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Connection Reports Fourth Quarter and Full Year 2016 Results
[February 01, 2017]

Connection Reports Fourth Quarter and Full Year 2016 Results

PC Connection, Inc. (dba Connection; NASDAQ: CNXN), an industry-leading Global Technology Solutions Provider, today announced results for the quarter ended December 31, 2016. Net sales for the fourth quarter of 2016 increased by 7.5% to $735.5 million, compared to $684.3 million for the prior year quarter. Gross profit increased by 6.8% from $91.9 million to $98.1 million in the fourth quarter of 2016 as compared to the fourth quarter of 2015. Net income for the quarter ended December 31, 2016 decreased by 4.5% to $13.0 million, or $0.49 per diluted share, compared to net income of $13.6 million, or $0.51 per diluted share for the prior year quarter. Earnings per share, adjusted for acquisition costs, restructuring charges, and amortization of acquired intangibles, increased to $0.53 cents per share for the quarter ended December 31, 2016, compared to $0.52 cents per share for the prior year quarter.

The fourth quarter 2016 results include $1.5 million of acquisition and restructuring costs. This charge includes professional fees related to the GlobalServe acquisition and severance related to internal restructuring activities. In addition, the Company has presented separately amortization of acquired intangible assets in the income statement, which was approximately $0.5 million in the quarter.

Net sales for the year ended December 31, 2016 were $2.7 billion, an increase of $118.6 million or 4.6%, compared to $2.6 billion for the year ended December 31, 2015. Gross profit increased by 8.8% from $341.0 million to $371.2 million due to higher net sales and a 54 basis-point increase in gross margin for the year ended December 31, 2016. Net income for the year ended December 31, 2016 increased by 2.7% to $48.1 million, or $1.80 per diluted share, compared to net income of $46.8 million, or $1.76 per diluted share, for the year ended December 31, 2015. Earnings per share, adjusted for acquisition costs, restructuring charges, and amortization of acquired intangibles, increased to $1.90 cents per share for the year ended December 31, 2016, compared to $1.78 cents per share for the prior year. Earnings before interest, taxes, acquisition, rebranding, and restructuring costs, depreciation and amortization, and stock-based compensation expense ("Adjusted EBITDA") totaled $95.5 million for December 31, 2016, compared to $89.5 million for December 31, 2015.

Quarterly Performance by Segment:

  • Net sales for the SMB segment increased by 5.2% to $276.4 million in the fourth quarter of 2016, compared to the prior year quarter. Strong performance in advanced technology solution categories contributed to a 3.9% increase in gross profit.
  • Net sales for the Large Account segment increased by 4.3% to $288.8 million in the fourth quarter of 2016, compared to the prior year quarter. Gross margin improved by 51 basis points due to a strong performance in software, which contributed to an 8.9% increase in gross profit.
  • Net sales to the Public Sector segment increased by 17.7% to $170.4 million in the fourth quarter of 2016, compared to the prior year quarter. Sales to the federal government increased by 46.1%, compared to the prior year, while sales to state and local government and educational institutions decreased by 3.8%. Notebooks/mobility sales were strong in this segment with a 31.4% increase, and contributed to a 10.0% increase in gross profit. The Company's Public Sector current order backlog is up over $30 million from a year ago. This segment won several large deals in the fourth quarter, driving the increase. Some of these deals are at lower than average margins due to the competitive nature of the bidding process.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company's largest product category, increased by 14% year over year and accounted for 22% of net sales in the fourth quarter of 2016 compared to 20% of net sales in the prior year quarter. Mobility continues to be a strategic focus area for customers in all segments.
  • Software sales increased by 14% year over year and accounted for 21% of net sales in the fourth quarter of 2016 compared to 20% of net sales in the prior year quarter. We experienced growth in cloud-based offerings, security, and virtualization.

Overall gross profit increased by $6.3 million, or 6.8%, in the fourth quarter of 2016, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased slightly to 13.3% for the fourth quarter of 2016, compared to 13.4% for the prior year quarter.

Selling, general and administrative expenses increased in the fourth quarter of 2016 to $76.2 million from $69.0 million in the prior year quarter. Excluding acquisition costs, restructuring charges, and amortization of acquired intangibles, SG&A expenses were $74.2 million in the fourth quarter of 2016, with variable cost increasing due to higher levels of gross profit. We also had three months of Softmart SG&A in the current quarter. We continue to invest in technical solution sales capabilities and expect SG&A expenses to rise accordingly. However, we are highly focused on improving efficiencies and streamlining wherever possible.

Total cash was $49.2 million at December 31, 2016, compared to $80.2 million at December 31, 2015. In January 2017, we paid a 34 cent per share special dividend to shareholders, which totaled $9.0 million. The Company generated positive cash flow of approximately $23 million for 2016 before the Softmart acquisition of $32 million, the GlobalServe acquisition of $11 million, and the special dividend of $10.6 million. Days sales outstanding were 48 days at December 31, 2016, and inventory turns were 22 turns in the fourth quarter of 2016.

As announced last quarter, the Company acquired GlobalServe, Inc. on October 11, 2016. GlobalServe has developed a portal designed to meet its customers' global IT needs with consistent delivery, reporting, pricing, and logistics. We are excited to be able to offer our customers this global capability. This industry leading tool simplifies our customers' global IT procurement and reduces their costs. We believe that this acquisition gives us a competitive advantage in the market place and expect this to be an important component of our future growth strategy.

"The Company achieved record sales and gross profit this quarter in an overall muted IT spending environment," said Timothy McGrath, President and Chief Executive Officer. "The recent acquisitions of Softmart and GlobalServe have expanded our capabilities and added significantly to our customer count, sales headcount, and technical personnel. We believe our team and the strategies we have in place position us well to gain market share and increase long-term shareholder value," concluded Mr. McGrath.

Non-GAAP Financial Information

Adjusted EBITDA, Adjusted EPS and Adjusted S,G & A are non-GAAP financial measures. This information is included to provide information with respect to the Company's operating performance and earnings.

About Connection

Connection (www.connection.com; NASDAQ: CNXN), is the combined corporate brand name for PC Connection, Inc., a Fortune 1000 company, along with its subsidiaries: PC Connection Sales, GovConnection, and MoreDirect,, reflecting the Company's mission to connect people with technology that enhances growth, elevates productivity, and empowers innovation. Headquartered in Merrimack, NH with offices throughout the United States, the Company continues to deliver custom-configured computer systems overnight from our ISO 9001:2008 certified technical configuration lab at our distribution center in Wilmington, OH. In addition, the company has over 2,500 technical certifications to ensure that we can solve the most complex issues of our customers. Connections 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 - Public Sector Solutions (800-800-0019), 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.

Connection - Enterprise Solutions (561-237-3300), www.connection.com/enterprise, 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.

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"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," "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, competitive products and pricing, product availability and market acceptance, new products, market acceptance of the Company's new branding, fluctuations in operating results, the ability of the Company to manage personnel levels in response to fluctuations in revenue, 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, 2015. More specifically, the statements in this release concerning the Company's outlook for selling, general, and administrative expenses, the Company's efforts in improving efficiencies and streamlining its business and other statements of a non-historical basis (including statements regarding the Company's ability to increase market share and enhance long-term shareholder value, and integrate its two acquisitions in an effective manner, and the Company's continuing investments in technical solution sales capabilities) 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 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,     2016 2015  
% 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 $ 735,548 $ 684,323 7%
Diluted earnings per share $ 0.49 $ 0.51 (4%)
Adjusted diluted earnings per share $ 0.53 $ 0.51 4%
 
Gross margin 13.3% 13.4%
Operating margin 3.0% 3.3%
Return on equity (1) 11.7% 12.5%
 
Inventory turns 22 22
Days sales outstanding 48 44
 
% of % of
Product Mix: Net Sales Net Sales
Notebooks/Mobility 22% 20%
Software 21 20
Servers/Storage 9 12
Net/Com Products 9 10
Other Hardware/Services   39   38
Total Net Sales   100%   100%
 
 
Stock Performance Indicators:
Actual shares outstanding 26,609 26,498
Total book value per share $ 16.29 $ 14.81
Tangible book value per share $ 13.05 $ 12.81
Closing price $ 28.09 $ 22.64
Market capitalization $ 747,447 $ 599,915
Trailing price/earnings ratio 15.6 12.9
LTM Adjusted EBITDA (2) $ 95,468 $ 89,535
Adjusted market capitalization/LTM Adjusted EBITDA (3) 7.3 5.9
 
(1) Based on last twelve months' net income.

(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for acquisition, rebranding, and restructuring costs, and 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 December 31,     2016   2015  
Net Gross Net Gross
(amounts in thousands) Sales   Margin Sales   Margin
 
SMB $ 276,373 15.7 % $ 262,646 15.9 %
Large Account 288,812 12.2 276,980 11.6
Public Sector   170,363 11.5   144,697 12.3
Total $ 735,548 13.3 % $ 684,323 13.4 %
 

                     
                                     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31,           2016 2015
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 735,548 100.0 % $ 684,323 100.0 %
Cost of sales   637,425   86.7     592,472   86.6  
Gross profit 98,123 13.3 91,851 13.4
 
Acquisition and restructuring costs 1,511 0.2 296 0.0
Amortization of acquired intangible assets 469 - - -
Selling, general and administrative expenses, other   74,242   10.1     68,664   10.1  
Income from operations 21,901 3.0 22,891 3.3
 
Interest/other expense, net (14 ) - (20 ) -
Income tax provision   (8,890 ) (1.2 )   (9,258 ) (1.3 )
Net income $ 12,997   1.8 % $ 13,613   2.0 %
 
Earnings per common share:
Basic $ 0.49   $ 0.51  
Diluted $ 0.49   $ 0.51  
 
Shares used in the computation of earnings per common share:
Basic   26,569     26,459  
Diluted   26,738     26,632  

                     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,           2016     2015  
(amounts in thousands, except per share data) Amount % of Net Sales Amount % of Net Sales
 
Net sales $ 2,692,592 100.0 % $ 2,573,973 100.0 %
Cost of sales   2,321,435   86.2     2,232,954   86.8  
Gross profit 371,157 13.8 341,019 13.2
 
Acquisition, rebranding and restructuring costs 3,406 0.1 1,026 -
Amortization of acquired intangible assets 846 - - -
Selling, general and administrative expenses, other   286,385   10.7     261,439   10.2  
Income from operations 80,520 3.0 78,554 3.0
 
Interest/other expense, net (67 ) - (87 ) -
Income tax provision   (32,342 ) (1.2 )   (31,640 ) (1.2 )
Net income $ 48,111   1.8 % $ 46,827   1.8 %
 
Earnings per common share:
Basic $ 1.81   $ 1.77  
Diluted $ 1.80   $ 1.76  
 
Shares used in the computation of earnings per common share:
Basic   26,528     26,398  
Diluted   26,719     26,616  
 

                     
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 acquisition, rebranding and restructuring costs 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.
(amounts in thousands) Three Months Ended December 31, Years Ended December 31,
2016 2015 % Change 2016 2015 % Change
Net income $ 12,997 $ 13,613 $ 48,111 $ 46,827
Depreciation and amortization 2,948 2,364 10,453 8,961
Income tax expense 8,890 9,258 32,342 31,640
Interest expense   54   20   107   87
EBITDA 24,889 25,255 91,013 87,515
Acquisition, rebranding and restructuring costs (1) 1,511 296 3,406 1,026
Stock-based compensation   74   274     1,049   994  
Adjusted EBITDA $ 26,474 $ 25,825 3% $ 95,468 $ 89,535 7%
 
(1) Acquisition, rebranding, and restructuring costs relate to our 2016 acquisitions, the re-branding of the Company to "Connection", severance related to internal restructuring, duplicate costs incurred with the move of our Chicago-area facility, and in 2015, duplicate costs incurred with the transition to our new distribution center.
 

       
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 the Amortization of Acquired Intangible Assets and Acquisition, Rebranding, and Restructuring Costs, 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). We believe that these non-GAAP disclosures provide helpful information with respect to our operating performance.
(amounts in thousands, except per share data) Three Months Ended December 31, Years Ended December 31,
  2016   2015 % Change   2016   2015 % Change
Net income $ 12,997 $ 13,613 $ 48,111 $ 46,827
Acquisition, rebranding, and restructuring costs, net of tax (1) 898 176 2,037 613
Amortization of acquired intangible assets, net of tax (2)   279   -   506   -
Adjusted Net Income $ 14,174 $ 13,789 $ 50,654 $ 47,440
Diluted shares   26,738   26,632     26,719   26,616  
Adjusted Diluted Earnings per Share $ 0.53 $ 0.52 2% $ 1.90 $ 1.78 6%
 
 

(1) Acquisition, rebranding, and restructuring costs relate to our 2016 acquisitions, the re-branding of the Company to "Connection," severance related to internal restructuring, duplicate costs incurred with the move of our Chicago-area facility, and in 2015, duplicate costs incurred with the transition to our new distribution center.

(2) Amortization of acquired intangible assets relates to intangible assets recorded as a result of our 2016 acquisitions.
 

ADJUSTED SELLING, GENERAL AND ADMINISTRATION EXPENSES      
                   
A reconciliation from selling, general and administration expenses to adjusted selling, general and administration expenses is detailed below. Adjusted selling, general and administration expenses is defined as selling, general and administration expenses less Acquisition, Rebranding, and Restructuring Costs and Amortization of Acquired Intangible Assets. Adjusted selling, general and administration expenses are considered non-GAAP financial measures (see note above in Adjusted EBITDA and Adjusted EPS for a description of non-GAAP financial measures). We believe that these non-GAAP disclosures provide helpful information with respect to our operating performance.
(amounts in thousands) Three Months Ended December 31, Years Ended December 31,
2016 2015 2016 2015
Selling, general and administration $ 76,222 $ 68,960 $ 290,637 $ 262,465
Acquisition, rebranding, and restructuring costs (1) (1,511) (296) (3,406) (1,026)
Amortization of acquired intangible assets (2) (469) - (846) -
Adjusted selling, general and administration $ 74,242 $ 68,664 $ 286,385 $ 261,439
 

(1) Acquisition, rebranding, and restructuring costs relate to our 2016 acquisitions, the re-branding of the Company to "Connection," severance related to internal restructuring, duplicate costs incurred with the move of our Chicago-area facility, and in 2015, duplicate costs incurred with the transition to our new distribution center.

(2) Amortization of acquired intangible assets relates to intangible assets recorded as a result of our 2016 acquisitions.

 

                       
        December 31,       December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS     2016 2015
(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents $ 49,180 $ 80,188
Accounts receivable, net 411,883 356,145
Inventories 90,535 102,780
Prepaid expenses and other current assets 5,453 4,254
Income taxes receivable 2,120 1,575
Deferred income taxes   -     7,909  
Total current assets 559,171 552,851
Property and equipment, net 39,402 32,227
Goodwill 73,602 51,276
Other intangibles, net 12,586 1,668
Other assets   1,373     1,052  
Total Assets $ 686,134   $ 639,074  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 177,862 $ 166,516
Accrued expenses and other liabilities 31,047 36,207
Accrued payroll   21,345     19,280  
Total current liabilities 230,254 222,003
Deferred income taxes 19,602 21,615
Other liabilities   2,836     3,005  
Total Liabilities   252,692     246,623  
Stockholders' Equity:
Common stock 285 284
Additional paid-in capital 111,081 109,161
Retained earnings 337,938 298,868
Treasury stock at cost   (15,862 )   (15,862 )
Total Stockholders' Equity   433,442     392,451  
Total Liabilities and Stockholders' Equity $ 686,134   $ 639,074  
 

           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,                 2016     2015  
(amounts in thousands)
Cash Flows from Operating Activities:
Net income $ 48,111 $ 46,827
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,453 8,961
Deferred income taxes 3,506 2,652
Stock-based compensation expense 1,049 994
Provision for doubtful accounts 360 1,097
Loss on disposal of fixed assets 92 44
Excess tax benefit from exercise of equity awards (513 ) (552 )
 
Changes in assets and liabilities:
Accounts receivable (33,835 ) (64,215 )
Inventories 12,401 (11,863 )
Prepaid expenses and other current assets (1,274 ) (285 )
Other non-current assets (321 ) (328 )
Accounts payable (3,012 ) 41,324
Accrued expenses and other liabilities   (3,431 )   6,206  
Net cash provided by operating activities   33,586     30,862  
 
Cash Flows from Investing Activities:
Purchases of equipment (11,885 ) (12,337 )
Purchase of GlobalServe (11,101 ) -
Purchase of Softmart (31,889 ) -
Purchase of intangible asset   -     (450 )
Net cash used for investing activities   (54,875 )   (12,787 )
 
Cash Flows from Financing Activities:
Dividend payment (10,591 ) -
Issuance of stock under Employee Stock Purchase Plan 961 875
Excess tax benefit from exercise of equity awards 513 552
Exercise of stock options 135 437
Payment of payroll taxes on stock-based compensation through shares withheld   (737 )   (660 )
Net cash (used for) provided by financing activities   (9,719 )   1,204  
(Decrease) increase in cash and cash equivalents (31,008 ) 19,279
Cash and cash equivalents, beginning of period   80,188     60,909  
Cash and cash equivalents, end of period $ 49,180   $ 80,188  
 
Non-cash Investing Activities:
Accrued capital expenditures $ 109 $ 504
Dividend declaration $ 9,041 $ 10,591
 
Supplemental Cash Flow Information:
Income taxes paid $ 29,740 $ 30,371
 

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