Connection (CNXN) Reports Third Quarter 2019 Results

Net Income Increases by 72.5% From Prior Q3

THIRD QUARTER SUMMARY:

  • Net income: $23.7 million, up 72.5% y/y
  • Record gross profit: $118.9 million, up 18.3% y/y
  • Record gross margin: 16.3%, compared to 15.3% y/y
  • Record diluted EPS: $0.90, compared to $0.51 y/y, up 75.3%
  • Cash balance: $98.5 million

MERRIMACK, N.H.--()--Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the third quarter ended September 30, 2019. Net sales for the quarter ended September 30, 2019 increased by 10.8% to $729.4 million, compared to $658.5 million for the prior year quarter. Net income for the third quarter ended September 30, 2019 increased by 72.5% to $23.7 million, or $0.90 per diluted share, compared to net income of $13.8 million, or $0.51 per diluted share, for the prior year quarter.

Net sales for the nine months ended September 30, 2019 increased by 5.7% to $2.1 billion, compared to $2.0 billion for the nine months ended September 30, 2018. Our average daily sales during the nine months ended September 30, 2019 increased by 6.3%, compared to the nine months ended September 30, 2018. Net income for the nine months ended September 30, 2019 increased by 38.9% to $60.1 million, or $2.27 per diluted share, compared to net income of $43.3 million, or $1.61 per diluted share, for the nine months ended September 30, 2018.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $129.0 million for the twelve months ended September 30, 2019, compared to $99.1 million for the twelve months ended September 30, 2018.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment increased 11.8% to $273.8 million in the third quarter of 2019, compared to $244.9 million in the prior year quarter. We experienced strong growth in sales of mobility, desktops, and software products in the quarter. Gross margin increased by 83 basis points to 19.0% due to higher sales volumes and the change in customer mix.
  • Net sales for the Public Sector Solutions segment increased by 19.7% to $177.4 million in the third quarter of 2019, compared to the prior year quarter. Sales to the federal government increased by 88.2%, compared to the prior year, while sales to state and local government and educational institutions increased by 1.5%. Gross margin increased by 175 basis points to 13.9% primarily due to increases in the level of both hardware and software sales, and changes in customer mix.
  • Net sales for the Enterprise Solutions segment increased by 4.8% to $278.3 million in the third quarter of 2019, compared to the prior year quarter. Gross margin increased by 86 basis points to 15.1% primarily due to an increase in sales of cloud-based and security software, which are recognized on a net basis.

Quarterly Sales by Product Mix:

  • Notebook/mobility sales, the Company’s largest product category, increased by 20% year over year and accounted for 30% of net sales in the third quarter of 2019, compared to 28% of net sales in the prior year quarter. All three selling segments experienced strong year-over-year growth in notebook/mobility sales.
  • Accessories sales decreased slightly year over year and accounted for 12% of net sales in the third quarter of 2019, compared to 13% of net sales in the third quarter of 2018. The decrease was due to the timing of large rollouts, primarily in the Enterprise Solutions segment. The Business Solutions and Public Sector segments experienced year-over-year growth in accessories sales, compared to the prior year quarter.
  • Desktop sales increased by 33% year over year and accounted for 13% of net sales in the third quarter of 2019, compared to 10% of net sales in the prior year quarter. All three selling segments experienced strong year-over-year growth in desktop sales.
  • Software sales increased by 8% year over year and accounted for 11% of net sales in the third quarter of 2019 and 2018. The Business Solutions and Enterprise Solutions segments experienced strong year-over-year growth in software sales.

Selling, general and administrative (“SG&A”) expenses increased in the third quarter of 2019 to $86.2 million from $81.5 million in the prior year quarter, but decreased 55 basis points as a percentage of net sales. The increase in SG&A was driven in part by an increase in variable compensation, which increased in the third quarter of 2019 compared to the third quarter of 2018, due to the higher level of sales and gross profit achieved compared to the prior year quarter.

Cash and cash equivalents were $98.5 million at September 30, 2019, compared to $91.7 million at December 31, 2018. During the third quarter of 2019, the Company repurchased 23,472 shares of stock for $0.9 million.

“We are pleased that our efforts to help customers solve IT resulted in a 75% increase in earnings per share,” said Tim McGrath, President and Chief Executive Officer. “Our success is attributed to our continued focus and strategic plan to help our customers build out solutions for software defined datacenter, hybrid cloud, and the digital workplace,” concluded Mr. McGrath. “I would like to thank our dedicated team for their commitment and support delivering these record results. In a rapidly changing industry, we believe our team and the strategies we have in place, well position Connection to gain market share and increase long-term shareholder value.”

Conference Call and Webcast

Connection will host a conference call and live web cast today, October 30, 2019 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. This information is included to provide information with respect to the Company’s operating performance and earnings. Non-GAAP measures are not a substitute for GAAP measures and should be considered together with the GAAP financial measures. Our non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. 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 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), (the original business of PC Connection) operating through our PC Connection Sales Corp. subsidiary, is a rapid-response provider of IT products and services serving primarily the small‑ and medium-sized business sector. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection – Enterprise Solutions (561-237-3300), www.connection.com/enterprise, operating through our MoreDirect, Inc. subsidiary, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and access to over 300,000 products and 1,600 vendors through TRAXX™, a proprietary cloud-based eProcurement system. The team’s engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

Connection – Public Sector Solutions (800-800-0019), operating through our GovConnection, Inc. subsidiary, is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

cnxn-g

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are based on currently available information, operating plans, and projections about future events and trends. Terms such as "believe," "expect," "intend," "plan," "estimate," "anticipate," "may," "should," "will," or similar statements or variations of such terms are intended to identify forward-looking statements, although not all forward-looking statements include such terms. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the impact of changes in market demand and the overall level of economic activity and environment, or in the level of business investment in information technology products, 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, and other risks detailed in the Company's filings with the Securities and Exchange Commission, including under the caption "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2018. 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,

2019

2018

%

(Amounts and shares in thousands, except operating data, P/E ratio, and per share data) Change
 
Operating Data:
Net sales

$

729,410

 

$

658,504

 

11

%

Diluted earnings per share

$

0.90

 

$

0.51

 

76

%

 
Gross margin

 

16.3

%

 

15.3

%

Operating margin

 

4.5

%

 

2.9

%

Return on equity (1)

 

15.0

%

 

12.9

%

 
Inventory turns

 

16

 

 

22

 

Days sales outstanding

 

52

 

 

50

 

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

 

30

%

 

28

%

Desktops

 

13

 

 

10

 

Accessories

 

12

 

 

13

 

Software

 

11

 

 

11

 

Displays

 

10

 

 

10

 

Servers/Storage

 

8

 

 

9

 

Net/Com Products

 

7

 

 

9

 

Other Hardware/Services

 

9

 

 

10

 

Total Net Sales

 

100

%

 

100

%

 
 
Stock Performance Indicators:
Actual shares outstanding

 

26,316

 

 

26,730

 

Total book value per share

$

22.16

 

$

19.58

 

Tangible book value per share

$

19.04

 

$

16.45

 

Closing price

$

38.90

 

$

38.89

 

Market capitalization

$

1,023,692

 

$

1,039,530

 

Trailing price/earnings ratio

 

12.7

 

 

16.3

 

LTM Adjusted EBITDA (2)

$

128,971

 

$

99,068

 

Adjusted market capitalization/LTM Adjusted EBITDA (3)

 

7.2

 

 

9.5

 

 
(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,

2019

2018

Net Gross Net Gross
(amounts in thousands) Sales Margin Sales Margin
 
Business Solutions

$

273,756

 

19.0

%

$

244,872

 

18.2

%

Enterprise Solutions

 

278,295

 

15.1

 

 

265,477

 

14.3

 

Public Sector Solutions

 

177,359

 

13.9

 

 

148,155

 

12.1

 

Total

$

729,410

 

16.3

%

$

658,504

 

15.3

%

 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands, except per share data)

2019

2018

2019

2018

 
Net sales

$

729,410

 

$

658,504

 

$

2,103,407

 

$

1,989,969

 

Cost of sales

 

610,547

 

 

558,060

 

 

1,768,210

 

 

1,685,685

 

Gross profit

 

118,863

 

 

100,444

 

 

335,197

 

 

304,284

 

 
Selling, general and administrative expenses

 

86,226

 

 

81,494

 

 

252,125

 

 

244,915

 

Restructuring and other charges

 

-

 

 

-

 

 

703

 

 

-

 

Income from operations

 

32,637

 

 

18,950

 

 

82,369

 

 

59,369

 

 
Other income/(expense), net

 

62

 

 

114

 

 

444

 

 

412

 

Income tax provision

 

(8,949

)

 

(5,298

)

 

(22,668

)

 

(16,489

)

Net income

$

23,750

 

$

13,766

 

$

60,145

 

$

43,292

 

 
Earnings per common share:
Basic

$

0.90

 

$

0.52

 

$

2.28

 

$

1.62

 

Diluted

$

0.90

 

$

0.51

 

$

2.27

 

$

1.61

 

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

 

26,323

 

 

26,716

 

 

26,339

 

 

26,745

 

Diluted

 

26,479

 

 

26,902

 

 

26,496

 

 

26,883

 

 
 
September 30, December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS

2019

2018

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

$

98,489

 

$

91,703

 

Accounts receivable, net

 

478,907

 

 

447,698

 

Inventories, net

 

126,078

 

 

119,195

 

Income taxes receivable

 

-

 

 

922

 

Prepaid expenses and other current assets

 

6,881

 

 

9,661

 

Total current assets

 

710,355

 

 

669,179

 

Property and equipment, net

 

62,336

 

 

51,799

 

Right-of-use assets, net

 

14,850

 

 

-

 

Goodwill

 

73,602

 

 

73,602

 

Intangibles assets, net

 

8,613

 

 

9,564

 

Other assets

 

892

 

 

1,211

 

Total Assets

$

870,648

 

$

805,355

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable

$

197,736

 

$

201,640

 

Accrued payroll

 

23,393

 

 

24,319

 

Accrued expenses and other liabilities

 

36,341

 

 

33,840

 

Total current liabilities

 

257,470

 

 

259,799

 

Deferred income taxes

 

17,194

 

 

17,184

 

Operating lease liability

 

11,386

 

 

-

 

Other liabilities

 

1,454

 

 

2,469

 

Total Liabilities

 

287,504

 

 

279,452

 

Stockholders’ Equity:
Common stock

 

288

 

 

288

 

Additional paid-in capital

 

117,301

 

 

115,842

 

Retained earnings

 

501,155

 

 

441,010

 

Treasury stock at cost

 

(35,600

)

 

(31,237

)

Total Stockholders’ Equity

 

583,144

 

 

525,903

 

Total Liabilities and Stockholders’ Equity

$

870,648

 

$

805,355

 

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, Nine Months Ended September 30,
(amounts in thousands)

2019

2018

2019

2018

Cash Flows from Operating Activities:
Net income

$

23,750

 

$

13,766

 

$

60,145

 

$

43,292

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization

 

3,107

 

 

3,633

 

 

10,184

 

 

10,362

 

Stock-based compensation expense

 

426

 

 

273

 

 

1,259

 

 

738

 

Provision for doubtful accounts

 

527

 

 

734

 

 

181

 

 

1,428

 

Deferred income taxes

 

-

 

 

-

 

 

10

 

 

429

 

Loss on disposal of fixed assets

 

(4

)

 

51

 

 

114

 

 

51

 

 
Changes in assets and liabilities:
Accounts receivable

 

21,478

 

 

62,429

 

 

(31,390

)

 

63,881

 

Inventories

 

49,826

 

 

2,166

 

 

(6,883

)

 

(9,399

)

Prepaid expenses and other current assets

 

229

 

 

(1,514

)

 

3,702

 

 

812

 

Other non-current assets

 

88

 

 

2,279

 

 

319

 

 

282

 

Accounts payable

 

(61,348

)

 

(35,524

)

 

(3,167

)

 

(29,361

)

Accrued expenses and other liabilities

 

(1,386

)

 

(8,558

)

 

5,548

 

 

(1,262

)

Net cash provided by operating activities

 

36,693

 

 

39,735

 

 

40,022

 

 

81,253

 

 
Cash Flows from Investing Activities:
Purchases of equipment

 

(6,744

)

 

(5,714

)

 

(20,621

)

 

(15,641

)

Net cash used in investing activities

 

(6,744

)

 

(5,714

)

 

(20,621

)

 

(15,641

)

 
Cash Flows from Financing Activities:
Proceeds from short-term borrowings

 

-

 

 

-

 

 

-

 

 

859

 

Repayment of short-term borrowings

 

-

 

 

-

 

 

-

 

 

(859

)

Dividend payment

 

-

 

 

-

 

 

(8,452

)

 

(9,122

)

Purchase of treasury shares

 

(862

)

 

-

 

 

(4,363

)

 

(4,384

)

Issuance of stock under Employee Stock Purchase Plan

 

-

 

 

-

 

 

609

 

 

605

 

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

 

(337

)

 

(458

)

 

(409

)

 

(458

)

Net cash used in financing activities

 

(1,199

)

 

(458

)

 

(12,615

)

 

(13,359

)

Increase in cash and cash equivalents

 

28,750

 

 

33,563

 

 

6,786

 

 

52,253

 

Cash and cash equivalents, beginning of period

 

69,739

 

 

68,680

 

 

91,703

 

 

49,990

 

Cash and cash equivalents, end of period

$

98,489

 

$

102,243

 

$

98,489

 

$

102,243

 

 
Non-cash Investing Activities:
Accrued capital expenditures

$

1,684

 

$

1,055

 

 

1,684

 

 

1,055

 

 
Supplemental Cash Flow Information:
Income taxes paid

$

7,009

 

$

6,825

 

$

18,972

 

$

15,134

 

 
 
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, favorable resolution of a contract dispute, 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)

2019

2018

% Change

2019

2018

% Change
Net income

$

23,750

$

13,766

73

%

$

81,445

$

64,015

27

%

Depreciation and amortization

 

3,107

 

3,634

(15

%)

 

13,885

 

13,557

2

%

Income tax expense

 

8,949

 

5,298

69

%

 

30,251

 

17,740

71

%

Interest expense

 

28

 

51

(45

%)

 

119

 

142

(16

%)

EBITDA

 

35,834

 

22,749

58

%

 

125,700

 

95,454

32

%

Restructuring and other charges (2)

 

-

 

-

-

 

 

1,670

 

2,695

(38

%)

Stock-based compensation

 

426

 

273

56

%

 

1,601

 

919

74

%

Adjusted EBITDA

$

36,260

$

23,022

58

%

$

128,971

$

99,068

30

%

 
(1) LTM: Last twelve months
(2) Restructuring and other charges in 2019 consist of severance and other charges related to internal restructuring activities.
Restructuring and other charges in LTM 2018 consist of a 2017 fourth quarter one-time bonus paid to all employees except
executive officers as well as severance and relocation costs for our Softmart facility incurred in the second quarter 2017.
 
 
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,

2019

2018

% Change

2019

2018

% Change
Net income

$

23,750

$

13,766

$

60,145

$

43,292

Restructuring and other charges, net of tax (1)

 

-

 

-

 

510

 

-

Adjusted Net Income

$

23,750

$

13,766

73

%

$

60,655

$

43,292

40

%

Diluted shares

 

26,479

 

26,902

 

26,496

 

26,883

Adjusted Diluted Earnings per Share

$

0.90

$

0.51

75

%

$

2.29

$

1.61

42

%

 
 
(1) Restructuring and other charges in 2019 consist of severance and other charges related to internal restructuring activities.

 

Contacts

Investor Relations Contact:
Tom Baker, 603.683.2505
Tom@connection.com

Contacts

Investor Relations Contact:
Tom Baker, 603.683.2505
Tom@connection.com