PCMI PCM Inc

Net Sales of $564.1 million in Q4 and $2,164.0 Million for Full YearGross Profit Increased 6% in Q4 to $84.8 Million and 6% for Full Year to $343.9 MillionGross Profit Margin Increased 40 Basis Points to 15.0% in Q4 and 90 Basis Points to 15.9% for Full YearDiluted EPS Increased $0.75 to $0.48 and Increased $1.63 for Full Year to $1.83Non-GAAP Adjusted EPS Increased $0.54 in Q4 to $0.57 and Increased $1.44 for Full Year to $2.36Generated Cash Flow from Operations of $46 Million for Q4 and $134 Million for Full Year

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 ofTotal Net Sales Net Sales   Percentage ofTotal Net Sales Dollar Change PercentChange 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 ofTotal Net Sales Net Sales Percentage ofTotal Net Sales Dollar Change PercentChange 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/YSales Growth

 

2018

  2017   Y/YSales 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. We believe that these non-GAAP financial measures allow a more meaningful comparison of our operating performance trends to both management and investors that is more indicative of our consolidated operating results across reporting periods. We believe that adjusted EBITDA and adjusted EPS provide a better understanding of our company’s operating performance and cash flows. A reconciliation of the non-GAAP consolidated financial measures is included in a table below.

Conference Call

Management will hold a conference call, which will be webcast, on February 6, 2019 at 9:00 a.m. Eastern Time (6:00 a.m. Pacific Time) to discuss its fourth quarter and full year results. To listen to PCM management’s discussion of its fourth quarter and full year results live, access http://investor.pcm.com/events-presentations.

The archived webcast can be accessed at http://investor.pcm.com under “Events & Presentations.” A replay of the conference call by phone will be available from 12:00 p.m. ET on February 6, 2019 until February 13, 2019 and can be accessed by calling (855) 859-2056 (International (404) 537-3406) and inputting code 3284949.

About PCM, Inc.

PCM, Inc., through its wholly-owned subsidiaries, is a leading multi-vendor provider of technology solutions, including hardware, software and services to small, medium and enterprise businesses, state, local and federal governments and educational institutions across the United States, Canada and the UK. We generated net sales of approximately $2.2 billion in the twelve months ended December 31, 2018. For more information, please visit investor.pcm.com or call (310) 354-5600.

Forward-looking Statements

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding our expectations, hopes or intentions regarding the future, including but not limited to, statements related to the effectiveness of our strategy to leverage our investments and further optimize our sales mix while managing costs; our intentions to continue executing our ERP migration in a very careful manner in order to minimize any negative customer impact; our expectations to have the vast majority of our business operating on the new ERP platform and once completed, optimizing the new environment and becoming more efficient and nimble, increasing productivity and driving operating leverage; expectations of financial performance; opportunities, expectations or intentions for top or bottom line operating results including without limit sales and gross profit growth; and expectations for non-GAAP earnings per share. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause our actual results to differ materially include without limitation risks and uncertainties related to the following: our IT infrastructure; our ability to attract and retain key employees; our ability to receive expected returns on changes in our sales and services organizations or strategic investments, including without limit, investments in security, cloud, hybrid data center, advanced technology solutions and services, our call centers and our international expansion; availability of key vendor incentives and other vendor assistance; risks associated with cyber and data security including compliance with related regulatory requirements such as the European Union General Data Protection Regulation and the California Consumer Privacy Act; the relationship between the number of our account executives and productivity; decreased sales related to any of our segments, including but not limited to, potential decreases in sales resulting from the loss of or a reduction in purchases from significant customers; possible discontinuance of IT licenses or authorizations used to operate our business which are provided by vendors; increased competition, including, but not limited to, increased competition from direct sales by some of our largest vendors and increased pricing pressures which affect our pricing strategy in any given period; the misappropriation or unauthorized use of our proprietary or confidential information by competitors or others; our loss of personnel to competitors; the effect of our pricing strategy on our operating results; potential decreases in sales related to changes in our vendors products; the potential lack of availability of government funding applicable to our Public Sector business; the impact of seasonality on our sales; availability of products from third party suppliers at reasonable prices; business and other conditions in Canada, the UK and Europe and the Asia Pacific region and the related effects on our Canadian, UK and our Asia-Pacific operations, including without limitation our executive management’s lack of experience operating in some of these markets; increased expenses, including, but not limited to, interest expense, foreign currency transaction gains/losses and other expenses which may increase as a result of future inflationary pressures; our advertising, marketing and promotional efforts may be costly and may not achieve desired results; shifts in market demand or price erosion of owned inventory; other risks related to foreign currency fluctuations; warranties and indemnities we may be required to provide to third parties through our commercial contracts; litigation by or against us, including without limitation the litigation and other actions related to our En Pointe acquisition; and availability of financing, including availability under our existing credit lines. Additional factors that could cause our actual results to differ are discussed under the heading “Risk Factors” in Item 1A, Part II of our Form 10-Q for the period ended September 30, 2018, on file with the Securities and Exchange Commission, and in our other reports filed from time to time with the SEC. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statements.

 

PCM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

      Three Months EndedDecember 31,   Year EndedDecember 31, 2018     2017 2018     2017 Net sales $ 564,118 $ 544,770 $ 2,163,960 $ 2,166,887 Cost of goods sold 479,323 465,142 1,820,018 1,842,159 Gross profit 84,795 79,628 343,942 324,728 Selling, general and administrative expenses 74,040 80,621 303,196 314,100 Operating profit (loss) 10,755 (993 ) 40,746 10,628 Interest expense, net 2,436 2,305 9,486 7,894 Equity income from unconsolidated affiliate 393 104 770 528 Income (loss) before income taxes 8,712 (3,194 ) 32,030 3,262 Income tax expense (benefit) 2,604 (18 ) 9,257 667 Net income (loss) $ 6,108 $ (3,176 ) $ 22,773 $ 2,595   Basic and Diluted Earnings (Loss) Per Common Share Basic $ 0.50 $ (0.27 ) $ 1.90 $ 0.21 Diluted 0.48 (0.27 ) 1.83 0.20   Weighted average number of common shares outstanding: Basic 12,162 11,770 11,993 12,269 Diluted 12,738 11,770 12,437 13,094    

PCM, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(unaudited, in thousands, except per share amounts)

      Three Months Ended

December 31,

  Year Ended

December 31,

2018   2017 2018   2017 EBITDA(a) Consolidated operating profit (loss) $ 10,755 $ (993 ) $ 40,746 $ 10,628 Add: Consolidated depreciation expense 2,523 2,663 10,429 10,052 Consolidated amortization expense 682 1,036 3,011 4,129 Equity income from unconsolidated affiliate(b). 393 104   770   528 EBITDA $ 14,353 $ 2,810 $ 54,956 $ 25,337   EBITDA Adjustments Contingent consideration adjustment(c) $ (1,075 ) $ — $ (1,075 ) $ — Stock-based compensation 801 686 3,059 2,605 M&A and related litigation costs and fees(d) 481 539 1,793 2,916 Severance and restructuring related costs(e) 242 1,482 1,528 6,818 Foreign exchange loss (gain) 251 (22 )   533   (25 ) Total EBITDA adjustments $ 700 $ 2,685 $ 5,838 $ 12,314   Adjusted EBITDA EBITDA $ 14,353 $ 2,810 $ 54,956 $ 25,337 Add: EBITDA Adjustments 700 2,685   5,838   12,314 Adjusted EBITDA $ 15,053 $ 5,495 $ 60,794 $ 37,651   Net income (loss) Income (loss) before income taxes $ 8,712 $ (3,194 ) $ 32,030 $ 3,262 Less: Income tax expense (benefit) 2,604 (18 )   9,257   667 Net income (loss) $ 6,108 $ (3,176 ) $ 22,773 $ 2,595   Income (loss) before income taxes $ 8,712 $ (3,194 ) $ 32,030 $ 3,262 Add: EBITDA Adjustments 700 2,685 5,838 12,314 Amortization of purchased intangibles(f) 679 1,032 2,996 4,112 One-time interest charge(g) — — — 321 Adjusted income before income taxes 10,091 523 40,864 20,009 Less: Adjusted income tax expense(h) 2,856 207   11,565 7,904 Non-GAAP net income $ 7,235 $ 316 $ 29,299 $ 12,105   Diluted earnings (loss) per share GAAP diluted EPS $ 0.48 $ (0.27 ) $ 1.83 $ 0.20 Non-GAAP diluted EPS 0.57 0.03 2.36 0.92   GAAP diluted weighted average number of common shares outstanding 12,738 11,770 12,437 13,094 Non-GAAP diluted weighted average number of common shares outstanding 12,738

12,246

(i) 12,437 13,094

______________________________________________

(a)   EBITDA — earnings from operations before interest, taxes, depreciation and amortization expenses. (b) Represents our equity income resulting from our 49% ownership interest in the NCE. (c) Represents adjustment to contingent consideration related to the Provista Technology acquisition. (d) Includes acquisition-related costs and fees, including litigation. (e) Includes employee severance related costs related to our cost reduction initiatives, duplicate costs associated with the Ovex transition, lease vacancy costs and other restructuring related costs. (f) Includes amortization expense for acquisition-related intangible assets, which include trademarks, trade names, non-compete agreements and customer relationships. (g) Represents interest expense levied against the company for unclaimed property reports for periods dating back to 2003. (h) The 2018 adjusted income tax expense assumes an estimated annual effective tax rate of 28.3%, which excludes out of period impacts of the Tax Reform and Jobs Act of 2017. The 2017 adjusted income tax expense assumes an estimated annual effective tax rate of 39.5%. (i) Includes approximately 476,000 dilutive shares for the three months ended December 31, 2017 for computation of non-GAAP diluted EPS.    

PCM, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share amounts and share data)

 

    December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $ 6,032 $ 9,113 Accounts receivable, net of allowances of $1,714 and $2,181 463,487 439,658 Inventories 61,617 103,471 Prepaid expenses and other current assets 8,535 9,333 Total current assets 539,671 561,575 Property and equipment, net 69,286 71,551 Goodwill 87,226 87,768 Intangible assets, net 8,103 11,090 Deferred income taxes 1,483 1,759 Investment and other assets 15,181 6,509 Total assets $ 720,950 $ 740,252   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 357,212 $ 289,201 Accrued expenses and other current liabilities 63,213 55,040 Deferred revenue 7,966 7,913 Line of credit 88,399 213,778 Notes payable — current 3,283 3,362 Total current liabilities 520,073 569,294 Notes payable 29,507 32,892 Other long-term liabilities 16,583 7,338 Deferred income taxes 1,894 3,102 Total liabilities 568,057 612,626 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding — — Common stock, $0.001 par value; 30,000,000 shares authorized; 17,573,700 and 17,170,273 shares issued; 12,183,048 and 11,779,621 shares outstanding 18

17

Additional paid-in capital 138,703 134,646 Treasury stock, at cost: 5,390,652 shares (38,536 ) (38,536 ) Accumulated other comprehensive (loss) income (1,313 ) 251 Retained earnings 54,021 31,248 Total stockholders’ equity 152,893 127,626 Total liabilities and stockholders’ equity $ 720,950 $ 740,252    

PCM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

      Year EndedDecember 31, 2018 2017 Cash Flows From Operating Activities Net income $ 22,773 $ 2,595 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,440 14,181 Equity income from an unconsolidated affiliate (770 ) (528 ) Distribution from equity method investee 294 237 Provision for deferred income taxes (959 ) 283 Non-cash stock-based compensation 3,059 2,605 Change in operating assets and liabilities: Accounts receivable (23,829 ) (67,997 ) Inventories 41,854 (31,252 ) Prepaid expenses and other current assets 798 7,061 Other assets (7,937 ) (333 ) Accounts payable 66,641 8,355 Accrued expenses and other current liabilities 18,253 3,868 Deferred revenue 53 (3,853 ) Total adjustments 110,897 (67,373 ) Net cash provided by (used in) operating activities 133,670 (64,778 ) Cash Flows From Investing Activities Purchases of property and equipment (5,741 ) (17,325 ) Acquisitions, net of cash acquired (35 ) (4,806 ) Net cash used in investing activities (5,776 ) (22,131 ) Cash Flows From Financing Activities Net (payments) borrowings under line of credit (125,379 ) 106,382 Borrowings under notes payable — 5,216 Payments under notes payable (3,450 ) (3,771 ) Change in book overdraft 1,314 3,195 Payments of obligations under capital leases (1,009 ) (1,311 ) Payments of earn-out liability (2,199 ) (13,427 ) Proceeds from capital lease obligations — 587 Net proceeds from stock issued under stock option plans 1,646 5,080 Payments for deferred financing costs (275 ) (1,009 ) Common shares repurchased and held in treasury — (11,602 ) Payment of taxes related to net-settled stock awards (646 ) (894 ) Net cash (used in) provided by financing activities (129,998 ) 88,446 Effect of foreign currency on cash flow (977 ) 404 Net change in cash and cash equivalents (3,081 ) 1,941 Cash and cash equivalents at beginning of the period 9,113 7,172 Cash and cash equivalents at end of the period $ 6,032 $ 9,113 Supplemental Cash Flow Information Interest paid $ 9,051 $ 7,071 Income taxes paid, net 2,048 4,340 Supplemental Non-Cash Investing and Financing Activities Financed and accrued purchases of property and equipment $ 2,508 $ 900 Accrued earn-out liability related to acquisitions — 707  

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Investor Relations:Kim RogersHayden IR(385) 831-7337kim@haydenir.com