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.
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“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 | ||||||
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Contacts:
Joseph Driscoll, 603-683-2322
Senior Vice
President, Treasurer and Chief Financial Officer
