PCM Reports Record Fourth Quarter and Full Year 2018 Results

Net Sales of $564.1 million in Q4 and $2,164.0 Million for Full Year
Gross
Profit Increased 6% in Q4 to $84.8 Million and 6% for Full Year to
$343.9 Million

Gross Profit Margin Increased 40 Basis Points
to 15.0% in Q4 and 90 Basis Points to 15.9% for Full Year

Diluted
EPS Increased $0.75 to $0.48 and Increased $1.63 for Full Year to $1.83

Non-GAAP
Adjusted EPS Increased $0.54 in Q4 to $0.57 and Increased $1.44 for Full
Year to $2.36

Generated Cash Flow from Operations of $46
Million for Q4 and $134 Million for Full Year

EL SEGUNDO, Calif.–(BUSINESS WIRE)–PCM, Inc. (NASDAQ: PCMI), a leading technology solutions
provider, today reported financial results for the fourth quarter and
year ended December 31, 2018.

 

Consolidated Financial Summary

   
  Three Months Ended December 31, Year Ended December 31,
(in millions, except per share data) 2018 2017 % Change 2018 2017 % Change
Net Sales $ 564.1 $ 544.8   4

%

 

$ 2,164.0 $ 2,166.9 (0 )%
Gross Profit 84.8 79.6 6 343.9 324.7 6
Gross Profit Margin 15.0 % 14.6 % 40 bp 15.9 % 15.0 % 90 bp
SG&A Expenses $ 74.0 $ 80.6 (8 ) $ 303.2 $ 314.1 (3 )
Operating Profit (Loss) 10.8 (1.0 ) NM (1 ) 40.7 10.6 283
Net Income (Loss) 6.1 (3.2 ) NM (1 ) 22.8 2.6 778
Non-GAAP Net Income 7.2 0.3 2,190 29.3 12.1 142
 
EBITDA 14.4 2.8 411 55.0 25.3 117
Adjusted EBITDA 15.1 5.5 174 60.8 37.7 61
 
Diluted Earnings (Loss) Per Share 0.48 (0.27 ) NM (1 ) 1.83 0.20 815
Adjusted Diluted Earnings Per Share 0.57 0.03 1,800 2.36 0.92 157
 
(1)   Not meaningful.      

Frank Khulusi, Chairman and CEO of PCM, Inc., stated, “We finished the
year with another fantastic quarter of profitable growth while
continuing to improve our balance sheet and deliver shareholder value.
These results confirm the effectiveness of our strategy to leverage our
investments, further optimize our sales mix, while managing our costs. I
am very pleased with how our team executed in the fourth quarter and
throughout 2018, further moving us up the value chain with our
customers. Much like we saw in the first three quarters of the year, we
drove solid results in the fourth quarter in our areas of strategic
focus, such as managed services, advanced technologies and cloud and
security solutions, and again walked away from some non-strategic
low-margin volume business we identified as unprofitable.”

Khulusi continued, “Listing some fourth quarter highlights, our sales
grew 4%, and our gross profit, which continued to grow faster than
sales, increased 6% year over year. Our gross margin was a solid 15.0%,
an increase of 40 basis points over last year, and a fourth quarter
record. Coupled with cost discipline, this resulted in strong operating
leverage, and we achieved a record $0.57 per share in adjusted EPS for
the quarter. For the year, our gross profit grew 6% to a record $343.9
million and we grew our gross margin by 90 basis points to an annual
record of 15.9%. Our strong operating leverage profile resulted in us
driving significant improvement in our adjusted EPS, which grew 157% to
a record $2.36 per share, exceeding the high end of our guidance. Along
with our increased profitability, we continued to drive strong operating
cash flow by delivering an additional $45.8 million in cash from
operations in the fourth quarter. This brought our total cash provided
by operations for the year to $133.7 million, which helped reduce our
net debt by $125.8 million since the end of 2017.”

Commenting on PCM’s ERP migration, Khulusi stated, “I am also pleased
that during 2018 we made significant progress on our journey to upgrade
and consolidate our ERP systems. During the fourth quarter, we
significantly accelerated our migration to our new SAP environment, and
we exited the year with 32% of consolidated billings occurring in the
new environment. We have been and intend to continue executing this
migration in a very careful manner in order to minimize any negative
customer impact. This year, we expect to have the vast majority of our
business operating on the new platform. Once completed, we will begin to
focus on optimizing the new environment, which over the next few years,
should allow us to become more efficient and nimble, increase
productivity and drive greater operating leverage.”

Commenting on PCM’s outlook for 2019, Khulusi concluded, “On the back of
a stellar 2018 and reflecting a strong outlook for 2019, we are
targeting gross profit growth in the mid single digits over 2018 on low
single digit sales growth. We are also targeting adjusted EPS in the
range of $2.55 to $2.75. These results reflect a continuation of year
over year reductions during the first half of the year of non-strategic
lower margin volume business we have identified as unprofitable while we
continue to execute in our areas of strategic focus. As a result, we
expect year over year growth in sales and gross profit to accelerate
throughout the course of the year, with Q1 being our seasonally lowest
quarter in sales and profitability. We strongly feel that the future for
PCM is very bright, and we’re better positioned than ever. I am
extremely grateful to our PCM team who through their hard work,
dedication and unwavering commitment to our vision are making our
success possible.”

New Accounting Standard

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606),” which, along with amendments issued in 2015 and
2016, replaced most existing revenue recognition guidance under GAAP and
eliminate industry specific guidance. The core principle of the new
guidance is that an entity should recognize revenue for the transfer of
goods and services equal to an amount it expects to be entitled to
receive for those goods and services. We adopted the guidance on January
1, 2018 using the full retrospective method, which resulted in
adjustments to our consolidated statement of operations for the three
and twelve months ended December 31, 2017, and our consolidated
statement of cash flows for the twelve months ended December 31, 2017
presented herein.

 

Results of Operations

 

Fourth Quarter Segment Results Summary

 

Net Sales

 

    Three Months Ended December 31,    
2018   2017
Net Sales   Percentage of
Total Net Sales
Net Sales   Percentage of
Total Net Sales
Dollar Change Percent
Change
Commercial $ 440,186 78 % $ 442,357 81 % $ (2,171 ) (0 )%
Public Sector 59,893 11 52,507 10 7,386 14
Canada 50,449 9 40,883 8 9,566 23
United Kingdom 13,742 2 9,136 2 4,606 50
Corporate & Other (152 ) (113 ) (39 ) 35
Consolidated $ 564,118 100 % $ 544,770 100 %(1) $ 19,348 4
 
(1)   Does not foot due to rounding.      

Consolidated net sales were $564.1 million in the three months ended
December 31, 2018 compared to $544.8 million in the three months ended
December 31, 2017, an increase of $19.3 million or 4%. Consolidated
sales of services were $45.5 million in the three months ended December
31, 2018 compared to $43.0 million in the three months ended December
31, 2017, an increase of $2.5 million, or 6%, and represented 8% of
consolidated net sales in each of the three months ended December 31,
2018 and 2017.

Commercial net sales were $440.2 million in the three months ended
December 31, 2018 compared to $442.4 million in the three months ended
December 31, 2017, a decrease of $2.2 million. Sales of services in our
Commercial segment were $32.1 million in the three months ended December
31, 2018 compared to $31.9 million in the three months ended December
31, 2017, an increase of $0.2 million or 1%, and represented 7% of
Commercial net sales in each of the three months ended December 31, 2018
and 2017. The decrease in our Commercial segment net sales in the three
months ended December 31, 2018 was primarily due to a $4.3 million
increase in sales reported on a net basis, and several specific
non-strategic customer deals we elected not to pursue based on our focus
on profitable growth, partially offset by increases in more profitable
sales transactions. In addition, we believe we were negatively impacted
by integrated circuit supply shortages from a major chip manufacturer
due to their high demand, which shortages continued from the third
quarter of 2018 and affected finished goods supply of certain notebooks
and desktops in the fourth quarter of 2018.

Public Sector net sales were $59.9 million in the three months ended
December 31, 2018 compared to $52.5 million in the three months ended
December 31, 2017, an increase of $7.4 million or 14%, primarily due to
a 16% increase in our federal sales and a 11% increase in our state and
local government and educational institution (“SLED”) business. Sales of
services in our Public Sector segment were $4.6 million in the three
months ended December 31, 2018 compared to $3.3 million in the three
months ended December 31, 2017, an increase of $1.3 million or 41%, and
represented 8% and 6% of Public Sector net sales in the three months
ended December 31, 2018 and 2017, respectively.

Canada net sales were $50.4 million in the three months ended December
31, 2018 compared to $40.9 million in the three months ended December
31, 2017, an increase of $9.6 million, or 23%. Sales of services in our
Canada segment were $7.8 million in the three months ended December 31,
2018, compared to $7.4 million in the three months ended December 31,
2017, an increase of $0.4 million or 5%, and represented 15% and 18% of
Canada net sales in the three months ended December 31, 2018 and 2017,
respectively.

Our United Kingdom segment, which officially launched in the second
quarter of 2017, generated net sales of $13.7 million in the three
months ended December 31, 2018 compared to $9.1 million in the three
months ended December 31, 2017, an increase of $4.6 million, or 50%.
Sales of services in our United Kingdom segment were $1.0 million in the
three months ended December 31, 2018, compared to $0.5 million in the
three months ended December 31, 2017, an increase of $0.5 million or
100%, and represented 7% and 5% of United Kingdom net sales in the three
months ended December 31, 2018 and 2017, respectively.

Gross Profit and Gross Profit Margin

Consolidated gross profit was $84.8 million in the three months ended
December 31, 2018 compared to $79.6 million in the three months ended
December 31, 2017, an increase of $5.2 million, or 6%. Consolidated
gross profit margin increased to 15.0% in the three months ended
December 31, 2018 from 14.6% in the same period last year. The increase
in consolidated gross profit was primarily due to a shift in mix toward
higher margin solutions and service sales, partially offset by a
decrease in vendor consideration. The increase in gross profit margin
was primarily due to the increased gross profit margin associated with
the shift in mix towards higher margin solutions and services, and the
increase in sales recorded on a net basis, partially offset by a
decrease in vendor consideration as a percentage of net sales.

Selling, General & Administrative Expenses

Consolidated SG&A expenses were $74.0 million in the three months ended
December 31, 2018 compared to $80.6 million in the three months ended
December 31, 2017, a decrease of $6.6 million or 8%. Consolidated SG&A
expenses as a percentage of net sales decreased to 13.1% in the three
months ended December 31, 2018 from 14.8% in the same period last year.
The decrease in consolidated SG&A expenses was primarily due to a
decrease in personnel costs of $2.2 million, a decrease in restructuring
charges of $0.9 million, a decrease in credit card related costs of $0.8
million, a decrease in telecommunication expense of $0.7 million, a
decrease in outside service costs of $0.6 million and an adjustment to
reduce $1.1 million of contingent consideration relating to the Provista
Technology acquisition.

Operating Profit (Loss)

Consolidated operating profit increased by $11.8 million to $10.8
million in the three months ended December 31, 2018 compared to
operating loss $1.0 million in the same period prior year due to the
increase in gross profit and reduction in SG&A expenses as discussed
above.

Income Taxes

Income tax expense was $2.6 million in the three months ended December
31, 2018 compared to income tax benefit of $18,000 in the three months
ended December 31, 2017. Our effective tax rate was 29.9% compared to
0.6% in the same period prior year. Income taxes in the three months
ended December 31, 2018 benefited from the decrease in enacted US
federal income tax rates from 35% to 21%. Income taxes in the three
months ended December 31, 2017 reflected a one-time reduction in income
expense of $0.4 million associated with the adoption of ASU 2014-09, as
well as certain adjustments related to the Tax Cuts and Jobs Act of 2017
including a $1.9 million one-time benefit of revaluing our deferred tax
liabilities at a new lower US federal tax rate, partially offset by a
$0.7 million one-time expense related to the foreign income transition
tax.

Net Income (Loss)

Net income for the three months ended December 31, 2018 was $6.1 million
compared to a net loss of $3.2 million for the three months ended
December 31, 2017. Diluted earnings per share was $0.48 compared to a
loss per share of $0.27 in the same period of the prior year.

Adjusted EPS

Non-GAAP EPS (adjusted EPS) was $0.57 for the three months ended
December 31, 2018 compared to $0.03 for the three months ended December
31, 2017.

 

Full Year Segment Results Summary

 

Net Sales

 
    Year Ended December 31,    
2018   2017
Net Sales   Percentage of
Total Net Sales
Net Sales Percentage of
Total Net Sales
Dollar Change Percent
Change
Commercial $ 1,647,431 76 % $ 1,709,249 79 % $ (61,818 ) (4 )%
Public Sector 258,945 12 274,650 13 (15,705 ) (6 )
Canada 195,846 9 171,208 8 24,638 14
United Kingdom 62,359 3 12,235 1 50,124 410
Corporate & Other (621 ) (455 ) (166 ) 36
Consolidated $ 2,163,960 100 % $ 2,166,887 100 %(1) $ (2,927 ) (0 )
 
(1)   Does not foot due to rounding.      

Consolidated net sales were $2,164.0 million in 2018 compared to
$2,166.9 million in 2017, a decrease of $2.9 million. Consolidated sales
of services were $178.2 million in 2018 compared to $160.8 million in
2017, an increase of $17.4 million, or 11%, and represented 8% and 7% of
consolidated net sales in 2018 and 2017, respectively.

Commercial net sales were $1,647.4 million in 2018 compared to $1,709.2
million in 2017, a decrease of $61.8 million or 4%. Sales of services in
our Commercial segment were $125.0 million in 2018 compared to $116.3
million in 2017, an increase of $8.7 million, or 7%, and represented 8%
and 7% of Commercial net sales in 2018 and 2017, respectively. The
decrease in our Commercial segment net sales in 2018 was primarily due
to a $35.2 million increase in sales reported on a net basis, the impact
of a couple of large, lower-margin enterprise customer projects in the
prior year that did not reoccur, and several specific, non-strategic
customer deals we elected not to pursue based on our focus on profitable
growth. In addition, we believe we were negatively impacted by
integrated circuit supply shortages from a major chip manufacturer due
to their high demand, which shortages affected finished goods supply of
certain notebooks and desktops in the second half of 2018.

Public Sector net sales were $258.9 million in 2018 compared to $274.7
million in 2017, a decrease of $15.7 million, or 6%. Sales of services
in our Public Sector segment were $17.8 million in 2018 compared to
$13.9 million in 2017, an increase of $3.9 million, or 28%, and
represented 7% and 5% of Public Sector net sales in 2018 and 2017,
respectively. The decrease in our Public Sector net sales in 2018 was
primarily due to a 20% decrease in our federal sales which were
negatively impacted by the loss of a single Federal contract, which we
were unwilling to rebid at a loss, and a large rollout to a different
Federal agency that did not reoccur.

Canada net sales were $195.8 million in 2018 compared to $171.2 million
in 2017, an increase of $24.6 million, or 14%. Sales of services in our
Canadian segment were $30.6 million in 2018 compared to $30.1 million in
2017, an increase of $0.5 million, or 2%, and represented 16% and 18% of
Canada net sales in 2018 and 2017, respectively.

United Kingdom net sales were $62.4 million in 2018 compared to $12.2
million in 2017, an increase of $50.2 million, or 410%. Sales of
services in our United Kingdom segment were $4.8 million in 2018
compared to $0.5 million in 2017, an increase of $4.3 million, or 837%,
and represented 8% and 4% of United Kingdom net sales in 2018 and 2017,
respectively.

Gross Profit and Gross Profit Margin

Consolidated gross profit was $343.9 million in 2018 compared to $324.7
million in 2017, an increase of $19.2 million, or 6%. Consolidated gross
profit margin increased to 15.9% in 2018 from 15.0% in the same period
last year. The increase in consolidated gross profit was primarily due
to a shift in mix toward higher margin solutions and service sales,
partially offset by a decrease in vendor consideration. The increase in
gross profit margin was primarily due to the increase in sales recorded
on a net basis and the increased gross profit margin associated with the
shift in mix towards higher margin solutions and services, partially
offset by a decrease in vendor consideration as a percentage of net
sales.

Selling, General & Administrative Expenses

Consolidated SG&A expenses were $303.2 million in 2018 compared to
$314.1 million in 2017, a decrease of $10.9 million or 3%. Consolidated
SG&A expenses as a percentage of net sales decreased to 14.0% in 2018
from 14.5% in the same period last year. The decrease in consolidated
SG&A expenses was primarily due to a decrease in outside services of
$4.9 million, primarily related to the termination of the service
contract with our prior BPO service provider in Pakistan and a decrease
in third party logistics costs, a decrease in restructuring related
costs of $3.3 million, a decrease in credit card related costs of $2.2
million, a decrease in telecommunication costs of $1.8 million, a
decrease in net advertising costs of $1.3 million and an adjustment to
reduce $1.1 million of contingent consideration relating to the Provista
Technology acquisition, slightly offset by an increase in personnel
costs of $1.2 million.

Operating Profit

Consolidated operating profit increased by $30.1 million to $40.7
million in 2018 compared to $10.6 million in 2017, primarily due to the
increase in gross profit and reduction in SG&A expenses as discussed
above.

Income Taxes

Income tax expense was $9.3 million in 2018 compared to $0.7 million in
2017. Our effective tax rate was 28.9% compared to 20.4% in 2017. Income
taxes in 2018 benefited from the decrease in enacted US federal income
tax rates from 35% to 21%.
Income taxes in 2017 benefited from a
one-time reduction in income tax expense of $0.4 million associated with
the adoption of ASU 2014-09, as well as certain adjustments related to
the Tax Cuts and Jobs Act of 2017 including a $1.9 million one-time
benefit of revaluing our deferred tax liabilities at a new lower federal
tax rate, partially offset by a $0.7 million one-time expense related to
the foreign income transition tax.

Net Income

Net income for 2018 was $22.8 million compared to $2.6 million in 2017.
Diluted earnings per share was $1.83 in 2018 compared $0.20 in 2017.

Adjusted EPS

Non-GAAP EPS (adjusted EPS) was $2.36 in 2018 compared to $0.92 in 2017.

Consolidated Balance Sheet and Cash Flow

We had cash and cash equivalents of $6.0 million at December 31, 2018
compared to $9.1 million at December 31, 2017. We had $133.7 million of
net cash provided by operating activities in the year ended December 31,
2018 compared to $64.8 million of net cash used in operating activities
in the year ended December 31, 2017.

Accounts receivable at December 31, 2018 was $463.5 million, an increase
of $23.8 million from December 31, 2017. Inventory at December 31, 2018
was $61.6 million, a decrease of $41.9 million from December 31, 2017,
primarily related to the sell through of certain purchases made in the
fourth quarter of 2017. Accounts payable at December 31, 2018 was $357.2
million, an increase of $68.0 million from December 31, 2017.

Cash used in investing activities in the year ended December 31, 2018
totaled $5.8 million compared to $22.1 million in the year ended
December 31, 2017. Investing activities in the year ended December 31,
2018 were primarily related to expenditures relating to investments in
our IT infrastructure. Investing activities in the year ended December
31, 2017 were primarily related to $17.3 million of capital
expenditures, including a purchase of real property in Woodridge,
Illinois for $3.1 million, expenditures relating to investments in our
IT infrastructure and leasehold improvements and the acquisitions of
Provista Technology and Stack Technology in the UK for $3.1 million and
$1.7 million, respectively.

Within cash flows from financing activities, we paid earnout payments
totaling $2.2 million in the year ended December 31, 2018, compared to
$13.4 million in the year ended December 31, 2017.

Our outstanding borrowings under our line of credit was $88.4 million at
December 31, 2018, a $125.4 million decrease compared to $213.8 million
at December 31, 2017 as a result of the cash flow generated from our
earnings combined with our focus on working capital management during
2018.

Sales Mix Summary

The following table sets forth our gross billed sales (net of returns)
by major categories as a percentage of total gross billed sales (net of
returns) for the periods presented, determined based upon our internal
product code classifications:

 
    Three Months Ended December 31,     Year Ended December 31,
2018   2017   Y/Y
Sales Growth

 

2018

  2017   Y/Y
Sales Growth
Software (1)   29 % 25 %   19 % 29 %   28 % 5 %
Notebooks and tablets 18 22 (15 ) 17 20 (12 )
Networking 9 6 48 8 6 26
Services 8 8 6 8 7 11
Desktops 7 8

(5

)

8 7 3
Display 5 4 16 5 4 10
Manufacturer service and warranties (1)

5

5

12

6 6 4
Accessories 4 4 (4 ) 3 4 (6 )
Storage 3 4 (22 ) 3 3 (5 )
Input Devices 2 2 5 2 2 0
Printers 2 2 (1 ) 2 2 (14 )
Servers 2 3 (41 ) 3 3 (5 )
Other (2) 6 7 (17 ) 6 8 (7 )
Total 100 % 100 % 100 % 100 %

________________________________________________________________________________________

(1)   Software, including software licenses, maintenance and enterprise
agreements, and manufacturer service and warranties are shown, for
purposes of this table, on a gross sales billed to customers basis,
net of returns and do not reflect the net down impact related to
revenue recognition for sales of such products.
(2) Other includes power, supplies, consumer electronics, memory,
iPod/MP3 and miscellaneous other items.
 

Non-GAAP Measures

We are presenting earnings before interest, taxes, depreciation and
amortization expenses (EBITDA), adjusted EBITDA and non-GAAP EPS
(adjusted EPS), which are financial measures that are not determined in
accordance with accounting principles generally accepted in the United
States of America, or GAAP. Adjusted EBITDA and adjusted EPS remove the
effect of severance and restructuring related expenses related to our
cost reduction initiatives and stock-based compensation, as well as
uncommon, non-recurring or special items. Adjusted EPS also removes the
effect of amortization of intangibles acquired in acquisitions.
Depreciation and amortization expenses primarily represent an allocation
to current expense of the cost of historical capital expenditures and
for acquired intangible assets resulting from prior business
acquisitions. EBITDA, adjusted EBITDA and adjusted EPS should be used in
conjunction with other GAAP financial measures and are not presented as
an alternative measure of operating results, as determined in accordance
with GAAP.

Contacts

Investor Relations:
Kim Rogers
Hayden IR
(385)
831-7337
[email protected]

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