Connection (CNXN) Reports Third Quarter 2022 Results

November 3, 2022

Gross Profit Grows 13.2% 

THIRD QUARTER HIGHLIGHTS:

  • Net sales: $775.7 million, up 3.2% y/y
  • Gross profit: $136.6 million, up 13.2% y/y
  • Net income: $23.2 million, up 15.8% y/y
  • Diluted EPS: $0.88, up 15.4% y/y

MERRIMACK, N.H.--(BUSINESS WIRE)--Nov. 3, 2022-- 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, 2022.

“We continued to execute well against our strategic objectives and delivered another strong quarter. We saw a shift in product mix as our customers prioritized datacenter modernization, cloud solutions, security, and software, over end-point devices. The shift to these advanced technologies was the primary driver of our record gross margin,” said Timothy McGrath, President and Chief Executive Officer of Connection.

Net sales for the quarter ended September 30, 2022 increased by 3.2%, year over year. Gross profit increased 13.2% while gross margin expanded 155 basis points to a record 17.6%, compared to the prior year quarter. Net income for the quarter ended September 30, 2022 increased by 15.8% to $23.2 million, or $0.88 per diluted share, compared to net income of $20.0 million, or $0.76 per diluted share, for the prior year quarter.

Net sales for the nine months ended September 30, 2022 increased by 14.3%, year over year. Gross profit increased 19.0% while gross margin expanded 66 basis points to 16.8%, compared to the nine months ended September 30, 2021. Net income for the nine months ended September 30, 2022 increased by 48.1% to $70.4 million, or $2.66 per diluted share, compared to net income of $47.5 million, or $1.80 per diluted share for the nine months ended September 30, 2021.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) increased 42% to $145.5 million for the twelve months ended September 30, 2022, compared to $102.4 million for the twelve months ended September 30, 2021. 1

Quarterly Performance by Segment:

  • Net sales for the Business Solutions segment increased by 12.2% to $315.8 million in the third quarter of 2022, compared to $281.4 million in the prior year quarter. Gross profit increased by 15.7% to $63.3 million in the third quarter of 2022, compared to $54.7 million in the prior year quarter. Gross margin increased by 60 basis points to 20.0% primarily due to an increase in sales of software and services during the third quarter of 2022 which are recognized as revenue on a net basis.
  • Net sales for the Public Sector Solutions segment decreased by 3.7% to $154.4 million in the third quarter of 2022, compared to $160.2 million in the prior year quarter. Sales to state and local governments and educational institutions decreased by 2.6%, compared to the prior year quarter, while sales to the federal government decreased by 9.1%. Gross profit increased by 23.3% to $25.1 million in the third quarter of 2022, compared to $20.3 million in the prior year quarter. Gross margin increased by 356 basis points to 16.3%. The increase in gross margin was primarily driven by an increase in sales of software and services during the third quarter of 2022 which are recognized as revenue on a net basis.
  • Net sales for the Enterprise Solutions segment decreased by 1.4% to $305.5 million in the third quarter of 2022, compared to $309.7 million in the prior year quarter. Gross profit increased by 5.7% to $48.3 million in the third quarter of 2022, compared to $45.6 million in the prior year quarter. Gross margin increased by 106 basis points to 15.8% primarily due to an increase in sales of software and services during the third quarter of 2022 which are recognized as revenue on a net basis as well as increases in datacenter solutions.

Quarterly Highlights

  • Continued growth in our vertical markets:
    • In the Finance vertical, we grew revenue 40% year over year and 12% sequentially as our customers were upgrading legacy hardware and focusing on securing their environments.
    • Manufacturing revenue grew 3% year over year as clients focused on increasing automation and process integration, and long-term investment in new technologies to support cybersecurity, risk reduction, and growth opportunities.
    • Revenue in Healthcare grew 14% year over year driven by post pandemic technology refreshes and new investments in traditional and new patient care delivery models.

Quarterly Sales by Product Mix:

  • Software sales increased by 41% year over year and accounted for 11% of net sales in the third quarter of 2022, compared to 8% of net sales in the third quarter of 2021.
  • Notebook/mobility sales decreased 9% year over year and accounted for 36% of net sales in the third quarter of 2022, compared to 40% of net sales in the third quarter of 2021.
  • Accessories sales increased by 12% year over year and accounted for 13% of net sales in the third quarter of 2022, compared to 12% of net sales in the third quarter of 2021.
  • Desktop sales increased by 5% year over year and accounted for 9% of net sales in the third quarter of 2022 and 2021.

Selling, general and administrative (“SG&A”) expenses increased in the third quarter of 2022 to $104.9 million from $93.4 million in the prior year quarter. The increase in SG&A was primarily due to an increase in variable compensation due to higher levels of gross profit and an increase in personnel cost associated with an investment in incremental headcount focused on building our technical and sales organizations, as well as increased marketing spending. SG&A as a percentage of net sales increased to 13.5%, compared to 12.4% in the prior year quarter. The increase in SG&A as a percentage of net sales is primarily due to the shift in product mix toward sales of software and services which are recognized as revenue on a net basis.

Cash and cash equivalents were $116.2 million at September 30, 2022, compared to $108.3 million at December 31, 2021.

“As evidenced by our results this quarter, our team has continued to successfully adapt to the needs of our customers,” 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, November 3, 2022 at 4:30 p.m. ET to discuss its third quarter financial results. For participants who would like to participate via telephone, please register here to receive the dial-in number along with a unique PIN number that is required to access the call. 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

EBITDA and Adjusted EBITDA 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 measures 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 460,000 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 460,000 products and 2,500 vendors through MarkITplace®, 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.

Cautionary Note Regarding Forward-Looking Statements

Statements in this release, other than statements of historical fact, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve important risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. You can generally identify forward-looking statements by words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “may,” “should,” “will,” or similar statements or variations of such terms, although not all forward-looking statements include such terms. Such risks and uncertainties include, but are not limited to, the continuation of the COVID-19 pandemic, including, without limitation, the actions taken by governments in response to it, disruptions impacting the global supply chain, including those attributable to the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, 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 in the current uncertain macroeconomic environment characterized by, among other things, persistent inflation and rising interest rates, 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, 2021. 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 FINANCIAL INFORMATION
At or for the Three Months Ended September 30,

2022

2021

%

Change

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

$

775,692

 

$

751,368

 

3

%

Diluted earnings per share

$

0.88

 

$

0.76

 

16

%

 
Gross margin

 

17.6

%

 

16.1

%

Operating margin

 

4.1

%

 

3.6

%

 
Inventory turns

 

12

 

 

15

 

Days sales outstanding

 

69

 

 

66

 

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

 

36

%

 

40

%

Accessories

 

13

 

 

12

 

Software

 

11

 

 

8

 

Displays

 

10

 

 

10

 

Desktops

 

9

 

 

9

 

Net/Com Products

 

7

 

 

7

 

Servers/Storage

 

7

 

 

7

 

Other Hardware/Services

 

7

 

 

7

 

Total Net Sales

 

100

%

 

100

%

 
 
Stock Performance Indicators:
Actual shares outstanding

 

26,288

 

 

26,205

 

Total book value per share

$

28.76

 

$

26.18

 

Tangible book value per share

$

25.77

 

$

23.14

 

Closing price

$

45.09

 

$

44.03

 

Market capitalization

$

1,185,326

 

$

1,153,806

 

Trailing price/earnings ratio

 

12.9

 

 

18.1

 

LTM Adjusted EBITDA (1)

$

145,502

 

$

102,402

 

 
(1) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation and restructuring and other related charges.
 
 
REVENUE AND MARGIN INFORMATION
For the Three Months Ended September 30,

2022

2021

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

$

305,510

 

15.8

%

$

309,722

 

14.7

%

Business Solutions

 

315,816

 

20.0

 

 

281,425

 

19.4

 

Public Sector Solutions

 

154,366

 

16.3

 

 

160,221

 

12.7

 

Total

$

775,692

 

17.6

%

$

751,368

 

16.1

%

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

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 
Net sales

$

775,692

 

$

751,368

 

$

2,392,545

 

$

2,092,421

 

Cost of sales

 

639,066

 

 

630,671

 

 

1,990,712

 

 

1,754,877

 

Gross profit

 

136,626

 

 

120,697

 

 

401,833

 

 

337,544

 

 
Selling, general and administrative expenses

 

104,887

 

 

93,369

 

 

305,189

 

 

272,332

 

Income from operations

 

31,739

 

 

27,328

 

 

96,644

 

 

65,212

 

 
Other income, net

 

308

 

 

-

 

 

319

 

 

7

 

Income tax provision

 

(8,841

)

 

(7,283

)

 

(26,567

)

 

(17,698

)

Net income

$

23,206

 

$

20,045

 

$

70,396

 

$

47,521

 

 
Earnings per common share:
Basic

$

0.88

 

$

0.77

 

$

2.68

 

$

1.81

 

Diluted

$

0.88

 

$

0.76

 

$

2.66

 

$

1.80

 

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

 

26,279

 

 

26,197

 

 

26,267

 

 

26,186

 

Diluted

 

26,455

 

 

26,368

 

 

26,432

 

 

26,362

 

 
 
September 30, December 31,
CONDENSED CONSOLIDATED BALANCE SHEETS

 

2022

 

 

2021

 

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

$

116,190

 

$

108,310

 

Accounts receivable, net

 

646,656

 

 

607,532

 

Inventories, net

 

213,316

 

 

206,555

 

Prepaid expenses and other current assets

 

10,095

 

 

10,016

 

Total current assets

 

986,257

 

 

932,413

 

Property and equipment, net

 

59,913

 

 

61,011

 

Right-of-use assets, net

 

8,495

 

 

9,579

 

Goodwill

 

73,602

 

 

73,602

 

Intangibles assets, net

 

4,953

 

 

5,868

 

Other assets

 

905

 

 

910

 

Total Assets

$

1,134,125

 

$

1,083,383

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable

$

258,596

 

$

281,836

 

Accrued payroll

 

31,478

 

 

30,966

 

Accrued expenses and other liabilities

 

62,846

 

 

61,830

 

Total current liabilities

 

352,920

 

 

374,632

 

Deferred income taxes

 

19,278

 

 

19,278

 

Operating lease liability

 

5,620

 

 

6,789

 

Other liabilities

 

200

 

 

211

 

Total Liabilities

 

378,018

 

 

400,910

 

Stockholders’ Equity:
Common stock

 

291

 

 

290

 

Additional paid-in capital

 

125,592

 

 

122,354

 

Retained earnings

 

676,161

 

 

605,766

 

Treasury stock at cost

 

(45,937

)

 

(45,937

)

Total Stockholders’ Equity

 

756,107

 

 

682,473

 

Total Liabilities and Stockholders’ Equity

$

1,134,125

 

$

1,083,383

 

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

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Cash Flows from Operating Activities:
Net income

$

23,206

 

$

20,045

 

$

70,396

 

$

47,521

 

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

 

3,020

 

 

2,947

 

 

9,000

 

 

9,165

 

Adjustments to credit losses reserve

 

1,016

 

 

645

 

 

2,658

 

 

1,704

 

Stock-based compensation expense

 

1,282

 

 

1,026

 

 

4,072

 

 

3,118

 

Loss on disposal of fixed assets

 

3

 

 

2

 

 

16

 

 

2

 

 
Changes in assets and liabilities:
Accounts receivable

 

(3,719

)

 

(4,369

)

 

(41,782

)

 

22,437

 

Inventories

 

9,842

 

 

(8,295

)

 

(6,761

)

 

(34,507

)

Prepaid expenses and other current assets

 

3,273

 

 

1,791

 

 

(79

)

 

(360

)

Other non-current assets

 

(22

)

 

(3

)

 

5

 

 

314

 

Accounts payable

 

(19,823

)

 

(40,863

)

 

(23,268

)

 

(49,997

)

Accrued expenses and other liabilities

 

6,006

 

 

4,088

 

 

1,432

 

 

9,437

 

Net cash provided by (used in) operating activities

 

24,084

 

 

(22,986

)

 

15,689

 

 

8,834

 

 
Cash Flows from Investing Activities:
Purchases of equipment and capitalized software

 

(2,410

)

 

(2,481

)

 

(6,975

)

 

(7,092

)

Proceeds from life insurance

 

-

 

 

-

 

 

-

 

 

1,500

 

Net cash used in investing activities

 

(2,410

)

 

(2,481

)

 

(6,975

)

 

(5,592

)

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

 

10,409

 

 

-

 

 

36,463

 

 

-

 

Repayment of short-term borrowings

 

(10,409

)

 

-

 

 

(36,463

)

 

-

 

Dividend payments

 

-

 

 

-

 

 

-

 

 

(8,375

)

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

 

(380

)

 

(470

)

 

(834

)

 

(794

)

Net cash used in financing activities

 

(380

)

 

(470

)

 

(834

)

 

(9,169

)

Increase (Decrease) in cash and cash equivalents

 

21,294

 

 

(25,937

)

 

7,880

 

 

(5,927

)

Cash and cash equivalents, beginning of period

 

94,896

 

 

115,665

 

 

108,310

 

 

95,655

 

Cash and cash equivalents, end of period

$

116,190

 

$

89,728

 

$

116,190

 

$

89,728

 

 
Non-cash Investing Activities:
Accrued capital expenditures

$

362

 

$

394

 

 

362

 

 

394

 

 
Supplemental Cash Flow Information:
Income taxes paid

$

9,250

 

$

7,459

 

$

30,759

 

$

20,600

 

Interest paid

$

1

 

$

-

 

$

4

 

$

-

 

 
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. When analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA in addition to, and not as alternatives for Net income or any other performance measure presented in accordance with GAAP. Our non-GAAP financial measures may not be comparable to other similar titled measures of other companies.
 
(amounts in thousands) Three Months Ended September 30, LTM Ended September 30, (1)

2022

 

2021

 

% Change

 

2022

 

2021

 

% Change

Net income

$

23,206

$

20,045

16

%

$

92,781

$

63,817

45

%

Depreciation and amortization

 

3,020

 

2,947

2

%

 

12,037

 

12,434

(3

%)

Income tax expense

 

8,841

 

7,283

21

%

 

35,485

 

22,203

60

%

Interest expense

 

1

 

-

100

%

 

14

 

29

(52

%)

EBITDA

 

35,068

 

30,275

16

%

 

140,317

 

98,483

42

%

Stock-based compensation

 

1,282

 

1,026

25

%

 

5,185

 

3,919

32

%

Adjusted EBITDA

$

36,350

$

31,301

16

%

$

145,502

$

102,402

42

%

 
(1) LTM: Last twelve months

 

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

Source: PC Connection, Inc.