Business Wire | Nov 9, 2020 04:06PM EST

Connection (CNXN) Reports Third Quarter 2020 Results

Nov. 09, 2020

MERRIMACK, N.H.--(BUSINESS WIRE)--Nov. 09, 2020--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(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 September 2020 201930, %

(Amounts and shares in thousands, except Changeoperating data, P/E ratio, and per sharedata) 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 % ofProduct Mix: Net Sales Net SalesNotebooks/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 9.7 7.2Adjusted 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 September 30, 2020 2019

Net Gross Net Gross(amounts in thousands) Sales Margin Sales Margin Enterprise Solutions $ 259,767 14.8% $ 278,295 15.1%

Business Solutions 230,985 20.2 273,756 19.0

Public Sector Solutions 162,000 14.1 177,359 13.9

Total $ 652,752 16.5% $ 729,410 16.3%

CONDENSED CONSOLIDATED STATEMENTS OF INCOMEThree 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

CONDENSED CONSOLIDATED STATEMENTSOF INCOME Three Months Ended Nine Months Ended September 30, September 30,(amounts in thousands, except per 2020 2019 2020 2019share data) $ 652,752 $ 729,410 $ $Net sales 1,914,603 2,103,407

Cost of sales 544,922 610,547 1,604,656 1,768,210

Gross profit 107,830 118,863 309,947 335,197

Selling, general and 86,753 86,226 256,640 252,125administrative expensesRestructuring and other charges - - 992 703

Income from operations 21,077 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 ofearnings per common share:Basic 26,130 26,323 26,158 26,339

Diluted 26,311 26,479 26,337 26,496

September 30, December 31,CONDENSED CONSOLIDATED BALANCE SHEETS 2020 2019

(amounts in thousands) ASSETSCurrent Assets:Cash and cash equivalents $ 108,051 $ 90,060

Accounts receivable, net 588,960 549,626

Inventories, net 134,689 124,666

Income taxes receivable - 1,388

Prepaid expenses and other current assets 12,016 10,671

Total current assets 843,716 776,411

Property and equipment, net 63,189 64,226

Right-of-use assets, net 13,768 13,842

Goodwill 73,602 73,602

Intangibles assets, net 7,393 8,307

Other assets 1,666 947

Total Assets $ 1,003,334 $ 937,335

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable $ 283,163 $ 235,641

Accrued payroll 20,200 28,050

Accrued expenses and other liabilities 34,997 45,232

Total current liabilities 338,360 308,923

Deferred income taxes 20,170 20,170

Operating lease liability 10,579 10,330

Other liabilities 5,948 600

Total Liabilities 375,057 340,023

Stockholders' Equity:Common stock 289 288

Additional paid-in capital 119,762 118,045

Retained earnings 554,163 514,694

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

Total Stockholders' Equity 628,277 597,312

Total Liabilities and Stockholders' Equity $ 1,003,334 $ 937,335

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS Three Months Ended Nine Months Ended September 30, September 30,(amounts in thousands) 2020 2019 2020 2019

Cash Flows from OperatingActivities:Net income $ 16,930 $ 23,750 $ 39,469 $ 60,145

Adjustments to reconcile netincome to net cash providedby (used in) operatingactivities:Depreciation and 3,833 3,107 10,335 10,184amortizationProvision for doubtful (351) 527 3,276 181accountsStock-based compensation 618 426 1,866 1,259expenseDeferred income taxes - - - 10

Loss on disposal of fixed - (4) 13 114assets Changes in assets andliabilities:Accounts receivable (141,893) 21,478 (42,610) (31,390)

Inventories 30,943 49,826 (10,023) (6,883)

Prepaid expenses and other 1,434 229 43 3,702current assetsOther non-current assets (539) 88 (719) 319

Accounts payable 36,236 (61,348) 48,736 (3,167)

Accrued expenses and other (3,223) (1,386) (3,987) 5,548liabilitiesNet cash provided by (used (56,012) 36,693 46,399 40,022in) operating activities Cash Flows from InvestingActivities:Purchases of equipment (1,397) (6,744) (9,611) (20,621)

Net cash used in investing (1,397) (6,744) (9,611) (20,621)activities Cash Flows from FinancingActivities:Dividend payment - - (8,427) (8,452)

Purchase of treasury shares - (862) (10,222) (4,363)

Issuance of stock under - - 536 609Employee Stock PurchasePlanPayment of payroll taxes on (483) (337) (684) (409)stock-based compensationthrough shares withheldNet cash used in financing (483) (1,199) (18,797) (12,615)activitiesIncrease (decrease) in cash (57,892) 28,750 17,991 6,786and cash equivalentsCash and cash equivalents, 165,943 69,739 90,060 91,703beginning of periodCash and cash equivalents, $ 108,051 $ 98,489 $ 108,051 $ 98,489end of period Non-cash InvestingActivities:Accrued capital $ 248 $ 1,684 248 1,684expenditures Supplemental Cash FlowInformation: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.

Three Months Ended LTM Ended September 30, ^(amounts in thousands) September 30, (1)

2020 2019 % 2020 2019 % Change Change

$ $ (29%) $ $ (25%)Net income 16,930 23,750 61,435 81,445

Depreciation and 3,833 3,107 23% 13,465 13,885 (3%)amortizationIncome tax expense 4,130 8,949 (54%) 20,826 30,251 (31%)

Interest expense 25 28 (11%) 103 119 (13%)

EBITDA 24,918 35,834 (30%) 95,829 125,700 (24%)

Restructuring and other - - 100% 992 1,670 (41%)charges ^(2)Stock-based compensation 618 426 45% 2,470 1,601 54%

$ $ (30%) $ $ (23%)Adjusted EBITDA 25,536 36,260 99,291 128,971

(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.

(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 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, Three Months Ended Nine Months Endedexcept per share data) September 30, September 30,

2020 2019 % 2020 2019 % Change Change

$ $ $ $Net income 16,930 23,750 39,469 60,145

Restructuring and other - - 747 510charges, net of tax ^(1) $ $ -29% $ $ -34%Adjusted Net Income 16,930 23,750 40,216 60,655

Diluted shares 26,311 26,479 26,337 26,496

Adjusted Diluted $ 0.64 $ 0.90 -28% $ 1.53 $ 2.29 -33%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/20201109006059/en/

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