in operating results, and the ability of the Company to manage costs in response to fluctuations in revenue, and other risks that could cause actual results to differ materially from those detailed 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, 2013. More specifically, the statements in this release concerning the Company's outlook for selling, general, and administrative expenses in 2014, the Company's efforts in improving efficiencies and streamlining its business, the Company's anticipated product growth categories, and other statements of a non-historical basis (including statements regarding areas of demand for the Company's products, the Company's ability to grow revenues, improve gross margins, increase market share, enhance long-term shareholder value, and increase earnings per share) are forward-looking statements that involve certain risks and uncertainties. Such risks and uncertainties include the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, the continued acceptance of the Company's distribution channel by vendors and customers, continuation of key vendor and customer relationships and support programs, the ability of the Company to gain or maintain market share, and the ability of the Company to hire and retain qualified sales representatives and other essential personnel. The Company disclaims any 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.


At or for the Three Months Ended March 31,






(Amounts and shares in thousands, except


% of

    % of %

operating data, P/E ratio, and per share data)


Net Sales

        Net Sales Change

Operating Data:

Net sales $ 559,760 $ 505,423 11 %
Diluted earnings per share $ 0.27 $ 0.23 17 %
Gross margin 13.0 % 13.2 %
Operating margin 2.1 % 2.0 %
Return on equity (1) 11.6 % 11.5 %
Inventory turns 27 26
Days sales outstanding 39 40
Product Mix:
Notebook/Tablet $ 121,947 22 % $ 94,311 19 % 29 %
Desktop/Server 92,396 16 76,204 15 21 %
Software 85,908 15 75,213 15 14 %
Net/Com Product 54,064 10 50,187 10 8 %
Video, Imaging and Sound 48,749 9 43,706 8 12 %
Printer and Printer Supplies 37,045 7 37,238 7 (1 %)
Storage 28,653 5 30,301 6 (5 %)
Memory and System Enhancement 16,557 3 13,223 3 25 %
Accessory/Services/Other   74,441   13     85,040   17   (12 %)

Total Net Sales

$ 559,760   100



$ 505,423   100 % 11 %

Stock Performance Indicators:

Actual shares outstanding

26,206 26,071
Total book value per share $ 12.48 $ 11.47
Tangible book value per share $ 10.43 $ 9.37
Closing price $ 20.32 $ 16.35
Market capitalization $ 532,506 $ 426,261
Trailing price/earnings ratio 14.6 13.0
LTM Adjusted EBITDA (2) $ 69,525 $ 63,291
Adjusted market capitalization/LTM Adjusted EBITDA (3) 6.7 5.8
(1) Based on last twelve months' net income.

(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation.

(3) Adjusted market capitalization is defined as gross market capitalization less cash balance.
For the Three Months Ended March 31,       2014                   2013        
Net Gross Net Gross
(amounts in thousands) Sales     Margin   Sales     Margin
SMB $ 253,471 14.9 % $ 235,678 15.1 %
Large Account 200,932 12.0 186,395 11.5
Public Sector   105,357   10.5   83,350   11.9
Total $ 559,760   13.0 % $ 505,423   13.2 %

Three Months Ended March 31,     2014     2013
(amounts in thousands, except per share data)     Amount % of Net Sales Amount % of Net Sales
Net sales $ 559,760 100.0 % $ 505,423 100.0 %
Cost of sales   486,913   87.0     438,585     86.8  
Gross profit 72,847 13.0 66,838 13.2
Selling, general and administrative expenses   61,101   10.9     56,713     11.2  
Income from operations 11,746 2.1 10,125 2.0
Interest/other expense, net (10 ) - (50 ) -
Income tax provision   (4,605 ) (0.8 )   (3,977 )   (0.8 )
Net income $ 7,131   1.3 % $ 6,098     1.2 %
Earnings per common share:
Basic $ 0.27   $ 0.23  
Diluted $ 0.27   $ 0.23  
Shares used in computation of earnings per common share:
Basic   26,202     25,998  
Diluted   26,485     26,272  

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 March 31, LTM Ended March 31, (1)
2014 2013 % Change 2014 2013 % Change
Net income $ 7,131 $ 6,098 $ 36,715 $ 33,694
Depreciation and amortization 2,077 1,627 7,539 6,964
Income tax expense 4,605 3,977 24,193 21,816
Interest/other expense, net   10   50     109     221


13,823 11,752 68,556 62,695
Stock-based compensation   159   148       969     596  

Adjusted EBITDA

$ 13,982 $ 11,900   17 % $ 69,525   $ 63,291 10 %
(1) LTM: Last twelve months

        March 31,   December 31,
(amounts in thousands)
Current Assets:
Cash and cash equivalents $ 64,881 $ 42,547
Accounts receivable, net 260,853 283,051
Inventories 71,419 79,141
Deferred income taxes 6,382 6,382
Prepaid expenses and other current assets 5,056 5,117
Income taxes receivable   -     2,256  
Total current assets 408,591 418,494
Property and equipment, net 27,228 27,600
Goodwill 51,276 51,276
Other intangibles, net 2,629 2,854
Other assets   692     720  

Total Assets

$ 490,416   $ 500,944  


Current Liabilities:
Accounts payable $ 109,639 $ 124,821
Accrued expenses and other liabilities 20,811 22,362
Accrued payroll   14,005     14,935  

Total current liabilities

144,455 162,118
Deferred income taxes 16,288 16,224
Other liabilities   2,538     2,773  

Total Liabilities

  163,281     181,115  
Stockholders' Equity:
Common stock 281 281
Additional paid-in capital 105,107 104,932
Retained earnings 237,609 230,478
Treasury stock at cost   (15,862 )   (15,862 )

Total Stockholders' Equity

  327,135     319,829  

Total Liabilities and Stockholders' Equity

$ 490,416   $ 500,944  

Three Months Ended March 31,               2014     2013  

(amounts in thousands)

Cash Flows from Operating Activities:

Net income $ 7,131 $ 6,098
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,077 1,627
Stock-based compensation expense 159 148
Provision for doubtful accounts 128 202
Deferred income taxes 64 (111 )
Excess tax benefit from exercise of equity awards (34 ) (216 )
Loss on disposal of fixed assets - 5
Income tax benefit from stock-based compensation - 155
Changes in assets and liabilities:
Accounts receivable 22,070 30,826
Inventories 7,722 10,044
Prepaid expenses and other current assets 2,317 (970 )
Other non-current assets 28 11
Accounts payable (15,205 ) (31,605 )
Accrued expenses and other liabilities   (2,682 )   2,817  
Net cash provided by operating activities   23,775     19,031  
Cash Flows from Investing Activities:
Purchases of equipment (1,466 ) (1,745 )
Proceeds from sale of equipment   9     -  
Net cash used for investing activities   (1,457 )   (1,745 )

Cash Flows from Financing Activities:

Excess tax benefit from exercise of equity awards 34 216
Exercise of stock options 16 1,380

Shares withheld for taxes paid on stock awards

(34 ) -
Repayment of capital lease obligation to affiliate   -     (260 )
Net cash provided by financing activities   16     1,336  
Increase in cash and cash equivalents 22,334 18,622
Cash and cash equivalents, beginning of period   42,547     39,907  
Cash and cash equivalents, end of period $ 64,881   $ 58,529  

Non-cash Investing Activities:

Accrued capital expenditures $ 358 $ 356

PC Connection, Inc.
Joseph Driscoll, 603-683-2322
Senior Vice President, Treasurer and Chief Financial Officer

Source: PC Connection, Inc.

News Provided by Acquire Media