Connection (CNXN) Reports First Quarter 2017 Results

FIRST QUARTER SUMMARY:

• Record Q1 net sales: $671 million, up 17.2% y/y
• Gross profit up 5.5% y/y
• Diluted EPS: $0.28, compared to $0.34
• Cash balance: $65.8 million, up from Q4-2016

MERRIMACK, N.H.--(BUSINESS WIRE)--Connection (PC Connection, Inc.; NASDAQ: CNXN), an industry-leading national technology solutions provider of a full range of information technology (IT) solutions to business, government, and education markets, today announced results for the quarter ended March 31, 2017. Net sales for the quarter ended March 31, 2017 increased by 17.2% to $670.6 million, compared to $572.4 million for the prior year quarter. Net income for the quarter ended March 31, 2017 decreased by 18.0% to $7.4 million, or $0.28 per diluted share, compared to net income of $9.1 million, or $0.34 per diluted share for the prior year quarter.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and rebranding, acquisition and restructuring costs (“Adjusted EBITDA”) totaled $92.1 million for the twelve months ended March 31, 2017, compared to $90.8 million for the twelve months ended March 31, 2016.

Quarterly Performance by Segment:

• Net sales for the SMB segment increased by 5% to $273.6 million in the first quarter of 2017, compared to the prior year quarter. Software and mobility products each grew at double-digit rates. Gross margin decreased by 67 basis points due to increased sales of lower-margin mobility and desktop products.
• Net sales for the Large Account segment increased by 26% to $252.9 million in the first quarter of 2017, compared to the prior year quarter. Software, net/com products, and servers had strong growth during this quarter at 61%, 87%, and 70%, respectively. Gross margin decreased by 64 basis points due to product mix and an increase in large project rollouts, which generally carry lower margins.
• Net sales to the Public Sector segment increased by 30% to $144.0 million in the first quarter of 2017, compared to the prior year quarter. Sales to state and local government and educational institutions increased by 15%, compared to the prior year quarter, while sales to the federal government increased by 62%. Gross margin decreased by 357 basis points due to a large federal customer project rollout that consisted of lower-margin products such as desktops, which grew 288% during the quarter.

Quarterly Sales by Product Mix:

• Notebook/mobility sales, the Company’s largest product category, increased by 9% year over year and accounted for 22% of net sales in the first quarter of 2017 compared to 24% of net sales in the prior year quarter. Large Account and SMB experienced strong year-over-year growth in notebook/mobility sales.
• Software sales increased by 36% year over year and accounted for 19% of net sales in the first quarter of 2017 compared to 17% of net sales in the prior year quarter. We experienced growth in cloud-based offerings, security, and office productivity.

Overall gross profit increased by $4.5 million, or 5.5%, in the first quarter of 2017, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased to 12.9% in the first quarter of 2017, compared to 14.4% for the prior year quarter.

Selling, general and administrative dollars increased in the first quarter of 2017 to $75.3 million from $67.0 million in the prior year quarter, 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.

The Company generated significant cash flow during the quarter ended March 31, 2017. Total cash was $65.8 million at March 31, 2017, compared to $49.2 million at December 31, 2016. During the quarter we paid a $9.0 million special dividend to shareholders. Days sales outstanding were 48 days at March 31, 2017, and inventory turns were 25 turns in the first quarter of 2017.

“We are encouraged with the acceleration of our top line during the quarter. We saw strong growth in software, networking communications, workforce productivity, and services,” said Tim McGrath, President and Chief Executive Officer. “With this market share growth, we remain focused on gross margin improvements, operating expense management, and our strategic plan to help our customers solve their business challenges with advanced technology solutions,” concluded Mr. McGrath.

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. 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.

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. 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.pcconnection.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," "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, 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, 2016. 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 March 31,	2017				2016
				% 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	$	670,594			$	572,394			17	%
Diluted earnings per share	$	0.28			$	0.34			(18	%)
Gross margin		12.9	%			14.4	%
Operating margin		1.7	%			2.7	%
Return on equity ^(1)		11.0	%			12.3	%
Inventory turns		25				19
Days sales outstanding		48				41
	% of				% of
Product Mix:	Net Sales				Net Sales
Notebooks/Mobility		22	%			24	%
Software		19				17
Servers/Storage		9				11
Net/Com Products		9				8
Other Hardware/Services		41				40
Total Net Sales		100	%			100	%
Stock Performance Indicators:
Actual shares outstanding		26,761				26,501
Total book value per share	$	16.54			$	15.16
Tangible book value per share	$	13.34			$	13.17
Closing price	$	29.79			$	25.81
Market capitalization	$	797,210			$	683,991
Trailing price/earnings ratio		17.0				14.5
LTM Adjusted EBITDA ^(2)	$	92,136			$	90,795
Adjusted market capitalization/LTM Adjusted EBITDA ^(3)		7.9				6.6
(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 March 31,	2017				2016
	Net		Gross		Net		Gross
(amounts in thousands)	Sales		Margin		Sales		Margin
SMB	$	273,633	15.3	%	$	261,246	15.9	%
Large Account		252,918	12.5			200,109	13.1
Public Sector		144,043	9.2			111,039	12.8
Total	$	670,594	12.9	%	$	572,394	14.4	%

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,	2017					2016
(amounts in thousands, except per share data)	Amount			% of Net Sales		Amount			% of Net Sales
Net sales	$	670,594		100.0	%	$	572,394		100.0	%
Cost of sales		583,861		87.1			490,201		85.6
Gross profit		86,733		12.9			82,193		14.4
Selling, general and administrative expenses, other		75,281		11.2			67,029		11.7
Income from operations		11,452		1.7			15,164		2.7
Interest/other expense, net		19		–			(14	)	–
Income tax provision		(4,039	)	(0.6	)		(6,087	)	(1.1	)
Net income	$	7,432		1.1	%	$	9,063		1.6	%
Earnings per common share:
Basic	$	0.28				$	0.34
Diluted	$	0.28				$	0.34
Shares used in the computation of earnings per common share:
Basic		26,697					26,499
Diluted		26,866					26,671

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 March 31,						LTM Ended March 31, ^(1)
	2017		2016		% Change		2017		2016		% Change
Net income	$	7,432	$	9,063			$	46,480	$	47,306
Depreciation and amortization		2,855		2,416				10,892		9,185
Income tax expense		4,039		6,087				30,294		32,131
Interest expense		28		14				121		102
EBITDA		14,354		17,580				87,787		88,724
Acquisition, rebranding and restructuring costs ^(2)		-		-				3,406		1,026
Stock-based compensation		183		289				943		1,045
Adjusted EBITDA	$	14,537	$	17,869	-19	%	$	92,136	$	90,795	1	%
(1) LTM: Last twelve months
(2) 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.

	March 31,			December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS	2017			2016
(amounts in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	65,755		$	49,180
Accounts receivable, net		378,453			411,883
Inventories		99,973			90,535
Prepaid expenses and other current assets		5,604			5,453
Income taxes receivable		953			2,120
Total current assets		550,738			559,171
Property and equipment, net		38,650			39,402
Goodwill		73,602			73,602
Other intangibles, net		12,151			12,586
Other assets		1,351			1,373
Total Assets	$	676,492		$	686,134
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	171,866		$	177,862
Accrued expenses and other liabilities		24,079			31,047
Accrued payroll		15,572			21,345
Total current liabilities		211,517			230,254
Deferred income taxes		19,640			19,602
Other liabilities		2,600			2,836
Total Liabilities		233,757			252,692
Stockholders’ Equity:
Common stock		286			285
Additional paid-in capital		112,941			111,081
Retained earnings		345,370			337,938
Treasury stock at cost		(15,862	)		(15,862	)
Total Stockholders’ Equity		442,735			433,442
Total Liabilities and Stockholders’ Equity	$	676,492		$	686,134

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,	2017			2016
(amounts in thousands)
Cash Flows from Operating Activities:
Net income	$	7,432		$	9,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,855			2,416
Provision for doubtful accounts		545			(103	)
Stock-based compensation expense		183			289
Deferred income taxes		38			34
Excess tax benefit from exercise of equity awards		-			(32	)
Changes in assets and liabilities:
Accounts receivable		32,885			67,942
Inventories		(9,438	)		5,431
Prepaid expenses and other current assets		1,016			(1,928	)
Other non-current assets		22			(128	)
Accounts payable		(6,177	)		(52,359	)
Accrued expenses and other liabilities		(3,936	)		(7,156	)
Net cash provided by operating activities		25,425			23,469
Cash Flows from Investing Activities:
Purchases of equipment		(1,487	)		(2,078	)
Net cash used for investing activities		(1,487	)		(2,078	)
Cash Flows from Financing Activities:
Dividend payment		(9,041	)		(10,591	)
Exercise of stock options		1,678			-
Excess tax benefit from exercise of equity awards		-			32
Payment of payroll taxes on stock-based compensation through shares withheld		-			(40	)
Net cash used for financing activities		(7,363	)		(10,599	)
Increase in cash and cash equivalents		16,575			10,792
Cash and cash equivalents, beginning of period		49,180			80,188
Cash and cash equivalents, end of period	$	65,755		$	90,980
Non-cash Investing Activities:
Accrued capital expenditures	$	291		$	578
Supplemental Cash Flow Information:
Income taxes paid	$	1,546		$	7,638

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