Connection (CNXN) Reports First Quarter 2019 Results

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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.

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