Connection (CNXN) Reports Fourth Quarter and Full Year Results

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)–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.

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, 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.

Contacts

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

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