Connection (CNXN) Reports Third Quarter 2020 Results
Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, and education markets, today announced results for the third quarter ended September 30, 2020.
“While clearly not yet at pre-COVID-19 levels, business activity continues to improve as reflected in a substantially better Q3 performance compared with our second quarter, “said Tim McGrath, President and CEO of Connection. “In particular, we benefitted during the quarter from growing demand for digital ecommerce platforms, software subscriptions, managed services and security.”
McGrath continued, “I am proud of, and grateful to, our people who continue to work hard helping customers navigate the challenges brought about by the pandemic. The steps we have taken to stabilize and strengthen our business during this time have enhanced our ability to deliver even better service for customers and drive profitable growth for shareholders.”
Net sales for the quarter ended September 30, 2020 decreased by 10.5% to $652.8 million, compared to $729.4 million for the prior year quarter. The reduction in revenue year over year is primarily due to the continuing impact of the COVID-19 pandemic, which resulted in lower demand from customers and had an adverse impact on our business. Net income for the third quarter ended September 30, 2020 decreased by 28.7% to $16.9 million, or $0.64 per diluted share, compared to net income of $23.7 million, or $0.90 per diluted share, for the prior year quarter.
Net sales for the nine months ended September 30, 2020 decreased by 9.0% to $1.9 billion, compared to $2.1 billion for the nine months ended September 30, 2019. Net income for the nine months ended September 30, 2020 decreased by 34.4% to $39.5 million, or $1.50 per diluted share, compared to net income of $60.1 million, or $2.27 per diluted share, for the nine months ended September 30, 2019.
Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $99.3 million for the twelve months ended September 30, 2020, compared to $129.0 million for the twelve months ended September 30, 2019. 1
During the third quarter, the Company recorded certain out-of-period adjustments, related primarily to the Business Solutions segment, which increased net sales, gross profit and net income for the third quarter ended September 30, 2020 by $0.9 million, $4.2 million, and $3.0 million, respectively. The Company has determined that these out-of-period adjustments were not material to any previously issued financial statements or for the third quarter where they were corrected.
Quarterly Highlights
We saw strong demand in our Retail vertical market. Our industry expertise is a differentiator to our customers looking to transform their businesses to adapt to current market conditions. Our State and Local business grew nearly 10%, as higher education continues to evolve to a hybrid environment of classroom and online learning. In Healthcare, we are working with our customers to optimize their infrastructure following the first and second waves of the COVID-19 virus. Our healthcare revenue this quarter matched last year’s levels. We saw strong demand for software as a service, and we expect continued growth in this area for workplace transformation, cloud, security and business resiliency solutions through our Technology Solutions Group (“TSG”). TSG delivers comprehensive technology solutions to our customers through a combination of advanced consulting and industry-leading brands.Quarterly Performance by Segment:
Net sales for the Business Solutions segment decreased by 15.6% to $231.0 million in the third quarter of 2020, compared to $273.8 million in the prior year quarter. Gross profit decreased by 10.7% to $46.6 million in the third quarter of 2020, compared to $52.1 million in the prior year quarter. Gross margin increased by 112 basis points to 20.2% primarily due to an increase in sales of cloud-based and security software, which are recognized on a net basis. Net sales for the Public Sector Solutions segment decreased by 8.7% to $162.0 million in the third quarter of 2020, compared to $177.4 million in the prior year quarter. Sales to the federal government decreased by 46.3%, compared to the prior year quarter, while sales to state and local government and educational institutions increased by 9.9%. Gross profit decreased by 7.4% to $22.8 million in the third quarter of 2020, compared to $24.6 million in the prior year quarter. Gross margin increased by 20 basis points to 14.1% primarily due to an increase in sales of cloud-based and security software, which are recognized on a net basis. Net sales for the Enterprise Solutions segment decreased by 6.7% to $259.8 million in the third quarter of 2020, compared to $278.3 million in the prior year quarter. Gross profit decreased by 8.7% to $38.4 million in the third quarter of 2020, compared to $42.1 million in the prior year quarter. Gross margin decreased by 33 basis points to 14.8% primarily due to changes in customer and hardware product mix.Quarterly Sales by Product Mix:
Notebook/mobility sales, the Company’s largest product category, decreased by 8% year over year and accounted for 31% of net sales in the third quarter of 2020, compared to 30% of net sales in the third quarter of 2019. Accessories sales decreased by 5% year over year and accounted for 13% of net sales in the third quarter of 2020, compared to 12% of net sales in the third quarter of 2019. Software sales decreased by 2% year over year and accounted for 12% of net sales in the third quarter of 2020, compared to 11% of net sales in the third quarter of 2019. Software revenue recognized on a net basis, such as, cloud-based software offerings, continues to grow rapidly. Desktop sales decreased by 31% year over year and accounted for 10% of net sales in the third quarter of 2020, compared to 13% of net sales in the third quarter of 2019.Selling, general and administrative (“SG&A”) expenses increased in the third quarter of 2020 to $86.8 million from $86.2 million in the prior year quarter. SG&A as a percentage of net sales, was 13.3%, compared to 11.8% in the prior year quarter. The increase in SG&A was primarily due to an increase in costs associated with our new ERP system that went live in the second quarter. These costs were related to adjustments and process improvement initiatives that will continue in the fourth quarter, but at a lower level than experienced in the third quarter of 2020.
Cash and cash equivalents were $108.1 million at September 30, 2020, compared to $90.1 million at December 31, 2019.
Conference Call and Webcast
Connection will host a conference call and live web cast today, November 9, 2020 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). A web-cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, can be accessed on Connection’s website at ir.connection.com. For those unable to participate in the live call, a replay of the webcast will be available at ir.connection.com approximately 90 minutes after the completion of the call and will be accessible on the site for approximately one year.
Non-GAAP Financial Information
Adjusted EBITDA, Adjusted EPS and Adjusted Net Income are non-GAAP financial measures. These measures are 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.pcconnection.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 access to over 425,000 products and 1,600 vendors through TRAXX™, a proprietary cloud-based eProcurement system. The team’s engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.
Connection–Public Sector Solutions (800.800.0019), 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 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, 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, 2019 as updated in the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarterly period ended September 30, 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.
1 Adjusted EBITDA is a non-GAAP measure. See page 10 for the definition and reconciliation.
2020
2019
%
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)Change
Operating Data: Net sales$
652,752
$
729,410
(11%)
Diluted earnings per share$
0.64
$
0.90
(29%)
Gross margin
16.5%
16.3%
Operating margin
3.2%
4.5%
Return on equity (1)
10.2%
15.0%
Inventory turns
15
16
Days sales outstanding
73
52
% of % of Product Mix: Net Sales Net Sales Notebooks/Mobility
31%
30%
Accessories
13
12
Software
11
11
Desktops
10
13
Net/Com Products
10
7
Servers/Storage
9
8
Displays
8
10
Other Hardware/Services
8
9
Total Net Sales
100%
100%
Stock Performance Indicators: Actual shares outstanding
26,142
26,316
Total book value per share$
24.03
$
22.16
Tangible book value per share$
20.94
$
19.04
Closing price$
41.06
$
38.90
Market capitalization$
1,073,391
$
1,023,692
Trailing price/earnings ratio
17.7
12.7
LTM Adjusted EBITDA (2)$
99,291
$
128,971
Adjusted market capitalization/LTM Adjusted EBITDA (3)
9.7
7.2
(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.2020
2019
Net Gross Net Gross (amounts in thousands) Sales Margin Sales Margin Enterprise Solutions$ 259,767
14.8%
$ 278,295
15.1%
Business Solutions230,985
20.2
273,756
19.0
Public Sector Solutions162,000
14.1
177,359
13.9
Total$ 652,752
16.5%
$ 729,410
16.3%
CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended September 30, Nine Months Ended September 30, (amounts in thousands, except per share data)2020
2019
2020
2019
Net sales$ 652,752
$ 729,410
$ 1,914,603
$ 2,103,407
Cost of sales544,922
610,547
1,604,656
1,768,210
Gross profit107,830
118,863
309,947
335,197
Selling, general and administrative expenses86,753
86,226
256,640
252,125
Restructuring and other charges-
-
992
703
Income from operations21,077
32,637
52,315
82,369
Other income/(expense), net(17)
62
80
444
Income tax provision(4,130)
(8,949)
(12,926)
(22,668)
Net income$ 16,930
$ 23,750
$ 39,469
$ 60,145
Earnings per common share: Basic$ 0.65
$ 0.90
$ 1.51
$ 2.28
Diluted$ 0.64
$ 0.90
$ 1.50
$ 2.27
Shares used in the computation of earnings per common share: Basic26,130
26,323
26,158
26,339
Diluted26,311
26,479
26,337
26,496
2020
2019
(amounts in thousands) ASSETS Current Assets: Cash and cash equivalents$ 108,051
$ 90,060
Accounts receivable, net588,960
549,626
Inventories, net134,689
124,666
Income taxes receivable-
1,388
Prepaid expenses and other current assets12,016
10,671
Total current assets843,716
776,411
Property and equipment, net63,189
64,226
Right-of-use assets, net13,768
13,842
Goodwill73,602
73,602
Intangibles assets, net7,393
8,307
Other assets1,666
947
Total Assets$ 1,003,334
$ 937,335
LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable$ 283,163
$ 235,641
Accrued payroll20,200
28,050
Accrued expenses and other liabilities34,997
45,232
Total current liabilities338,360
308,923
Deferred income taxes20,170
20,170
Operating lease liability10,579
10,330
Other liabilities5,948
600
Total Liabilities375,057
340,023
Stockholders’ Equity: Common stock289
288
Additional paid-in capital119,762
118,045
Retained earnings554,163
514,694
Treasury stock at cost(45,937)
(35,715)
Total Stockholders’ Equity628,277
597,312
Total Liabilities and Stockholders’ Equity$ 1,003,334
$ 937,335
2020
2019
2020
2019
Cash Flows from Operating Activities: Net income$
16,930
$
23,750
$
39,469
$
60,145
Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization
3,833
3,107
10,335
10,184
Provision for doubtful accounts
(351)
527
3,276
181
Stock-based compensation expense
618
426
1,866
1,259
Deferred income taxes
-
-
-
10
Loss on disposal of fixed assets
-
(4)
13
114
Changes in assets and liabilities: Accounts receivable
(141,893)
21,478
(42,610)
(31,390)
Inventories
30,943
49,826
(10,023)
(6,883)
Prepaid expenses and other current assets
1,434
229
43
3,702
Other non-current assets
(539)
88
(719)
319
Accounts payable
36,236
(61,348)
48,736
(3,167)
Accrued expenses and other liabilities
(3,223)
(1,386)
(3,987)
5,548
Net cash provided by (used in) operating activities
(56,012)
36,693
46,399
40,022
Cash Flows from Investing Activities: Purchases of equipment
(1,397)
(6,744)
(9,611)
(20,621)
Net cash used in investing activities
(1,397)
(6,744)
(9,611)
(20,621)
Cash Flows from Financing Activities: Dividend payment
-
-
(8,427)
(8,452)
Purchase of treasury shares
-
(862)
(10,222)
(4,363)
Issuance of stock under Employee Stock Purchase Plan
-
-
536
609
Payment of payroll taxes on stock-based compensation through shares withheld
(483)
(337)
(684)
(409)
Net cash used in financing activities
(483)
(1,199)
(18,797)
(12,615)
Increase (decrease) in cash and cash equivalents
(57,892)
28,750
17,991
6,786
Cash and cash equivalents, beginning of period
165,943
69,739
90,060
91,703
Cash and cash equivalents, end of period$
108,051
$
98,489
$
108,051
$
98,489
Non-cash Investing Activities: Accrued capital expenditures$
248
$
1,684
248
1,684
Supplemental Cash Flow Information: Income taxes paid$
12,716
$
7,009
$
13,798
$
18,972
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)
2020
2019
% Change
2020
2019
% Change
Net income$ 16,930
$ 23,750
(29%)
$ 61,435
$ 81,445
(25%)
Depreciation and amortization3,833
3,107
23%
13,465
13,885
(3%)
Income tax expense4,130
8,949
(54%)
20,826
30,251
(31%)
Interest expense25
28
(11%)
103
119
(13%)
EBITDA24,918
35,834
(30%)
95,829
125,700
(24%)
Restructuring and other charges (2)-
-
100%
992
1,670
(41%)
Stock-based compensation618
426
45%
2,470
1,601
54%
Adjusted EBITDA$ 25,536
$ 36,260
(30%)
$ 99,291
$ 128,971
(23%)
(1) LTM: Last twelve months (2) Restructuring and other charges in both 2020 and 2019 consist of severance and other charges related to internal restructuring activities.ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE
A reconciliation from Net Income to Adjusted Net Income is detailed below. Adjusted Net Income is defined as Net Income plus restructuring and other charges, net of tax. Adjusted Net Income and Adjusted Earnings Per Share are considered non-GAAP financial measures (see note above in Adjusted EBITDA for a description of non-GAAP financial measures). The Company believes that these non-GAAP disclosures provide helpful information with respect to the Company's operating performance.
(amounts in thousands, except per share data)Three Months Ended September 30,
Nine Months Ended September 30,
2020
2019
% Change
2020
2019
% Change
Net income$ 16,930
$ 23,750
$ 39,469
$ 60,145
Restructuring and other charges, net of tax (1)-
-
747
510
Adjusted Net Income$ 16,930
$ 23,750
-29%
$ 40,216
$ 60,655
-34%
Diluted shares26,311
26,479
26,337
26,496
Adjusted Diluted Earnings per Share$ 0.64
$ 0.90
-28%
$ 1.53
$ 2.29
-33%
(1) Restructuring and other charges in both 2020 and 2019 consist of severance and other charges related to internal restructuring activities.
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