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Connection (CNXN) Reports Third Quarter 2021 Results

November 4, 2021 GMT

MERRIMACK, N.H.--(BUSINESS WIRE)--Nov 4, 2021--

Connection (PC Connection, Inc.; NASDAQ: CNXN ), a leading information technology solutions provider to business, government, healthcare and education markets, today announced results for the third quarter ended September 30, 2021.

“We are pleased to report record Q3 revenue and gross profit in both our Enterprise and Business Solutions segments. These results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances growth, elevates productivity, and empowers innovation. This strong financial performance, while affected by on-going supply chain shortages, is expected to continue into fourth quarter,” said Tim McGrath, President and CEO of Connection. McGrath continued, “Our employees have gone above and beyond to help our customers manage issues associated with both their supply constraints and their on-going efforts to work-from-anywhere.”

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Net sales for the quarter ended September 30, 2021 increased by 15.1% to $751.4 million, compared to $652.8 million for the prior year quarter. Net income for the quarter ended September 30, 2021 increased by 18.4% to $20.0 million, or $0.76 per diluted share, compared to net income of $16.9 million, or $0.64 per diluted share, for the prior year quarter.

Net sales for the nine months ended September 30, 2021 increased by 9.3% to $2.1 billion, compared to $1.9 billion for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2021 increased by 20.4% to $47.5 million, or $1.80 per diluted share, compared to net income of $39.5 million, or $1.50 per diluted share for the nine months ended September 30, 2020.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $102.4 million for the twelve months ended September 30, 2021, compared to $99.3 million for the twelve months ended September 30, 2020. 1

1 Adjusted EBITDA is a non-GAAP measure. See page 10 for the definition and reconciliation.

Quarterly Highlights

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  • Continued growth across our vertical markets:
    • Manufacturing saw revenue growth of 24% year-over-year and 7% sequentially compared to Q2 2021 as manufacturers looked to augment the available workforce, automate, and invest in new technologies to address both short-term and long-term workforce challenges stemming from COVID-19 and workforce skills shortages.
    • Healthcare experienced revenue growth of 10% year-over-year as a result of organizations expanding and securing infrastructure to support a surge in employee remote access and telemedicine activity, as well as improving the patient and provider experience.

  • Our Technology Solutions Group saw strong demand and growth for managed services, cybersecurity services and network transformation services. Our services business grew more than 23% year-over-year.

  • Achieved Microsoft Azure Expert Managed Service Provider (MSP) certification. Connection has demonstrated industry-leading technical capabilities and offers end-to-end support across Azure cloud environments through our Microsoft Center of Excellence.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment increased by 21.8% to $281.4 million in the third quarter of 2021, compared to $231.0 million in the prior year quarter. Gross profit increased by 17.5% to $54.7 million in the third quarter of 2021, compared to $46.6 million in the prior year quarter. Gross margin decreased by 73 basis points to 19.4% primarily due to a higher mix of lower margin client-based solutions.

  • Net sales for the Public Sector Solutions segment decreased by 1.1% to $160.2 million in the third quarter of 2021, compared to $162.0 million in the prior year quarter. Sales to state and local government and educational institutions increased by 2.5%, compared to the prior year quarter, while sales to the federal government decreased by 15.8% primarily due to the timing of customer rollouts. Gross profit decreased by 10.8% to $20.3 million in the third quarter of 2021, compared to $22.8 million in the prior year quarter. Gross margin decreased by 138 basis points to 12.7% primarily due to a change in product mix and a decrease in software sales recorded on a net basis.

  • Net sales for the Enterprise Solutions segment increased by 19.2% to $309.7 million in the third quarter of 2021, compared to $259.8 million in the prior year quarter. Gross profit increased by 18.7% to $45.6 million in the third quarter of 2021, compared to $38.4 million in the prior year quarter. Gross margin decreased by 6 basis points to 14.7%.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales had a record quarter at $304 million which represented an increase of 50% year over year and accounted for 40% of net sales in the third quarter of 2021, compared to 31% of net sales in the third quarter of 2020. The increase in this product category was due to the growing hybrid work environment.

  • Accessories sales increased by 4% year over year and accounted for 12% of net sales in the third quarter of 2021, compared to 13% of net sales in the third quarter of 2020.

  • Software sales decreased by 21% year over year and accounted for 8% of net sales in the third quarter of 2021, compared to 12% in the third quarter of 2020. The decrease in software sales is primarily related to an increase in software recognized on a net basis.

  • Desktop sales increased by 7% year over year and accounted for 9% of net sales in the third quarter of 2021, compared to 10% of net sales in the third quarter of 2020.

Selling, general and administrative (“SG&A”) expenses increased in the third quarter of 2021 to $93.4 million from $86.8 million in the prior year quarter. SG&A as a percentage of net sales was 12.4%, compared to 13.3% in the prior year quarter. The increase in SG&A was primarily due to an increase in variable compensation due to the higher levels of gross profit and increased marketing costs.

Cash and cash equivalents were $89.7 million at September 30, 2021, compared to $95.7 million at December 31, 2020.

Conference Call and Webcast

Connection will host a conference call and live webcast today, November 4, 2021 at 4:30 p.m. ET to discuss its third quarter financial results. To access the conference call (audio only), please dial 877-776-4016 (US) or 973-638-3231 (International) and enter the confirmation number 8894527. 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 is a non-GAAP financial measure. This measure is included to provide additional 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 that 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) is a rapid-response provider of IT products and services serving primarily the small-and medium-sized business sector. It offers more than 425,000 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, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and real-time access to over 425,000 products and 1,600 vendors through MarkITplace ®, a proprietary next-generation, cloud-based supply chain solution. The team’s engineers, software licensing specialists, and subject matter experts help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

Connection–Public Sector Solutions (800.800.0019), is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

"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 continuation of the COVID-19 pandemic, including, without limitation, its impact on global supply chains and responses to it, 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, continued successful integration of the new ERP system, 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 (“SEC”) for the year ended December 31, 2020. 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 September 30,

2021

2020

 

%

(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)

Change

 
Operating Data:
Net sales

$

751,368

 

$

652,752

 

15

%

Diluted earnings per share

$

0.76

 

$

0.64

 

19

%

 
Gross margin

 

16.1

%

 

16.5

%

Operating margin

 

3.6

%

 

3.2

%

Return on equity (1)

 

9.8

%

 

10.2

%

 
Inventory turns

 

15

 

 

15

 

Days sales outstanding

 

66

 

 

73

 

 
% of% of
Product Mix:Net SalesNet Sales
Notebooks/Mobility

 

40

%

 

31

%

Accessories

 

12

 

 

13

 

Displays

 

10

 

 

8

 

Desktops

 

9

 

 

10

 

Software

 

8

 

 

11

 

Servers/Storage

 

7

 

 

9

 

Net/Com Products

 

7

 

 

10

 

Other Hardware/Services

 

7

 

 

8

 

Total Net Sales

 

100

%

 

100

%

 
 
Stock Performance Indicators:
Actual shares outstanding

 

26,205

 

 

26,142

 

Total book value per share

$

26.18

 

$

24.03

 

Tangible book value per share

$

23.14

 

$

20.94

 

Closing price

$

44.03

 

$

41.06

 

Market capitalization

$

1,153,806

 

$

1,073,391

 

Trailing price/earnings ratio

 

18.1

 

 

17.7

 

LTM Adjusted EBITDA (2)

$

102,402

 

$

99,291

 

Adjusted market capitalization/LTM Adjusted EBITDA (3)

 

10.4

 

 

9.7

 

(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 September 30,

2021

 

2020

Net

 

Gross

 

Net

 

Gross

(amounts in thousands)

Sales

 

Margin

 

Sales

 

Margin

 
Enterprise Solutions

$

309,722

14.7

%

$

259,767

14.8

%

Business Solutions

 

281,425

19.4

 

 

230,985

20.2

 

Public Sector Solutions

 

160,221

12.7

 

 

162,000

14.1

 

Total

$

751,368

16.1

%

$

652,752

16.5

%

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in thousands, except per share data)

2021

2020

2021

2020

 
Net sales

$

751,368

 

$

652,752

 

$

2,092,421

 

$

1,914,603

 

Cost of sales

 

630,671

 

 

544,922

 

 

1,754,877

 

 

1,604,656

 

Gross profit

 

120,697

 

 

107,830

 

 

337,544

 

 

309,947

 

 
Selling, general and administrative expenses

 

93,369

 

 

86,753

 

 

272,332

 

 

256,640

 

Restructuring and other charges

 

-

 

 

-

 

 

-

 

 

992

 

Income from operations

 

27,328

 

 

21,077

 

 

65,212

 

 

52,315

 

 
Other income, net

 

-

 

 

(17

)

 

7

 

 

80

 

Income tax provision

 

(7,283

)

 

(4,130

)

 

(17,698

)

 

(12,926

)

Net income

$

20,045

 

$

16,930

 

$

47,521

 

$

39,469

 

 
Earnings per common share:
Basic

$

0.77

 

$

0.65

 

$

1.81

 

$

1.51

 

Diluted

$

0.76

 

$

0.64

 

$

1.80

 

$

1.50

 

 
Shares used in the computation of earnings per common share:
Basic

 

26,197

 

 

26,130

 

 

26,186

 

 

26,158

 

Diluted

 

26,368

 

 

26,311

 

 

26,362

 

 

26,337

 

September 30,

December 31,

CONDENSED CONSOLIDATED BALANCE SHEETS

2021

2020

(amounts in thousands)
 
ASSETS
Current Assets:
Cash and cash equivalents

$

89,728

 

$

95,655

 

Accounts receivable, net

 

585,380

 

 

611,021

 

Inventories, net

 

175,374

 

 

140,867

 

Prepaid expenses and other current assets

 

11,797

 

 

11,437

 

Total current assets

 

862,279

 

 

858,980

 

Property and equipment, net

 

60,623

 

 

61,537

 

Right-of-use assets, net

 

10,218

 

 

12,821

 

Goodwill

 

73,602

 

 

73,602

 

Intangibles assets, net

 

6,173

 

 

7,088

 

Other assets

 

1,031

 

 

1,345

 

Total Assets

$

1,013,926

 

$

1,015,373

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable

$

217,084

 

$

266,846

 

Accrued payroll

 

24,023

 

 

17,828

 

Accrued expenses and other liabilities

 

52,241

 

 

57,586

 

Total current liabilities

 

293,348

 

 

342,260

 

Deferred income taxes

 

18,525

 

 

18,525

 

Operating lease liability

 

7,353

 

 

9,631

 

Other liabilities

 

8,528

 

 

8,630

 

Total Liabilities

 

327,754

 

 

379,046

 

Stockholders’ Equity:
Common stock

 

290

 

 

289

 

Additional paid-in capital

 

122,214

 

 

119,891

 

Retained earnings

 

609,605

 

 

562,084

 

Treasury stock at cost

 

(45,937

)

 

(45,937

)

Total Stockholders’ Equity

 

686,172

 

 

636,327

 

Total Liabilities and Stockholders’ Equity

$

1,013,926

 

$

1,015,373

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended September 30,

Nine Months Ended September 30,

(amounts in thousands)

2021

2020

2021

2020

Cash Flows from Operating Activities:
Net income

$

20,045

 

$

16,930

 

$

47,521

 

$

39,469

 

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization

 

2,947

 

 

3,833

 

 

9,165

 

 

10,335

 

Adjustments to credit losses reserve

 

645

 

 

(351

)

 

1,704

 

 

3,276

 

Stock-based compensation expense

 

1,026

 

 

618

 

 

3,118

 

 

1,866

 

Loss on disposal of fixed assets

 

2

 

 

-

 

 

2

 

 

13

 

 
Changes in assets and liabilities:
Accounts receivable

 

(4,369

)

 

(141,893

)

 

22,437

 

 

(42,610

)

Inventories

 

(8,295

)

 

30,943

 

 

(34,507

)

 

(10,023

)

Prepaid expenses and other current assets

 

1,791

 

 

1,434

 

 

(360

)

 

43

 

Other non-current assets

 

(3

)

 

(539

)

 

314

 

 

(719

)

Accounts payable

 

(40,863

)

 

36,236

 

 

(49,997

)

 

48,736

 

Accrued expenses and other liabilities

 

4,088

 

 

(3,223

)

 

9,437

 

 

(3,987

)

Net cash provided by (used in) operating activities

 

(22,986

)

 

(56,012

)

 

8,834

 

 

46,399

 

 
Cash Flows from Investing Activities:
Purchases of equipment and capitalized software

 

(2,481

)

 

(1,397

)

 

(7,092

)

 

(9,611

)

Proceeds from life insurance

 

-

 

 

-

 

 

1,500

 

 

-

 

Net cash used in investing activities

 

(2,481

)

 

(1,397

)

 

(5,592

)

 

(9,611

)

 
Cash Flows from Financing Activities:
Purchase of treasury shares

 

-

 

 

-

 

 

-

 

 

(10,222

)

Dividend payments

 

-

 

 

-

 

 

(8,375

)

 

(8,427

)

Issuance of stock under Employee Stock Purchase Plan

 

-

 

 

-

 

 

-

 

 

536

 

Payment of payroll taxes on stock-based compensation through shares withheld

 

(470

)

 

(483

)

 

(794

)

 

(684

)

Net cash used in financing activities

 

(470

)

 

(483

)

 

(9,169

)

 

(18,797

)

(Decrease) increase in cash and cash equivalents

 

(25,937

)

 

(57,892

)

 

(5,927

)

 

17,991

 

Cash and cash equivalents, beginning of period

 

115,665

 

 

165,943

 

 

95,655

 

 

90,060

 

Cash and cash equivalents, end of period

$

89,728

 

$

108,051

 

$

89,728

 

$

108,051

 

 
Non-cash Investing Activities:
Accrued capital expenditures

$

394

 

$

248

 

 

394

 

 

248

 

 
Supplemental Cash Flow Information:
Income taxes paid

$

7,459

 

$

12,716

 

$

20,600

 

$

13,798

 

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, 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 September 30,

LTM Ended September 30, (1)

2021

2020

% Change

2021

2020

% Change

Net income

$

20,045

$

16,930

18

%

$

63,817

$

61,435

4

%

Depreciation and amortization

 

2,947

 

3,833

(23

%)

 

12,434

 

13,465

(8

%)

Income tax expense

 

7,283

 

4,130

76

%

 

22,203

 

20,826

7

%

Interest expense

 

-

 

25

(100

%)

 

29

 

103

(72

%)

EBITDA

 

30,275

 

24,918

21

%

 

98,483

 

95,829

3

%

Restructuring and other charges (2)

 

-

 

-

0

%

 

-

 

992

(100

%)

Stock-based compensation

 

1,026

 

618

66

%

 

3,919

 

2,470

59

%

Adjusted EBITDA

$

31,301

$

25,536

23

%

$

102,402

$

99,291

3

%

(1) LTM: Last twelve months
(2) Restructuring and other charges in 2020 consist of severance and other charges related to internal restructuring activities.
ADJUSTED NET INCOME AND ADJUSTED DILUTED 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. A reconciliation from Diluted Earnings per Share to Adjusted Diluted Earnings per Share is detailed below. Adjusted Diluted Earnings per Share is defined Diluted Earnings per Shared adjusted for restructuring and other charges, net of tax. Adjusted Net Income and Adjusted Diluted 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 September 30,

Nine Months Ended September 30,

2021

2020

% Change

2021

2020

% Change

Net income

$

20,045

$

16,930

$

47,521

$

39,469

Restructuring and other charges, net of tax (1)

 

-

 

-

 

-

 

747

Adjusted Net Income

$

20,045

$

16,930

18

%

$

47,521

$

40,216

18

%

Diluted shares

 

26,368

 

26,311

 

26,362

 

26,337

Diluted Earnings per Share

$

0.76

$

0.64

18

%

$

1.80

$

1.50

20

%

Adjusted Diluted Earnings per Share

$

0.76

$

0.64

18

%

$

1.80

$

1.53

18

%

(1) Restructuring and other charges in 2020 consist of severance and other charges related to internal restructuring activities.

 

View source version on businesswire.com:https://www.businesswire.com/news/home/20211104006240/en/

CONTACT: Investor Relations Contact:

Thomas Baker, 603.683.2505

Senior Vice President, CFO, and Treasurer

tom@connection.com

KEYWORD: NEW HAMPSHIRE UNITED STATES NORTH AMERICA

INDUSTRY KEYWORD: TECHNOLOGY SEMICONDUCTOR SECURITY SATELLITE OTHER TECHNOLOGY PHOTOGRAPHY TELECOMMUNICATIONS NANOTECHNOLOGY SOFTWARE AUDIO/VIDEO NETWORKS INTERNET MOBILE/WIRELESS HARDWARE ELECTRONIC DESIGN AUTOMATION DATA MANAGEMENT CONSUMER ELECTRONICS

SOURCE: Connection

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PUB: 11/04/2021 04:05 PM/DISC: 11/04/2021 04:06 PM

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