Business Wire | Nov 4, 2021 04:07PM EDT

Connection (CNXN) Reports Third Quarter 2021 Results

Nov. 04, 2021

MERRIMACK, N.H.--(BUSINESS WIRE)--Nov. 04, 2021--Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, healthcare and education markets, today announced results for the third quarter ended September 30, 2021.

"We are pleased to report record Q3 revenue and gross profit in both our Enterprise and Business Solutions segments. These results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances growth, elevates productivity, and empowers innovation. This strong financial performance, while affected by on-going supply chain shortages, is expected to continue into fourth quarter," said Tim McGrath, President and CEO of Connection. McGrath continued, "Our employees have gone above and beyond to help our customers manage issues associated with both their supply constraints and their on-going efforts to work-from-anywhere."

Net sales for the quarter ended September 30, 2021 increased by 15.1% to $751.4 million, compared to $652.8 million for the prior year quarter. Net income for the quarter ended September 30, 2021 increased by 18.4% to $20.0 million, or $0.76 per diluted share, compared to net income of $16.9 million, or $0.64 per diluted share, for the prior year quarter.

Net sales for the nine months ended September 30, 2021 increased by 9.3% to $2.1 billion, compared to $1.9 billion for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2021 increased by 20.4% to $47.5 million, or $1.80 per diluted share, compared to net income of $39.5 million, or $1.50 per diluted share for the nine months ended September 30, 2020.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges ("Adjusted EBITDA") totaled $102.4 million for the twelve months ended September 30, 2021, compared to $99.3 million for the twelve months ended September 30, 2020. 1

1 Adjusted EBITDA is a non-GAAP measure. See page 10 for the definition and reconciliation.

Quarterly Highlights

* Continued growth across our vertical markets: Manufacturing saw revenue growth of 24% year-over-year and 7% sequentially compared to Q2 2021 as manufacturers looked to augment the available workforce, automate, and invest in new technologies to address both short-term and long-term workforce challenges stemming from COVID-19 and workforce skills shortages. Healthcare experienced revenue growth of 10% year-over-year as a result of organizations expanding and securing infrastructure to support a surge in employee remote access and telemedicine activity, as well as improving the patient and provider experience.

* Our Technology Solutions Group saw strong demand and growth for managed services, cybersecurity services and network transformation services. Our services business grew more than 23% year-over-year.

* Achieved Microsoft Azure Expert Managed Service Provider (MSP) certification. Connection has demonstrated industry-leading technical capabilities and offers end-to-end support across Azure cloud environments through our Microsoft Center of Excellence.

Quarterly Performance by Segment

* Net sales for the Business Solutions segment increased by 21.8% to $281.4 million in the third quarter of 2021, compared to $231.0 million in the prior year quarter. Gross profit increased by 17.5% to $54.7 million in the third quarter of 2021, compared to $46.6 million in the prior year quarter. Gross margin decreased by 73 basis points to 19.4% primarily due to a higher mix of lower margin client-based solutions.

* Net sales for the Public Sector Solutions segment decreased by 1.1% to $160.2 million in the third quarter of 2021, compared to $162.0 million in the prior year quarter. Sales to state and local government and educational institutions increased by 2.5%, compared to the prior year quarter, while sales to the federal government decreased by 15.8% primarily due to the timing of customer rollouts. Gross profit decreased by 10.8% to $20.3 million in the third quarter of 2021, compared to $22.8 million in the prior year quarter. Gross margin decreased by 138 basis points to 12.7% primarily due to a change in product mix and a decrease in software sales recorded on a net basis.

* Net sales for the Enterprise Solutions segment increased by 19.2% to $309.7 million in the third quarter of 2021, compared to $259.8 million in the prior year quarter. Gross profit increased by 18.7% to $45.6 million in the third quarter of 2021, compared to $38.4 million in the prior year quarter. Gross margin decreased by 6 basis points to 14.7%.

Quarterly Sales by Product Mix

* Notebook/mobility sales had a record quarter at $304 million which represented an increase of 50% year over year and accounted for 40% of net sales in the third quarter of 2021, compared to 31% of net sales in the third quarter of 2020. The increase in this product category was due to the growing hybrid work environment.

* Accessories sales increased by 4% year over year and accounted for 12% of net sales in the third quarter of 2021, compared to 13% of net sales in the third quarter of 2020.

* Software sales decreased by 21% year over year and accounted for 8% of net sales in the third quarter of 2021, compared to 12% in the third quarter of 2020. The decrease in software sales is primarily related to an increase in software recognized on a net basis.

* Desktop sales increased by 7% year over year and accounted for 9% of net sales in the third quarter of 2021, compared to 10% of net sales in the third quarter of 2020.

Selling, general and administrative ("SG&A") expenses increased in the third quarter of 2021 to $93.4 million from $86.8 million in the prior year quarter. SG&A as a percentage of net sales was 12.4%, compared to 13.3% in the prior year quarter. The increase in SG&A was primarily due to an increase in variable compensation due to the higher levels of gross profit and increased marketing costs.

Cash and cash equivalents were $89.7 million at September 30, 2021, compared to $95.7 million at December 31, 2020.

Conference Call and Webcast

Connection will host a conference call and live webcast today, November 4, 2021 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) and enter the confirmation number 8894527. 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 is a non-GAAP financial measure. This measure is 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.connection.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 real-time access to over 425,000 products and 1,600 vendors through MarkITplace(r), a proprietary next-generation, cloud-based supply chain solution. The team's engineers, software licensing specialists, and subject matter experts 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 of1995: This release contains forward-looking statements that are based oncurrently available information, operating plans, and projections about futureevents and trends. Terms such as "believe," "expect," "intend," "plan,""estimate," "anticipate," "may," "should," "will," or similar statements orvariations of such terms are intended to identify forward-looking statements,although not all forward-looking statements include such terms. Forward-lookingstatements inherently involve risks and uncertainties that could cause actualresults to differ materially from those predicted in such forward-lookingstatements. Such risks and uncertainties include, but are not limited to, thecontinuation of the COVID-19 pandemic, including, without limitation, itsimpact on global supply chains and responses to it, the impact of changes inmarket demand and the overall level of economic activity and environment, or inthe level of business investment in information technology products, productavailability and market acceptance, new products, continuation of key vendorand customer relationships and support programs, the ability to realize marketdemand for and competitive pricing pressures on the products and servicesmarketed by the Company, fluctuations in operating results and the ability ofthe Company to manage personnel levels in response to fluctuations in revenue,the ability of the Company to hire and retain qualified sales representativesand other essential personnel, the impact of changes in accountingrequirements, continued successful integration of the new ERP system, and otherrisks detailed in the Company's filings with the Securities and ExchangeCommission, including under the caption "Risk Factors" in the Company's AnnualReport on Form 10-K filed with the Securities and Exchange Commission ("SEC")for the year ended December 31, 2020. The Company assumes no obligation toupdate the information in this press release or revise any forward-lookingstatements, whether as a result of any new information, future events, orotherwise, except as required by law.

CONSOLIDATED SELECTED FINANCIALINFORMATIONAt or for the Three Months Ended 2021 2020 September 30, %

(Amounts and shares in thousands, except Changeoperating data, P/E ratio, and per sharedata) Operating Data:Net sales $ 751,368 $ 652,752 15 %

Diluted earnings per share $ 0.76 $ 0.64 19 %

Gross margin 16.1 % 16.5 %

Operating margin 3.6 % 3.2 %

Return on equity ^(1) 9.8 % 10.2 %

Inventory turns 15 15

Days sales outstanding 66 73

% of % ofProduct Mix: Net Sales Net SalesNotebooks/Mobility 40 % 31 %

Accessories 12 13

Displays 10 8

Desktops 9 10

Software 8 11

Servers/Storage 7 9

Net/Com Products 7 10

Other Hardware/Services 7 8

Total Net Sales 100 % 100 %

Stock Performance Indicators:Actual shares outstanding 26,205 26,142

Total book value per share $ 26.18 $ 24.03

Tangible book value per share $ 23.14 $ 20.94

Closing price $ 44.03 $ 41.06

Market capitalization $ 1,153,806 $ 1,073,391

Trailing price/earnings ratio 18.1 17.7

LTM Adjusted EBITDA ^(2) $ 102,402 $ 99,291

Adjusted market capitalization/LTM 10.4 9.7 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 September 30,2021

2020

Net

Gross

Net

Gross

(amounts in thousands)Sales

Margin

Sales

Margin

Enterprise Solutions$

309,722

14.7

%

$

259,767

14.8

%

Business Solutions281,425

19.4

230,985

20.2

Public Sector Solutions160,221

12.7

162,000

14.1

Total$

751,368

16.1

%

$

652,752

16.5

%

REVENUE AND MARGIN INFORMATIONFor the Three Months Ended September 2021 202030, Net Gross Net Gross

(amounts in thousands) Sales Margin Sales Margin

Enterprise Solutions $ 309,722 14.7 % $ 259,767 14.8 %

Business Solutions 281,425 19.4 230,985 20.2

Public Sector Solutions 160,221 12.7 162,000 14.1

Total $ 751,368 16.1 % $ 652,752 16.5 %

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME Three Months Ended Nine Months Ended September September 30, 30,

(amounts in thousands, 2021 2020 2021 2020except per share data) Net sales $ 751,368 $ 652,752 $ 2,092,421 $ 1,914,603

Cost of sales 630,671 544,922 1,754,877 1,604,656

Gross profit 120,697 107,830 337,544 309,947

Selling, general and 93,369 86,753 272,332 256,640 administrative expensesRestructuring and other - - - 992 chargesIncome from operations 27,328 21,077 65,212 52,315

Other income, net - (17 ) 7 80

Income tax provision (7,283 ) (4,130 ) (17,698 ) (12,926 )

Net income $ 20,045 $ 16,930 $ 47,521 $ 39,469

Earnings per commonshare:Basic $ 0.77 $ 0.65 $ 1.81 $ 1.51

Diluted $ 0.76 $ 0.64 $ 1.80 $ 1.50

Shares used in thecomputation of earningsper common share:Basic 26,197 26,130 26,186 26,158

Diluted 26,368 26,311 26,362 26,337

September 30, December 31,

CONDENSED CONSOLIDATED BALANCE SHEETS 2021 2020

(amounts in thousands) ASSETSCurrent Assets:Cash and cash equivalents $ 89,728 $ 95,655

Accounts receivable, net 585,380 611,021

Inventories, net 175,374 140,867

Prepaid expenses and other current assets 11,797 11,437

Total current assets 862,279 858,980

Property and equipment, net 60,623 61,537

Right-of-use assets, net 10,218 12,821

Goodwill 73,602 73,602

Intangibles assets, net 6,173 7,088

Other assets 1,031 1,345

Total Assets $ 1,013,926 $ 1,015,373

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable $ 217,084 $ 266,846

Accrued payroll 24,023 17,828

Accrued expenses and other liabilities 52,241 57,586

Total current liabilities 293,348 342,260

Deferred income taxes 18,525 18,525

Operating lease liability 7,353 9,631

Other liabilities 8,528 8,630

Total Liabilities 327,754 379,046

Stockholders' Equity:Common stock 290 289

Additional paid-in capital 122,214 119,891

Retained earnings 609,605 562,084

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

Total Stockholders' Equity 686,172 636,327

Total Liabilities and Stockholders' Equity $ 1,013,926 $ 1,015,373

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS Three Months Ended Nine Months Ended September 30, September 30,

(amounts in thousands) 2021 2020 2021 2020

Cash Flows from OperatingActivities:Net income $ 20,045 $ 16,930 $ 47,521 $ 39,469

Adjustments to reconcilenet income to net cashprovided by operatingactivities:Depreciation and 2,947 3,833 9,165 10,335 amortizationAdjustments to credit 645 (351 ) 1,704 3,276 losses reserveStock-based compensation 1,026 618 3,118 1,866 expenseLoss on disposal of fixed 2 - 2 13 assets Changes in assets andliabilities:Accounts receivable (4,369 ) (141,893 ) 22,437 (42,610 )

Inventories (8,295 ) 30,943 (34,507 ) (10,023 )

Prepaid expenses and other 1,791 1,434 (360 ) 43 current assetsOther non-current assets (3 ) (539 ) 314 (719 )

Accounts payable (40,863 ) 36,236 (49,997 ) 48,736

Accrued expenses and other 4,088 (3,223 ) 9,437 (3,987 )liabilitiesNet cash provided by (used (22,986 ) (56,012 ) 8,834 46,399 in) operating activities Cash Flows from InvestingActivities:Purchases of equipment and (2,481 ) (1,397 ) (7,092 ) (9,611 )capitalized softwareProceeds from life - - 1,500 - insuranceNet cash used in investing (2,481 ) (1,397 ) (5,592 ) (9,611 )activities Cash Flows from FinancingActivities:Purchase of treasury - - - (10,222 )sharesDividend payments - - (8,375 ) (8,427 )

Issuance of stock under - - - 536 Employee Stock PurchasePlanPayment of payroll taxeson stock-based (470 ) (483 ) (794 ) (684 )compensation throughshares withheldNet cash used in financing (470 ) (483 ) (9,169 ) (18,797 )activities(Decrease) increase in (25,937 ) (57,892 ) (5,927 ) 17,991 cash and cash equivalentsCash and cash equivalents, 115,665 165,943 95,655 90,060 beginning of periodCash and cash equivalents, $ 89,728 $ 108,051 $ 89,728 $ 108,051 end of period Non-cash InvestingActivities:Accrued capital $ 394 $ 248 394 248 expenditures Supplemental Cash FlowInformation:Income taxes paid $ 7,459 $ 12,716 $ 20,600 $ 13,798

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

2021 2020 % 2021 2020 % Change Change

Net income $ 20,045 $ 16,930 18 % $ 63,817 $ 61,435 4 %

Depreciation and 2,947 3,833 (23 %) 12,434 13,465 (8 %)amortizationIncome tax 7,283 4,130 76 % 22,203 20,826 7 %expenseInterest expense - 25 (100 %) 29 103 (72 %)

EBITDA 30,275 24,918 21 % 98,483 95,829 3 %

Restructuring - - 0 % - 992 (100 %)and othercharges ^(2)Stock-based 1,026 618 66 % 3,919 2,470 59 %compensationAdjusted EBITDA $ 31,301 $ 25,536 23 % $ 102,402 $ 99,291 3 %

(1) LTM: Last twelve months(2) Restructuring and other charges in 2020 consist of severance and other charges related to internal restructuring activities.(1) LTM: Last twelve months(2) Restructuring and other charges in 2020 consist of severance and othercharges related to internal restructuring activities.ADJUSTED NET INCOME AND ADJUSTED DILUTED 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. A reconciliation from Diluted Earnings per Share to Adjusted Diluted Earnings per Share is detailed below. Adjusted Diluted Earnings per Share is defined Diluted Earnings per Shared adjusted for restructuring and other charges, net of tax. Adjusted Net Income and Adjusted Diluted 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,

2021

2020

% Change

2021

2020

% Change

Net income$

20,045

$

16,930

$

47,521

$

39,469

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

-

-

747

Adjusted Net Income$

20,045

$

16,930

18

%

$

47,521

$

40,216

18

%

Diluted shares26,368

26,311

26,362

26,337

Diluted Earnings per Share$

0.76

$

0.64

18

%

$

1.80

$

1.50

20

%

Adjusted Diluted Earnings per Share$

0.76

$

0.64

18

%

$

1.80

$

1.53

18

%

ADJUSTED NET INCOME AND ADJUSTED DILUTED 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. A reconciliation from Diluted Earnings per Share toAdjusted Diluted Earnings per Share is detailed below. Adjusted DilutedEarnings per Share is defined Diluted Earnings per Shared adjusted forrestructuring and other charges, net of tax. Adjusted Net Income and AdjustedDiluted Earnings Per Share are considered non-GAAP financial measures (see noteabove in Adjusted EBITDA for a description of non-GAAP financial measures). TheCompany believes that these non-GAAP disclosures provide helpful informationwith respect to the Company's operating performance.(amounts in thousands, Three Months Ended Nine Months Endedexcept per share data) September 30, September 30,

2021 2020 % 2021 2020 % Change Change

Net income $ 20,045 $ 16,930 $ 47,521 $ 39,469

Restructuring and other - - - 747charges, net of tax ^(1)Adjusted Net Income $ 20,045 $ 16,930 18 % $ 47,521 $ 40,216 18 %

Diluted shares 26,368 26,311 26,362 26,337

Diluted Earnings per $ 0.76 $ 0.64 18 % $ 1.80 $ 1.50 20 %ShareAdjusted Diluted $ 0.76 $ 0.64 18 % $ 1.80 $ 1.53 18 %Earnings per Share(1) Restructuring and other charges in 2020 consist of severance and other charges related to internal restructuring activities. View source version on businesswire.com: https://www.businesswire.com/news/home/20211104006240/en/

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