Connection (CNXN) Reports First Quarter 2019 Results

Net Income Increases by 12.6% from Prior Q1

FIRST QUARTER SUMMARY:

  • Net income: $12.7 million, up 12.6% y/y
  • Gross profit: $99.3 million, up 3.1% y/y
  • Record gross margin: 15.7%, compared to 15.4%
  • Diluted EPS: $0.48, compared to $0.42 y/y, up 14.3%
  • Cash balance: $93.5 million

MERRIMACK, N.H.–(BUSINESS WIRE)–Connection (PC Connection, Inc.; NASDAQ: CNXN),
a leading technology solutions provider to business, government, and
education markets, today announced results for the first quarter ended
March 31, 2019. Net sales for the quarter ended March 31, 2019 increased
by 1.3% to $632.9 million, compared to $624.9 million for the prior year
quarter. Our average daily sales during the quarter increased by 2.9%,
compared to the prior year quarter. During the quarter, there was
downward pressure on net sales growth, because a greater portion of our
software sales were recognized on a net basis. Net income for the first
quarter ended March 31, 2019 increased by 12.6% to $12.7 million, or
$0.48 per diluted share, compared to net income of $11.3 million, or
$0.42 per diluted share for the prior year quarter.

Earnings before interest, taxes, depreciation and amortization, adjusted
for stock-based compensation expense and restructuring and other charges
(“Adjusted EBITDA”) totaled $108.1 million for the twelve months ended
March 31, 2019, compared to $98.6 million for the twelve months ended
March 31, 2018.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment decreased by 3.9% to
    $252.9 million in the first quarter of 2019, compared to the prior
    year quarter. We experienced strong growth in sales of mobility and
    software products in the quarter. Our software growth was driven by
    increases in cloud-based and security software sales, which are
    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. Gross margin increased by 23 basis points to 17.8% due
    to increased sales of cloud-based and security software, partially
    offset by changes in hardware product mix.
  • Net sales for the Public Sector Solutions segment decreased slightly
    to $104.4 million in the first quarter of 2019, compared to the prior
    year quarter. Sales to the federal government increased by 3.3%,
    compared to the prior year, while sales to state and local government
    and educational institutions decreased by 1.7%. Gross margin decreased
    by 29 basis points to 12.6% primarily due to changes in hardware
    product mix, partially offset by increases resulting from higher
    cloud-based and security software sales.
  • Net sales for the Enterprise Solutions segment increased by 7.2% to
    $275.6 million in the first quarter of 2019, compared to the prior
    year quarter primarily due to continued strong demand by our
    Enterprise customers. Gross margin increased by 69 basis points to
    15.0% primarily due to an increase in sales of cloud-based and
    security software and improved invoice selling margins.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company’s largest product category,
    increased by 10% year over year and accounted for 28% of net sales in
    the first quarter of 2019, compared to 26% of net sales in the prior
    year quarter. All three selling segments experienced strong
    year-over-year growth in notebook sales.
  • Accessories sales increased by 20% year over year and accounted for
    14% of net sales in the first quarter of 2019, compared to 12% of net
    sales in the prior year quarter. 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 6% year over year and accounted for 12% of
    net sales in the first quarter of 2019, compared to 11% of net sales
    in the prior year quarter. The Enterprise Solutions and Public Sector
    Solutions segments experienced strong year-over-year growth in desktop
    sales.
  • Software sales increased by 3% year over year and accounted for 11% of
    net sales in the first quarter of 2019 and 2018. The growth in
    software sales was largely driven by increased sales of cloud-based
    offerings, security, and maintenance software across all three
    segments.

Selling, general and administrative (“SG&A”) expenses increased in the
first quarter of 2019 to $81.2 million from $80.9 million in the prior
year quarter, but decreased 11 basis points as a percentage of net sales.

In addition, the first quarter 2019 results include $0.7 million of
restructuring and other related costs associated with severance and
other exit costs associated with the closing of an office facility.

Cash and cash equivalents were $93.5 million at March 31, 2019, compared
to $91.7 million at December 31, 2018. In January 2019, we paid a $0.32
cent per share special dividend to shareholders, which totaled $8.5
million. During the first quarter of 2019, the Company repurchased
42,537 shares of stock for $1.3 million.

“The Company achieved record gross margin this quarter. We saw strong
demand in mobility, software, cloud and security solutions. We are
pleased with the growth in our Enterprise segment and in our retail and
healthcare vertical markets,” said Tim McGrath, President and Chief
Executive Officer. “Our increased productivity and improved execution
allowed us to deliver a 12.6% increase in net income,” concluded Mr.
McGrath.

Conference Call and Webcast

Connection will host a conference call and live web cast today, May 2,
2019 at 4:30 p.m. ET to discuss its first 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 March 31,     2019 2018  
%
(Amounts and shares in thousands, except operating data, P/E
ratio, and per share data)
                Change
 
Operating Data:
Net sales $ 632,921 $ 624,895 1%
Diluted earnings per share $ 0.48 $ 0.42 14%
 
Gross margin 15.7% 15.4%
Operating margin 2.8% 2.5%
Return on equity (1) 12.7% 12.5%
 
Inventory turns 17 23
Days sales outstanding 55 53
 
% of % of
Product Mix: Net Sales Net Sales
Notebooks/Mobility 28% 26%
Accessories 14 12
Desktops 12 11
Software 11 11
Servers/Storage 9 12
Displays 9 9
Net/Com Products 7 8
Other Hardware/Services 10 11
Total Net Sales 100% 100%
 
 
Stock Performance Indicators:
Actual shares outstanding 26,356 26,737
Total book value per share $20.40 $18.40
Tangible book value per share $17.25 $15.25
Closing price $36.67 $25.00
Market capitalization $966,475 $668,425
Trailing price/earnings ratio 14.8 11.4
LTM Adjusted EBITDA (2) $108,117 $98,551
Adjusted market capitalization/LTM Adjusted EBITDA (3) 8.1 6.1
(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 March 31,     2019 2018
Net Gross Net Gross
(amounts in thousands) Sales   Margin Sales   Margin
 
Business Solutions $ 252,932 17.8 % $ 263,278 17.6 %
Enterprise Solutions 275,635 15.0 257,244 14.3
Public Sector Solutions   104,354 12.6   104,373 12.9
Total $ 632,921 15.7 % $ 624,895 15.4 %
           
CONDENSED CONSOLIDATED STATEMENTS OF INCOME      
      Three Months Ended March 31,
(amounts in thousands, except per share data) 2019 2018
 
Net sales $ 632,921 $ 624,895
Cost of sales   533,574     528,523  
Gross profit 99,347 96,372
 
Selling, general and administrative expenses 81,235 80,900
Restructuring and other charges   703      
Income from operations 17,409 15,472
 
Other income/(expense), net 198 116
Income tax provision   (4,880 )   (4,288 )
Net income $ 12,727   $ 11,300  
 
Earnings per common share:
Basic $ 0.48   $ 0.42  
Diluted $ 0.48   $ 0.42  
 
Shares used in the computation of earnings per common share:
Basic   26,359     26,835  
Diluted   26,525     26,916  
           
    March 31   December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS

2019

2018
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 93,470 $ 91,703
Accounts receivable, net 433,948 447,698
Inventories, net 137,665 119,195
Income taxes receivable 922
Prepaid expenses and other current assets   7,261     9,661  
Total current assets 672,344 669,179
Property and equipment, net 55,438 51,799
Right-of-use assets, net 16,750
Goodwill 73,602 73,602
Intangibles assets, net 9,223 9,564
Other assets   1,092     1,211  
Total Assets $ 828,449   $ 805,355  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 204,196 $ 201,640
Accrued payroll 18,066 24,319
Accrued expenses and other liabilities   36,619     33,840  
Total current liabilities 258,881 259,799
Deferred income taxes 17,184 17,184
Operating lease liability 13,215
Other liabilities   1,577     2,469  
Total Liabilities   290,857     279,452  
Stockholders’ Equity:
Common stock 288 288
Additional paid-in capital 116,098 115,842
Retained earnings 453,737 441,010
Treasury stock at cost   (32,531 )   (31,237 )
Total Stockholders’ Equity   537,592     525,903  
Total Liabilities and Stockholders’ Equity $ 828,449   $ 805,355  
           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      
      Three Months Ended March 31,
(amounts in thousands) 2019 2018
Cash Flows from Operating Activities:
Net income $ 12,727 $ 11,300
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 3,709 3,300
Stock-based compensation expense 269 207
Provision for doubtful accounts 256 417
Deferred income taxes 429
 
Changes in assets and liabilities:
Accounts receivable 13,494 57,389
Inventories (18,470 ) 10,302
Prepaid expenses and other current assets 3,322 2,721
Other non-current assets 119 (1,880 )
Accounts payable 2,121 (42,521 )
Accrued expenses and other liabilities   551     (4,420 )
Net cash provided by operating activities   18,098     37,244  
 
Cash Flows from Investing Activities:
Purchases of equipment   (6,572 )   (5,007 )
Net cash used in investing activities   (6,572 )   (5,007 )
 
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 859
Dividend payment (8,452 ) (9,122 )
Purchase of treasury shares (1,294 ) (2,997 )
Issuance of stock under Employee Stock Purchase Plan   (13 )    
Net cash used in financing activities   (9,759 )   (11,260 )
Increase (decrease) in cash and cash equivalents 1,767 20,977
Cash and cash equivalents, beginning of period   91,703     49,990  
Cash and cash equivalents, end of period $ 93,470   $ 70,967  
 
Non-cash Investing Activities:
Accrued capital expenditures $ 1,987 $ 1,140
 
Supplemental Cash Flow Information:

Income taxes paid

$ 291 $ 320
 

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 March 31, LTM Ended March 31, (1)
2019 2018 % Change 2019 2018 % Change
Net income $ 12,727 $ 11,300 13% $ 66,019 $ 58,725 12%
Depreciation and amortization 3,709 3,301 12% 14,472 12,285 18%
Income tax expense 4,880 4,288 14% 24,664 23,017 7%
Interest expense   30   25 20%   150   123 22%
EBITDA 21,346 18,914 13% 105,305 94,150 12%
Restructuring and other charges (2) 703 100% 1,670 3,636 (54%)
Stock-based compensation   269   207 30%   1,142   765 49%
Adjusted EBITDA $ 22,318 $ 19,121 17% $ 108,117 $ 98,551 10%
(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 March 31,
2019   2018   % Change
Net income $ 12,727 $ 11,300
Restructuring and other charges, net of tax (1)   508  
Adjusted Net Income $ 13,235 $ 11,300 17%
Diluted shares   26,525   26,916  
Adjusted Diluted Earnings per Share $ 0.50 $ 0.42 19%
 
(1)   Restructuring and other charges in 2019 consist of severance and
other charges related to internal restructuring activities.

Contacts

Tom Baker, 603.683.2505
Tom.Baker@connection.com

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