Business Wire | Feb 24, 2021 04:06PM EST

Connection (CNXN) Reports Fourth Quarter and Full Year 2020 Results

Feb. 24, 2021

MERRIMACK, N.H.--(BUSINESS WIRE)--Feb. 24, 2021--Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, and education markets, today announced results for the fourth quarter and year ended December 31, 2020.

"Our Q4 performance reflected the continued recovery trend in business conditions that we began to see very late in Q2," said Tim McGrath, President and CEO of Connection. "Our year-over-year revenue growth in our Business and Public Sector Solutions segments was offset by a decline in Enterprise Solutions, which had a strong Q4 2019. We believe current momentum will continue in the months ahead. There was solid demand in mobility, security, software, and managed services. In Q4, we experienced greater than 20% growth in both SLED and our manufacturing vertical market."

McGrath continued, "The pandemic had a significant impact on our business in 2020. Our people rose to the occasion and worked tirelessly through the year under difficult conditions to help our customers succeed. We are optimistic about 2021 and look forward to continuing to deliver the value-added services and products that enable our customers to transform their businesses."

Net sales for the quarter ended December 31, 2020 decreased by 5.7% to $675.7 million, compared to $716.6 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 in Enterprise and supply chain constraints. Net income for the quarter ended December 31, 2020 decreased by 25.8% to $16.3 million, or $0.62 per diluted share, compared to net income of $22.0 million, or $0.83 per diluted share, for the prior year quarter.

Net sales for the year ended December 31, 2020 decreased by 8.1% to $2.6 billion, compared to $2.8 billion for the year ended December 31, 2019. Net income for the year ended December 31, 2020 decreased by 32.1% to $55.8 million, or $2.12 per diluted share, compared to net income of $82.1 million, or $3.10 per diluted share, for the year ended December 31, 2019.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges ("Adjusted EBITDA") totaled $90.6 million for the year ended December 31, 2020, compared to $128.7 million for the year ended December 31, 2019. 1

Quarterly Highlights

* Our Manufacturing vertical market had impressive quarter-over-quarter and year-over-year revenue growth. Manufacturers are using technology to drive top and bottom line growth. We are seeing strong demand associated with business resiliency and security solutions.

* Healthcare, our largest vertical market, saw 12.5% sequential revenue growth, while our Finance vertical experienced 15.5% sequential revenue growth.

* We experienced record demand for notebooks and other mobility solutions as customers continue to advance their workplace transformation strategies during the COVID-19 pandemic.

* Our Technology Solutions Group saw strong demand and growth across lifecycle and managed services. Specific areas included end user service desk, cloud consulting and workplace transformation.

Quarterly Performance by Segment

* Net sales for the Business Solutions segment increased by 1.1% to $265.2 million in the fourth quarter of 2020, compared to $262.3 million in the prior year quarter. Gross profit decreased by 3.7% to $50.7 million in the fourth quarter of 2020, compared to $52.6 million in the prior year quarter. Gross margin decreased by 95 basis points to 19.1% primarily due to changes in product mix.

* Net sales for the Public Sector Solutions segment increased by 1.8% to $134.9 million in the fourth quarter of 2020, compared to $132.5 million in the prior year quarter. Sales to state and local government and educational institutions increased by 23.0%, compared to the prior year quarter, while sales to the federal government decreased by 27.8%. Gross profit decreased by 11.6% to $18.5 million in the fourth quarter of 2020, compared to $20.9 million in the prior year quarter. Gross margin decreased by 209 basis points to 13.7%. Our federal business declined against record Q4 net sales in 2019.

* Net sales for the Enterprise Solutions segment decreased by 14.4% to $275.6 million in the fourth quarter of 2020, compared to $321.9 million in the prior year quarter. Gross profit decreased by 6.7% to $39.7 million in the fourth quarter of 2020, compared to $42.6 million in the prior year quarter. Gross margin increased by 118 basis points to 14.4% primarily due to changes in customer mix.

Quarterly Sales by Product Mix

* Notebook/mobility sales, the Company's largest product category, increased by 16% year over year and accounted for 34% of net sales in the fourth quarter of 2020, compared to 28% of net sales in the fourth quarter of 2019. The increase in this product category was due to the continued work-from-home trend.

* Accessories sales decreased by 1% year over year and accounted for 13% of net sales in the fourth quarter of 2020, compared to 12% of net sales in the fourth quarter of 2019.

* Software sales decreased by 11% year over year and accounted for 12% of net sales in the fourth quarter of 2020 and 2019. Software revenue recognized on a net basis, such as cloud-based software offerings, continues to grow rapidly.

* Desktop sales decreased by 27% year over year and accounted for 9% of net sales in the fourth quarter of 2020, compared to 12% of net sales in the fourth quarter of 2019.

Selling, general and administrative ("SG&A") expenses increased in the fourth quarter of 2020 to $89.1 million from $86.5 million in the prior year quarter. SG&A as a percentage of net sales, was 13.2%, compared to 12.1% in the prior year quarter. The increase in SG&A was primarily due to an increase in costs associated with our new ERP system, costs associated with the creation of our new Technical Sales Organization and one-time legal fees.

Cash and cash equivalents were $95.7 million at December 31, 2020, compared to $90.1 million at December 31, 2019. In January 2021, we paid a $0.32 per share special dividend to shareholders, which totaled $8.4 million.

Conference Call and Webcast

Connection will host a conference call and live web cast today, February 24, 2021 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 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(tm), 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.

CONSOLIDATED SELECTED FINANCIALINFORMATIONAt or for the Three Months Ended 2020 2019 December 31, %

(Amounts and shares in thousands, Changeexcept operating data, P/E ratio, andper share data) Operating Data:Net sales $ 675,686 $ 716,627 (6 %)

Diluted earnings per share $ 0.62 $ 0.83 (25 %)

Gross margin 16.1 % 16.2 %

Operating margin 2.9 % 4.1 %

Return on equity ^(1) 9.1 % 14.6 %

Inventory turns 18 18

Days sales outstanding 75 63

% of % ofProduct Mix: Net Sales Net SalesNotebooks/Mobility 34 % 28 %

Accessories 13 12

Software 12 12

Desktops 9 12

Net/Com Products 9 10

Displays 8 9

Servers/Storage 7 8

Other Hardware/Services 8 9

Total Net Sales 100 % 100 %

Stock Performance Indicators:Actual shares outstanding 26,170 26,345

Total book value per share $ 24.32 $ 22.67

Tangible book value per share $ 21.23 $ 19.56

Closing price $ 47.29 $ 49.66

Market capitalization $ 1,237,579 $ 1,308,293

Trailing price/earnings ratio 22.3 16.0

LTM Adjusted EBITDA ^(2) $ 90,566 $ 128,662

Adjusted market capitalization/LTM 12.6 9.5 Adjusted EBITDA ^(3)(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.(1) Calculated as the trailing twelve months' of net income divided by theaverage trailing twelve months' of equity.(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes,depreciation and amortization) adjusted for stock-based compensation andrestructuring and other related charges.(3) Adjusted market capitalization is defined as gross market capitalizationless cash balance.REVENUE AND MARGIN INFORMATIONFor the Three Months Ended December 31,2020

2019

NetGrossNetGross(amounts in thousands)SalesMarginSalesMarginEnterprise Solutions$

275,625

14.4

%

$

321,851

13.2

%

Business Solutions265,173

19.1

262,309

20.1

Public Sector Solutions134,888

13.7

132,467

15.8

Total$

675,686

16.1

%

$

716,627

16.2

%

REVENUE AND MARGIN INFORMATIONFor the Three Months Ended December 31, 2020 2019

Net Gross Net Gross(amounts in thousands) Sales Margin Sales Margin Enterprise Solutions $ 275,625 14.4 % $ 321,851 13.2 %

Business Solutions 265,173 19.1 262,309 20.1

Public Sector Solutions 134,888 13.7 132,467 15.8

Total $ 675,686 16.1 % $ 716,627 16.2 %

CONDENSED CONSOLIDATED STATEMENTS OFINCOME Three Months Ended Years Ended December 31, December 31,(amounts in 2020 2019 2020 2019 thousands, except pershare data) Net sales $ 675,686 $ 716,627 $ 2,590,290 $ 2,820,034

Cost of sales 566,827 600,514 2,171,483 2,368,724

Gross profit 108,859 116,113 418,807 451,310

Selling, general and 89,101 86,510 345,741 338,635 administrativeexpensesRestructuring and - - 992 703 other chargesIncome from 19,758 29,603 72,074 111,972 operations Other income/ (18 ) 263 61 707 (expense), netGain from insurance 1,061 - 1,061 - policiesIncome tax provision (4,505 ) (7,900 ) (17,431 ) (30,568 )

Net income $ 16,296 $ 21,966 $ 55,765 $ 82,111

Earnings per commonshare:Basic $ 0.62 $ 0.83 $ 2.13 $ 3.12

Diluted $ 0.62 $ 0.83 $ 2.12 $ 3.10

Shares used in thecomputation of earningsper common share:

Basic 26,156 26,322 26,157 26,335

Diluted 26,328 26,523 26,336 26,505

December 31, December 31,

CONDENSED CONSOLIDATED BALANCE SHEETS 2020 2019

(amounts in thousands) ASSETSCurrent Assets:Cash and cash equivalents $ 95,655 $ 90,060

Accounts receivable, net 610,096 549,626

Inventories, net 140,867 124,666

Income taxes receivable - 1,388

Prepaid expenses and other current assets 12,362 10,671

Total current assets 858,980 776,411

Property and equipment, net 61,537 64,226

Right-of-use assets, net 12,821 13,842

Goodwill 73,602 73,602

Intangibles assets, net 7,088 8,307

Other assets 1,345 947

Total Assets $ 1,015,373 $ 937,335

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable $ 266,846 $ 235,641

Accrued payroll 17,828 28,050

Accrued expenses and other liabilities 57,586 45,232

Total current liabilities 342,260 308,923

Deferred income taxes 18,525 20,170

Operating lease liability 9,631 10,330

Other liabilities 8,630 600

Total Liabilities 379,046 340,023

Stockholders' Equity:Common stock 289 288

Additional paid-in capital 119,891 118,045

Retained earnings 562,084 514,694

Treasury stock at cost (45,937 ) (35,715 )

Total Stockholders' Equity 636,327 597,312

Total Liabilities and Stockholders' Equity $ 1,015,373 $ 937,335

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS Three Months Ended Years Ended December 31, December 31,(amounts in thousands) 2020 2019 2020 2019

Cash Flows fromOperating Activities:Net income $ 16,296 $ 21,966 $ 55,765 $ 82,111

Adjustments to reconcilenet income to net cashprovided by (used in)operating activities:Depreciation and 3,268 3,130 13,603 13,314 amortizationProvision for doubtful 40 (156 ) 3,316 25 accountsStock-based 802 604 2,668 1,863 compensation expenseDeferred income taxes (1,645 ) 2,976 (1,645 ) 2,986

Gain on life insurance (1,061 ) - (1,061 ) - proceedsLoss on disposal of 15 99 28 213 fixed assets Changes in assets andliabilities:Accounts receivable (20,115 ) (70,563 ) (62,725 ) (101,953 )

Inventories (6,178 ) 1,412 (16,201 ) (5,471 )

Prepaid expenses and (346 ) (5,178 ) (303 ) (1,476 )other current assetsOther non-current 321 (55 ) (398 ) 264 assetsAccounts payable (16,221 ) 38,127 32,515 34,960

Accrued expenses and 14,523 4,219 10,536 9,767 other liabilitiesNet cash provided by (10,301 ) (3,419 ) 36,098 36,603 (used in) operatingactivities Cash Flows fromInvesting Activities:Purchases of equipment (1,422 ) (5,035 ) (11,033 ) (25,656 )

Net cash used in (1,422 ) (5,035 ) (11,033 ) (25,656 )investing activities Cash Flows fromFinancing Activities:Dividend payment - - (8,427 ) (8,452 )

Purchase of treasury - (115 ) (10,222 ) (4,478 )sharesIssuance of stock under - 644 536 1,253 Employee Stock PurchasePlanPayment of payroll taxeson stock-based (673 ) (504 ) (1,357 ) (913 )compensation throughshares withheldNet cash used in (673 ) 25 (19,470 ) (12,590 )financing activitiesIncrease (decrease) in (12,396 ) (8,429 ) 5,595 (1,643 )cash and cashequivalentsCash and cash 108,051 98,489 90,060 91,703 equivalents, beginningof periodCash and cash $ 95,655 $ 90,060 $ 95,655 $ 90,060 equivalents, end ofperiod Non-cash InvestingActivities:Dividend declaration $ 8,375 $ 8,427 $ 8,375 $ 8,427

Life insurance proceeds $ 1,500 $ - $ 1,500 $ - recorded as receivableAccrued capital $ 442 $ 1,463 442 1,463 expenditures Supplemental Cash FlowInformation:Income taxes paid $ 5,643 $ 9,488 $ 19,441 $ 28,460

EBITDA AND ADJUSTED EBITDA A reconciliation of EBITDA and Adjusted EBITDA to the most directly comparableGAAP measure is detailed below. Adjusted EBITDA is defined as EBITDA (earningsbefore interest, taxes, depreciation and amortization) adjusted forrestructuring and other charges, and stock-based compensation. Both EBITDA andAdjusted EBITDA are considered non-GAAP financial measures. Generally, anon-GAAP financial measure is a numerical measure of a company's performance,financial position, or cash flows that either includes or excludes amounts thatare not normally included or excluded in the most directly comparable measurecalculated and presented in accordance with GAAP. We believe that EBITDA andAdjusted EBITDA provide helpful information with respect to our operatingperformance including our ability to fund our future capital expenditures andworking capital requirements. Adjusted EBITDA also provides helpful informationas it is the primary measure used in certain financial covenants contained inour credit agreements. Non-GAAP measures are not a substitute for GAAP measuresand should be considered together with the GAAP financial measures. Ournon-GAAP financial measures may not be comparable to other similar titledmeasures of other companies.(amounts in thousands)Three Months Ended December 31,

Years Ended December 31, (1)

2020

2019

% Change

2020

2019

% Change

Net income$

16,296

$

21,966

(26

%)

$

55,765

$

82,111

(32

%)

Depreciation and amortization3,269

3,130

4

%

13,603

13,314

2

%

Income tax expense4,505

7,900

(43

%)

17,431

30,568

(43

%)

Interest expense29

25

16

%

107

103

4

%

EBITDA24,099

33,021

(27

%)

86,906

126,096

(31

%)

Restructuring and other charges (2)-

-

100

%

992

703

41

%

Stock-based compensation801

604

33

%

2,668

1,863

43

%

Adjusted EBITDA$

24,900

$

33,625

(26

%)

$

90,566

$

128,662

(30

%)

Three Months Ended Years Ended December 31, ^(amounts in thousands) December 31, (1)

2020 2019 % 2020 2019 % Change Change

Net income $ 16,296 $ 21,966 (26 %) $ 55,765 $ 82,111 (32 %)

Depreciation and 3,269 3,130 4 % 13,603 13,314 2 %amortizationIncome tax expense 4,505 7,900 (43 %) 17,431 30,568 (43 %)

Interest expense 29 25 16 % 107 103 4 %

EBITDA 24,099 33,021 (27 %) 86,906 126,096 (31 %)

Restructuring and - - 100 % 992 703 41 %other charges ^(2)Stock-based 801 604 33 % 2,668 1,863 43 %compensationAdjusted EBITDA $ 24,900 $ 33,625 (26 %) $ 90,566 $ 128,662 (30 %)

(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.(1) LTM: Last twelve months(2) Restructuring and other charges in both 2020 and 2019 consist of severanceand other charges related to internal restructuring activities.ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHAREA 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.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 othercharges, net of tax. Adjusted Net Income and Adjusted Earnings Per Share areconsidered non-GAAP financial measures (see note above in Adjusted EBITDA for adescription of non-GAAP financial measures). The Company believes that thesenon-GAAP disclosures provide helpful information with respect to the Company'soperating performance.(amounts in thousands, except per share data)Three Months Ended December 31,Years Ended December 31,2020

2019

% Change

2020

2019

% Change

Net income$

16,296

$

21,966

$

55,765

$

82,111

Restructuring and other charges, net of tax (1)-

-

755

512

Adjusted Net Income$

16,296

$

21,966

-26

%

$

56,520

$

82,623

-32

%

Diluted shares26,328

26,523

26,336

26,505

Adjusted Diluted Earnings per Share$

0.62

$

0.83

-25

%

$

2.15

$

3.12

-31

%

(amounts in thousands, Three Months Ended Years Ended December 31,except per share data) December 31, 2020 2019 % 2020 2019 % Change Change

Net income $ 16,296 $ 21,966 $ 55,765 $ 82,111

Restructuring and other - - 755 512charges, net of tax ^(1)Adjusted Net Income $ 16,296 $ 21,966 -26 % $ 56,520 $ 82,623 -32 %

Diluted shares 26,328 26,523 26,336 26,505

Adjusted Diluted $ 0.62 $ 0.83 -25 % $ 2.15 $ 3.12 -31 %Earnings per Share(1) Restructuring and other charges in both 2020 and 2019 consist of severance and other charges related to internal restructuring activities. View source version on businesswire.com: https://www.businesswire.com/news/home/20210224006061/en/

CONTACT: Investor Relations Contact: Thomas Baker, 603.683.2505 Senior Vice President, CFO, and Treasurer tom@connection.com