PC Connection, Inc. Reports Record Second Quarter 2014 Results

SECOND QUARTER SUMMARY:

• Net income up 25%
• Net sales: $633.2 million, up 13.6% year over year
• Diluted EPS: $0.43, up 23% year over year

MERRIMACK, N.H.--(BUSINESS WIRE)-- 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 June 30, 2014. Net sales for the second quarter of 2014 increased by 13.6% to $633.2 million, compared to $557.3 million for the prior year quarter. Net income for the quarter ended June 30, 2014 increased by 24.9% to $11.4 million, or $0.43 per diluted share, compared to net income of $9.2 million, or $0.35 per diluted share for the prior year quarter. Sales, net income, and earnings per share amounts represent quarterly records for the Company.

Net sales for the six months ended June 30, 2014 were $1,193.0 million, an increase of $130.3 million or 12.3%, compared to $1,062.7 million for the six months ended June 30, 2013. Net income for the six months ended June 30, 2014 increased by 21.7% to $18.6 million, or $0.70 per diluted share, compared to net income of $15.3 million, or $0.58 per diluted share, for the six months ended June 30, 2013. Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense ("Adjusted EBITDA") totaled $73.6 million for the twelve months ended June 30, 2014, compared to $64.1 million for the twelve months ended June 30, 2013.

Quarterly Sales by Segment:

• Net sales for the SMB segment increased by 10.7% to $268.1 million in the second quarter of 2014, compared to the prior year quarter. Sales of software, desktop, and notebook products each grew at double-digit rates.
• Net sales for the Large Account segment increased by 13.3% to $222.3 million in the second quarter of 2014, compared to the prior year quarter. Notebook and software sales were strong in this segment with an increase of 27.7% and 33.0%, respectively. Commercial sales, which consists of SMB and Large Account sales, increased by 11.9% from the prior year quarter.
• Net sales to the Public Sector segment (government and education customers) increased by 20.2% to $142.9 million in the second quarter of 2014, compared to the prior year quarter. Sales to state and local government and educational institutions increased by 19.0%, compared to the prior year quarter, while sales to the federal government increased by 24.9%.

Quarterly Sales by Product Mix:

• Notebook/tablet sales, the Company's largest product category, increased by 30% year over year and accounted for 22% of net sales in the second 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.
• Software, the Company's second largest product category, increased by 15% year over year and accounted for 16% of net sales in the second quarter of 2014 and 2013. We experienced strong growth in security, office productivity, and operating system software.
• Desktop/Server sales increased by 17% year over year and accounted for 16% of net sales in the second quarter of 2014 and 2013. We experienced significant sales growth in both our SMB and Public Sector segments in this product category.
• Net/com product sales increased by 10% year over year and accounted for 9% of net sales in the second quarter of 2014 and 2013. Our SMB and Public Sector segments 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 $9.9 million, or 13.3%, in the second quarter of 2014, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, slightly decreased to 13.2% in the second quarter of 2014, compared to 13.3% 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 second quarter of 2014 to $64.6 million from $58.5 million in the prior year quarter, but decreased as a percentage of net sales from 10.5% to 10.2% 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 second 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 has generated significant cash flow during the six months ended June 30, 2014. Total cash was $60.3 million at June 30, 2014, compared to $42.5 million at December 31, 2013. Days sales outstanding were 40 days at June 30, 2014, and inventory turns were 28 turns in the second quarter of 2014.

"We are encouraged with PC Connection's strong performance this quarter. We had solid execution across all three of our sales segments, reinforcing the strength of our business model," said Timothy McGrath, President and Chief Executive Officer. PC Connection continued to see increased demand for notebooks and desktops in Q2 due to the expiration of Windows XP. In addition, their investments in technical solution sales led to strong growth in servers, networking, and software. As a National Solutions Provider, PC Connection's goal is to consistently invest in more complex solutions capabilities while delivering solid financial performance; they were able to accomplish that goal in Q2 with a double-digit sales increase and a 25% 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 wholly owned 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, 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.

pccc-g

# # #

"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 areas of future investments it plans to make in its business, and other statements of a non-historical basis (including statements regarding the Company's ability to grow revenues, increase market share, and enhance long-term shareholder value) 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.

CONSOLIDATED SELECTED FINANCIAL INFORMATION
At or for the Three Months Ended June 30,			2014									2013
								% of									% of				%
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)								Net Sales									Net Sales				Change
Operating Data:
Net sales			$	633,244								$	557,287								14	%
Diluted earnings per share			$	0.43								$	0.35								23	%
Gross margin				13.2	%								13.3	%
Operating margin				3.0	%								2.8	%
Return on equity (1)				12.1	%								11.4	%
Inventory turns				28									30
Days sales outstanding				40									39
Product Mix:
Notebook/Tablet			$	136,126				22	%			$	104,415				19	%			30	%
Software				104,157				16					90,629				16				15	%
Desktop/Server				101,404				16					86,720				16				17	%
Net/Com Product				57,908				9					52,540				9				10	%
Video, Imaging & Sound				56,775				9					49,950				9				14	%
Storage				39,452				6					36,085				6				9	%
Printer & Printer Supplies				37,175				6					36,826				7				1	%
Memory & System Enhancement				21,349				3					16,810				3				27	%
Accessory/Services/Other				78,898				13					83,312				15				(5	%)
Total Net Sales			$	633,244				100	%			$	557,287				100	%			14	%
Stock Performance Indicators:
Actual shares outstanding				26,224									26,112
Total book value per share			$	12.94								$	11.83
Tangible book value per share			$	10.89								$	9.74
Closing price			$	20.68								$	15.45
Market capitalization			$	542,312								$	403,430
Trailing price/earnings ratio				14.1									12.1
LTM Adjusted EBITDA (2)			$	73,595								$	64,073
Adjusted market capitalization/LTM Adjusted EBITDA (3)				6.5									5.3
(1) Based on last twelve months' net income.
(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for 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 June 30,			2014									2013
			Net					Gross				Net					Gross
(amounts in thousands)			Sales					Margin				Sales					Margin
SMB			$	268,056				15.3	%			$	242,194				15.8	%
Large Account				222,276				12.3					196,152				11.2
Public Sector				142,912				10.8					118,941				11.5
Total			$	633,244				13.2	%			$	557,287				13.3	%

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,			2014									2013
(amounts in thousands, except per share data)			Amount					% of Net Sales				Amount					% of Net Sales
Net sales			$	633,244				100.0	%			$	557,287				100.0	%
Cost of sales				549,478				86.8					483,371				86.7
Gross profit				83,766				13.2					73,916				13.3
Selling, general and administrative expenses				64,564				10.2					58,533				10.5
Income from operations				19,202				3.0					15,383				2.8
Interest/other expense, net				(26	)			-					(46	)			-
Income tax provision				(7,747	)			(1.2	)				(6,183	)			(1.2	)
Net income			$	11,429				1.8	%			$	9,154				1.6	%
Earnings per common share:
Basic			$	0.44								$	0.35
Diluted			$	0.43								$	0.35
Shares used in the computation of earnings per common share:
Basic				26,206									26,127
Diluted				26,487									26,379
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30,			2014									2013
(amounts in thousands, except per share data)			Amount					% of Net Sales				Amount					% of Net Sales
Net sales			$	1,193,004				100.0	%			$	1,062,710				100.0	%
Cost of sales				1,036,391				86.9					921,956				86.8
Gross profit				156,613				13.1					140,754				13.2
Selling, general and administrative expenses				125,665				10.5					115,246				10.8
Income from operations				30,948				2.6					25,508				2.4
Interest/other expense, net				(36	)			-					(96	)			-
Income tax provision				(12,352	)			(1.0	)				(10,160	)			(1.0	)
Net income			$	18,560				1.6	%			$	15,252				1.4	%
Earnings per common share:
Basic			$	0.71								$	0.59
Diluted			$	0.70								$	0.58
Shares used in the computation of earnings per common share:
Basic				26,204									26,063
Diluted				26,485									26,329

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 June 30,												LTM Ended June 30, (1)
			2014				2013				% Change				2014					2013					% Change
Net income			$	11,429			$	9,154							$	38,990				$	34,022
Depreciation and amortization				1,786				1,709								7,616					7,050
Income tax expense				7,747				6,183								25,757					22,250
Interest/other expense, net				26				46								89					174
EBITDA				20,988				17,092								72,452					63,496
Stock-based compensation				327				153								1,143					577
Adjusted EBITDA			$	21,315			$	17,245			24	%			$	73,595				$	64,073				15	%
(1) LTM: Last twelve months
															June 30,					December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS															2014					2013
(amounts in thousands)
ASSETS
Current Assets:
Cash and cash equivalents															$	60,289				$	42,547
Accounts receivable, net																295,327					283,051
Inventories																97,187					79,141
Deferred income taxes																6,382					6,382
Prepaid expenses and other current assets																4,533					5,117
Income taxes receivable																783					2,256
Total current assets																464,501					418,494
Property and equipment, net																27,679					27,600
Goodwill																51,276					51,276
Other intangibles, net																2,404					2,854
Other assets																698					720
Total Assets															$	546,558				$	500,944
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable															$	153,222				$	124,821
Accrued expenses and other liabilities																20,161					22,362
Accrued payroll																15,139					14,935
Total current liabilities																188,522					162,118
Deferred income taxes																16,281					16,224
Other liabilities																2,504					2,773
Total Liabilities																207,307					181,115
Stockholders' Equity:
Common stock																281					281
Additional paid-in capital																105,794					104,932
Retained earnings																249,038					230,478
Treasury stock at cost																(15,862	)				(15,862	)
Total Stockholders' Equity																339,251					319,829
Total Liabilities and Stockholders' Equity															$	546,558				$	500,944

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,			2014					2013
(amounts in thousands)
Cash Flows from Operating Activities:
Net income			$	18,560				$	15,252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				3,863					3,337
Provision for doubtful accounts				365					564
Deferred income taxes				57					(110	)
Stock-based compensation expense				486					301
Excess tax benefit from exercise of equity awards				(34	)				(228	)
Loss on disposal of fixed assets				-					5
Income tax benefit from stock-based compensation				-					196
Changes in assets and liabilities:
Accounts receivable				(12,641	)				10,613
Inventories				(18,046	)				(7,498	)
Prepaid expenses and other current assets				2,057					(660	)
Other non-current assets				22					13
Accounts payable				28,392					(1,400	)
Accrued expenses and other liabilities				(2,232	)				6,590
Net cash provided by operating activities				20,849					26,975
Cash Flows from Investing Activities:
Purchases of equipment				(3,493	)				(4,257	)
Proceeds from sale of equipment				10					-
Net cash used for investing activities				(3,483	)				(4,257	)
Cash Flows from Financing Activities:
Exercise of stock options				16					1,586
Issuance of stock under Employee Stock Purchase Plan				360					307
Excess tax benefit from exercise of equity awards				34					228
Payment of payroll taxes on stock-based compensation through shares withheld				(34	)				-
Repayment of capital lease obligation to affiliate				-					(527	)
Net cash provided by financing activities				376					1,594
Increase in cash and cash equivalents				17,742					24,312
Cash and cash equivalents, beginning of period				42,547					39,907
Cash and cash equivalents, end of period			$	60,289				$	64,219
Non-cash Investing Activity:
Accrued capital expenditures			$	343				$	151
Supplemental Cash Flow Information:
Income taxes paid			$	10,933				$	10,936

pccc-g

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