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Connection (CNXN) Reports Fourth Quarter and Full Year Results

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the fourth quarter and year ended December 31, 2019. Net sales for the quarter ended December 31, 2019 increased by 1.0% to $716.6 million, compared to $709.5 million for the prior year quarter. Net income for the fourth quarter ended December 31, 2019 increased by 3.1% to $22.0 million, or $0.83 per diluted share, compared to net income of $21.3 million, or $0.80 per diluted share, for the prior year quarter. Included in the prior year results was a favorable resolution of a contract dispute that resulted in an increase of $0.06 per diluted share.

Net sales for the year ended December 31, 2019 increased by 4.5% to $2.8 billion, compared to $2.7 billion for the year ended December 31, 2018. Net income for the year ended December 31, 2019 increased by 27.1% to $82.1 million, or $3.10 per diluted share, compared to net income of $64.6 million, or $2.41 per diluted share, for the year ended December 31, 2018.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) totaled $128.7 million for the year ended December 31, 2019, compared to $102.6 million for the year ended December 31, 2018.

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment increased 5.0% to $262.3 million in the fourth quarter of 2019, compared to $249.7 million in the prior year quarter. We experienced strong growth in sales of desktops and software products in the quarter. Gross profit increased by 12.5% to $52.6 million in the fourth quarter of 2019, compared to $46.8 million in the prior year quarter. Gross margin increased by 133 basis points to 20.1% due to higher sales volumes and the change in customer mix.
  • Net sales for the Public Sector Solutions segment increased by 11.9% to $132.5 million in the fourth quarter of 2019, compared to $118.4 million in the prior year quarter. Sales to the federal government increased by 25.4%, compared to the prior year quarter, while sales to state and local government and educational institutions increased by 3.8%. Gross profit increased by 28.5% to $20.9 million in the fourth quarter of 2019, compared to $16.3 million in the prior year quarter. Gross margin increased by 205 basis points to 15.8% primarily due to growth in sales and an increase in cloud-based and security software revenue, which is recognized on a net basis.
  • Net sales for the Enterprise Solutions segment decreased by 5.7% to $321.9 million in the fourth quarter of 2019, compared to $341.4 million in the prior year quarter. Gross profit decreased by 2.7% to $42.6 million in the fourth quarter of 2019, compared to $43.8 million in the prior year quarter. Gross margin increased by 41 basis points to 13.2% 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 9% year over year and accounted for 28% of net sales in the fourth quarter of 2019, compared to 26% of net sales in the prior year quarter. The Public Sector and Enterprise Solutions segments experienced strong year-over-year growth in notebook/mobility sales.
  • Accessories sales decreased by 15% year over year and accounted for 12% of net sales in the fourth quarter of 2019, compared to 14% of net sales in the fourth 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 21% year over year and accounted for 12% of net sales in the fourth 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 4% year over year and accounted for 12% of net sales in the fourth quarter of 2019 and 2018. The Business Solutions segment experienced strong year-over-year growth in software sales.

Selling, general and administrative (“SG&A”) expenses increased in the fourth quarter of 2019 to $86.5 million from $79.5 million in the prior year quarter. SG&A as a percentage of net sales, was 12.1%, compared to 11.2% in the prior year quarter. The increase in SG&A was primarily due to an increase in variable compensation due to the higher level of gross profit, as well as, an increase in advertising expense compared to the prior year quarter.

Cash and cash equivalents were $90.1 million at December 31, 2019, compared to $91.7 million at December 31, 2018. In January 2020, we paid a $0.32 per share special dividend to shareholders, which totaled $8.4 million. During the fourth quarter of 2019, the Company repurchased 2,333 shares of stock for $0.1 million.

“Connection achieved record fourth quarter and full year 2019 results. We saw strong demand for cloud, hybrid-cloud, software, and security solutions. We also continued to experience significant growth in modern workplace solutions driven by the PC refresh,” said Timothy McGrath, President and Chief Executive Officer. “I would like to thank our dedicated team for their commitment and hard work in delivering these record results,” concluded Mr. McGrath. “We believe the 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, February 4, 2020 at 4:30 p.m. ET to discuss its fourth 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 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 December 31,

2019

2018

%

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

$

716,627

$

709,520

1

%

Diluted earnings per share

$

0.83

$

0.80

4

%

 
Gross margin

16.2

%

15.1

%

Operating margin

4.1

%

3.7

%

Return on equity (1)

14.6

%

12.7

%

 
Inventory turns

18

21

Days sales outstanding

63

51

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

28

%

26

%

Desktops

12

10

Accessories

12

14

Software

12

12

Net/Com Products

10

8

Displays

9

9

Servers/Storage

8

10

Other Hardware/Services

9

11

Total Net Sales

100

%

100

%

 
 
Stock Performance Indicators:
Actual shares outstanding

26,345

26,396

Total book value per share

$

22.67

$

19.92

Tangible book value per share

$

19.56

$

16.77

Closing price

$

49.66

$

29.73

Market capitalization

$

1,308,293

$

784,753

Trailing price/earnings ratio

16.0

12.3

LTM Adjusted EBITDA (2)

$

128,662

$

102,620

Adjusted market capitalization/LTM Adjusted EBITDA (3)

9.5

6.8

 
(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 December 31,

2019

2018

NetGross NetGross
(amounts in thousands)SalesMarginSales Margin
 
Business Solutions

$

262,309

20.1

%

$

249,726

18.7

%

Enterprise Solutions

321,851

13.2

341,356

12.8

Public Sector Solutions

132,467

15.8

118,438

13.7

Total

$

716,627

16.2

%

$

709,520

15.1

%

 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31,Years Ended December 31,
(amounts in thousands, except per share data)

2019

2018

2019

2018

 
Net sales

$

716,627

$

709,520

$

2,820,034

$

2,699,489

Cost of sales

600,514

602,718

2,368,724

2,288,403

Gross profit

116,113

106,802

451,310

411,086

 
Selling, general and administrative expenses

86,510

79,518

338,635

324,433

Restructuring and other charges

-

967

703

967

Income from operations

29,603

26,317

111,972

85,686

 
Other income/(expense), net

263

2,566

707

2,978

Income tax provision

(7,900

)

(7,583

)

(30,568

)

(24,072

)

Net income

$

21,966

$

21,300

$

82,111

$

64,592

 
Earnings per common share:
Basic

$

0.83

$

0.80

$

3.12

$

2.42

Diluted

$

0.83

$

0.80

$

3.10

$

2.41

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

26,322

26,632

26,335

26,717

Diluted

26,523

26,766

26,505

26,854

 
 
December 31,December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS

2019

2018

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

$

90,060

$

91,703

Accounts receivable, net

549,626

447,698

Inventories, net

124,666

119,195

Income taxes receivable

1,388

922

Prepaid expenses and other current assets

10,671

9,661

Total current assets

776,411

669,179

Property and equipment, net

64,226

51,799

Right-of-use assets, net

13,842

-

Goodwill

73,602

73,602

Intangibles assets, net

8,307

9,564

Other assets

947

1,211

Total Assets

$

937,335

$

805,355

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable

$

235,641

$

201,640

Accrued payroll

28,050

24,319

Accrued expenses and other liabilities

45,232

33,840

Total current liabilities

308,923

259,799

Deferred income taxes

20,170

17,184

Operating lease liability

10,330

-

Other liabilities

600

2,469

Total Liabilities

340,023

279,452

Stockholders’ Equity:
Common stock

288

288

Additional paid-in capital

118,045

115,842

Retained earnings

514,694

441,010

Treasury stock at cost

(35,715

)

(31,237

)

Total Stockholders’ Equity

597,312

525,903

Total Liabilities and Stockholders’ Equity

$

937,335

$

805,355

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,Years Ended December 31,
(amounts in thousands)

2019

2018

2019

2018

Cash Flows from Operating Activities:
Net income

$

21,966

$

21,300

$

82,111

$

64,592

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

3,130

3,701

13,314

14,063

Deferred income taxes

2,976

1,059

2,986

1,488

Stock-based compensation expense

604

342

1,863

1,080

Loss on disposal of fixed assets

99

-

213

51

Provision for doubtful accounts

(156

)

252

25

1,680

 
Changes in assets and liabilities:
Accounts receivable

(70,563

)

(49,009

)

(101,953

)

14,872

Inventories

1,412

(13,912

)

(5,471

)

(23,311

)

Prepaid expenses and other current assets

(5,178

)

(1,857

)

(1,476

)

(1,045

)

Other non-current assets

(55

)

2,121

264

2,403

Accounts payable

38,127

35,083

34,960

5,722

Accrued expenses and other liabilities

4,219

6,506

9,767

5,244

Net cash provided by (used in) operating activities

(3,419

)

5,586

36,603

86,839

 
Cash Flows from Investing Activities:
Purchases of equipment

(5,035

)

(5,597

)

(25,656

)

(21,238

)

Net cash used in investing activities

(5,035

)

(5,597

)

(25,656

)

(21,238

)

 
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

(115

)

(10,991

)

(4,478

)

(15,375

)

Issuance of stock under Employee Stock Purchase Plan

644

642

1,253

1,247

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

(504

)

(180

)

(913

)

(638

)

Net cash (used in) provided by financing activities

25

(10,529

)

(12,590

)

(23,888

)

(Decrease)/Increase in cash and cash equivalents

(8,429

)

(10,540

)

(1,643

)

41,713

Cash and cash equivalents, beginning of period

98,489

102,243

91,703

49,990

Cash and cash equivalents, end of period

$

90,060

$

91,703

$

90,060

$

91,703

 
Non-cash Investing Activities:
Dividend declaration

$

8,427

$

8,452

$

8,427

$

8,452

Accrued capital expenditures

$

1,463

$

2,422

1,463

2,422

 
Supplemental Cash Flow Information:
Income taxes paid

$

9,488

$

4,811

$

28,460

$

19,945

 
 
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 December 31,Years Ended December 31, (1)

2019

2018

% Change

2019

2018

% Change
Net income

$

21,966

$

21,300

3%

$

82,111

$

64,592

27%

Depreciation and amortization

3,130

3,701

(15%)

13,314

14,064

(5%)

Income tax expense

7,900

7,583

4%

30,568

24,072

27%

Interest expense

25

41

(39%)

103

145

(29%)

EBITDA

33,021

32,625

1%

126,096

102,873

23%

Restructuring and other charges (2)

-

967

-

703

967

(27%)

Favorable resolution of a contract dispute, net (3)

-

(2,300

)

(100%)

-

(2,300

)

(100%)

Stock-based compensation

604

342

77%

1,863

1,080

73%

Adjusted EBITDA

$

33,625

$

31,634

6%

$

128,662

$

102,620

25%

 
(1) LTM: Last twelve months
(2) Restructuring and other charges in 2019 and 2018 consist of severance and other charges related to internal restructuring activities.
(3) The Company recorded $2.3 million of income in other income/(expense), net as a result of a favorable resolution of a contract dispute.
 
 
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 December 31,

Years Ended December 31,

2019

2018

% Change

2019

2018

% Change
Net income

$

21,966

$

21,300

$

82,111

$

64,592

Restructuring and other charges, net of tax (1)

-

713

512

705

Favorable resolution of a contract dispute, net of tax (2)

-

(1,662

)

-

(1,644

)

Adjusted Net Income

$

21,966

$

20,351

8%

$

82,623

$

63,653

30%

Diluted shares

26,523

26,766

26,505

26,854

Adjusted Diluted Earnings per Share

$

0.83

$

0.76

9%

$

3.12

$

2.37

32%

 
 
(1) Restructuring and other charges in 2019 and 2018 consist of severance and other charges related to internal restructuring activities.
(2) The Company recorded $2.3 million of income in other income/(expense), net as a result of a favorable resolution of a contract dispute.
 

Contacts:

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

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