Record Quarter for Net Income and Earnings per
Share
THIRD QUARTER SUMMARY:
- Net sales: $693.1 million, down 10.6% y/y
- Gross profit: $131.9 million, down 3.5% y/y
- Net income: $25.6 million, up 10.3% y/y
- Diluted EPS: $0.97, up 10.4% y/y
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, 2023, and that its board of
directors has declared a quarterly dividend of $0.08 per share on
the company’s common stock, which will be payable on December 1,
2023, to shareholders of record as of November 14, 2023.
“We executed well against our strategic priorities including
improving our mix of advanced technologies and integrated
solutions. Record gross margins and cashflow, combined with our
improved operational efficiencies, enabled us to deliver record
earnings per share of $0.97 cents during the third quarter” said
Timothy McGrath, President and Chief Executive Officer of
Connection.
Quarterly Results:
Net sales for the quarter ended September 30, 2023 decreased by
10.6%, year over year. Gross profit decreased 3.5% while gross
margin expanded 142 basis points to a record 19.0%, compared to the
prior year quarter. Net income for the quarter ended September 30,
2023 increased by 10.3% to a record $25.6 million, or $0.97 per
diluted share, compared to net income of $23.2 million, or $0.88
per diluted share, for the prior year quarter. Earnings per share,
adjusted for restructuring and other charges (“Adjusted Diluted
Earnings per Share”) 1, increased to $0.97 cents per share for the
quarter ended September 30, 2023, compared to $0.88 cents per share
for the prior year quarter.
Net sales for the nine months ended September 30, 2023 decreased
by 10.0%, compared to the nine months ended September 30, 2022.
Gross profit decreased 4.9% while gross margin expanded 94 basis
points to 17.7%, compared to the nine months ended September 30,
2022. Net income for the nine months ended September 30, 2023
decreased by 15.5% to $59.5 million, or $2.25 per diluted share,
compared to net income of $70.4 million, or $2.66 per diluted
share, for the nine months ended September 30, 2022. Adjusted
Diluted Earnings per Share1, decreased to $2.33 per share for the
nine months ended September 30, 2023, compared to $2.66 per share
for the nine months ended September 30, 2022.
Earnings before interest, taxes, depreciation and amortization,
adjusted for stock-based compensation expense and restructuring and
other charges (“Adjusted EBITDA”) 1 decreased 12% to $127.9 million
for the twelve months ended September 30, 2023, compared to $145.5
million for the twelve months ended September 30, 2022.
Performance by Segment:
- Net sales for the Business Solutions segment decreased by 14.8%
to $269.0 million in the third quarter of 2023, compared to a
$315.8 million in the prior year quarter. Gross profit decreased by
1.0% to $62.7 million in the third quarter of 2023, compared to
$63.3 million in the prior year quarter. Gross margin increased by
326 basis points to 23.3% primarily due to a shift in product mix
to sales of integrated solutions and advanced technologies, which
includes services and software, which are recorded on a net basis
during the third quarter of 2023.
- Net sales for the Public Sector Solutions segment decreased by
4.4% to $147.5 million in the third quarter of 2023, compared to
$154.4 million in the prior year quarter. Sales to the federal
government increased by 9.5% to $26.3 million, while sales to state
and local governments and educational institutions decreased by
7.0% to $121.2 million, compared to the prior year quarter. Gross
profit decreased slightly by 0.5% to $25.0 million in the third
quarter of 2023, compared to $25.1 million in the prior year
quarter. Gross margin increased by 67 basis points to a record
16.9% primarily due to a higher mix of software and services, which
are recorded on a net basis during the third quarter of 2023, in
addition to a shift in product mix to sales of advanced
technologies, including networking, software, servers and
services.
- Net sales for the Enterprise Solutions segment decreased by
9.5% to $276.6 million in the third quarter of 2023, compared to
$305.5 million in the prior year quarter. Gross profit decreased by
8.3% to $44.2 million in the third quarter of 2023, compared to
$48.2 million in the prior year quarter. Gross margin increased by
21 basis points to a record 16.0% primarily due to our enterprise
customers prioritizing integrated solutions of software and
services which are recorded on a net basis.
Sales by Product Mix:
- Notebook/mobility sales decreased 20% year over year and
accounted for 32% of net sales in the third quarter of 2023,
compared to 36% of net sales in the third quarter of 2022.
- Networking sales increased by 48% year over year and accounted
for 12% of net sales in the third quarter of 2023, compared to 7%
of net sales in the third quarter of 2022.
- Software sales decreased by 10% year over year and accounted
for 11% of net sales in the third quarter of 2023 and 2022.
- Accessories sales decreased by 26% year over year and accounted
for 10% of net sales in the third quarter of 2023, compared to 13%
of net sales in the third quarter of 2022.
Selling, general and administrative (“SG&A”) expenses
decreased in the third quarter of 2023 to $99.8 million from $104.9
million in the prior year quarter. The decrease in SG&A was
due, in part, to the realization of on-going cost reduction
initiatives we have undertaken this year. SG&A as a percentage
of net sales increased to 14.4%, compared to 13.5% in the prior
year quarter. The increase in SG&A as a percentage of net sales
is primarily due to the decrease in net sales compared to the prior
year quarter.
Interest income in the third quarter of 2023 was $2.7 million,
compared to $0.3 million in the third quarter of 2022.
Cash and cash equivalents, and short-term investments were
$289.4 million at September 30, 2023, compared to $116.2 million at
September 30, 2022.
Conference Call and Webcast
Connection will host a conference call and live web cast today,
November 1, 2023 at 4:30 p.m. EST 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, Adjusted EBITDA and Adjusted Diluted Earnings per Share
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
This earnings release contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements generally relate to future
events or our future financial or operating performance and may
include statements concerning, among other things, financial
results, business plans (including statements regarding new
products and services we may offer and future expenditures, costs
and investments), future liabilities, impairments, competition, and
the impact of current macroeconomic conditions on our businesses
and results of operations. 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. These
statements reflect our current views with respect to future events
and are based on assumptions as of the date of this report. These
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or
achievements to be materially different from expectations or
results projected or implied by forward-looking statements.
Such differences may result from actions taken by us, including
expense reduction or strategic initiatives (including reductions in
force, capital investments and new or expanded product offerings or
services), our execution of our business plans (including our
inventory management, our cost structure and our management and
other personnel decisions) or other business decisions, as well as
from developments beyond our control, including;
- substantial competition reducing our market share;
- significant price competition reducing our profit margins;
- the loss of any of our major vendors adversely affecting the
number of type of products we may offer;
- virtualization of information technology resources and
applications, including networks, servers, applications, and data
storage disrupting or altering our traditional distribution
models;
- service interruptions at third-partly shippers negatively
impacting our ability to deliver the products we offer to our
customers;
- increases in shipping and postage costs reducing our margins
and adversely affecting our results of operations;
- loss of key persons or the inability to attract, train and
retain qualified personnel adversely affecting our ability to
operate our business;
- cyberattacks or the failure to safeguard personal information
and our IT systems resulting in liability and harm to our
reputation; and
- the rate of innovations in the hardware, software and services
we offer as well as macroeconomics factors facing the global
economy, including disruptions in the capital markets, economic
sanctions and economic slowdowns or recessions, rising inflation
and changing interest rates have impacted and are expected to
continue to impact the level of investment our customers are
willing to make in IT products.
Additional factors include those described in this Annual Report
on Form 10-K for the year ended December 31, 2022, including under
the captions “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and “Business,”
in our subsequent quarterly reports on Form 10-Q, including under
the captions “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and in
our subsequent filings with the Securities and Exchange
Commission.
A forward-looking statement is neither a prediction nor a
guarantee of future events or circumstances. You should not place
undue reliance on the forward-looking statements. Unless required
by law, we assume no obligation to update any of these
forward-looking statements, or to update the reasons actual results
could differ materially from those anticipated, to reflect
circumstances or events that occur after the statements are
made.
1Adjusted EBITDA and Adjusted Earnings per
Share are non-GAAP measures. See page 10 for the definition and
reconciliation.
CONSOLIDATED SELECTED FINANCIAL INFORMATION At or
for the Three Months Ended September 30,
2023
2022
%
(Amounts and shares in thousands, except operating data, P/E ratio,
and per share data)
Change Operating Data: Net
sales
$
693,086
$
775,692
(11
%)
Diluted earnings per share
$
0.97
$
0.88
10
%
Gross margin
19.0
%
17.6
%
Operating margin
4.6
%
4.1
%
Inventory turns (1)
16
12
Days sales outstanding (2)
71
70
% of % of Product Mix: Net Sales
Net Sales Notebooks/Mobility
32
%
36
%
Net/Com Products
12
7
Software
11
11
Accessories
10
13
Displays
10
10
Desktops
10
9
Servers/Storage
7
7
Other Hardware/Services
8
7
Total Net Sales
100
%
100
%
Stock Performance Indicators: Actual shares
outstanding
26,272
26,288
Closing price
$
53.38
$
45.09
Market capitalization
$
1,402,399
$
1,185,326
Trailing price/earnings ratio
18.0
12.9
LTM Net Income
$
78,316
$
92,781
LTM Adjusted EBITDA (3)
$
127,906
$
145,502
(1) Represents the annualized cost of goods sold for the
period divided by the average inventory for the prior four-month
period. (2) Represents the trade receivable at the end of the
period divided by average daily net sales for the same three-month
period. (3) LTM Adjusted EBITDA is a non-GAAP measure defined as
EBITDA (earnings before interest, taxes, depreciation and
amortization) adjusted for stock-based compensation and
restructuring and other related charges for the last twelve months.
See page 10 for a reconciliation.
REVENUE AND
MARGIN INFORMATION For the Three Months Ended September
30,
2023
2022
Net
Gross
Net
Gross
(amounts in thousands)
Sales
Margin
Sales
Margin
Enterprise Solutions
$
276,566
16.0
%
$
305,510
15.8
%
Business Solutions
269,021
23.3
315,816
20.0
Public Sector Solutions
147,499
16.9
154,366
16.3
Total
$
693,086
19.0
%
$
775,692
17.6
%
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended
September 30, (amounts in thousands, except per share data)
2023
2022
2023
2022
Net sales
$
693,086
$
775,692
$
2,154,178
$
2,392,545
Cost of sales
561,198
639,066
1,772,217
1,990,712
Gross profit
131,888
136,626
381,961
401,833
Selling, general and administrative expenses
99,822
104,887
304,064
305,189
Restructuring and other charges
44
-
2,687
-
Income from operations
32,022
31,739
75,210
96,644
Other income, net
2,688
308
5,848
319
Income tax provision
(9,112
)
(8,841
)
(21,565
)
(26,567
)
Net income
$
25,598
$
23,206
$
59,493
$
70,396
Earnings per common share: Basic
$
0.97
$
0.88
$
2.26
$
2.68
Diluted
$
0.97
$
0.88
$
2.25
$
2.66
Shares used in the computation of earnings per common share:
Basic
26,262
26,279
26,281
26,267
Diluted
26,434
26,455
26,406
26,432
September 30, December 31, CONDENSED
CONSOLIDATED BALANCE SHEETS
2023
2022
(amounts in thousands)
ASSETS Current Assets: Cash
and cash equivalents
$
240,509
$
122,930
Short-term investments
$
48,894
-
Accounts receivable, net
587,597
610,280
Inventories, net
142,243
208,682
Income taxes receivable
7,388
-
Prepaid expenses and other current assets
14,068
11,900
Total current assets
1,040,699
953,792
Property and equipment, net
57,638
59,171
Right-of-use assets, net
4,934
7,558
Goodwill
73,602
73,602
Intangibles assets, net
3,733
4,648
Other assets
821
1,055
Total Assets
$
1,181,427
$
1,099,826
LIABILITIES AND STOCKHOLDERS’ EQUITY Current
Liabilities: Accounts payable
$
264,502
$
232,638
Accrued payroll
26,363
24,071
Accrued expenses and other liabilities
49,098
53,808
Total current liabilities
339,963
310,517
Deferred income taxes
18,011
17,970
Operating lease liability
3,638
4,994
Other liabilities
654
170
Total Liabilities
362,266
333,651
Stockholders’ Equity: Common stock
292
291
Additional paid-in capital
130,875
125,784
Retained earnings
739,223
686,037
Accumulated other comprehensive income
154
-
Treasury stock at cost
(51,383
)
(45,937
)
Total Stockholders’ Equity
819,161
766,175
Total Liabilities and Stockholders’ Equity
$
1,181,427
$
1,099,826
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, Nine Months Ended
September 30, (amounts in thousands)
2023
2022
2023
2022
Cash Flows from Operating Activities: Net income
$
25,598
$
23,206
$
59,493
$
70,396
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization
3,289
3,020
9,456
9,000
Adjustments to credit losses reserve
567
1,016
1,814
2,658
Stock-based compensation expense
1,789
1,282
5,425
4,072
Loss on disposal of fixed assets
88
3
563
16
Changes in assets and liabilities: Accounts receivable
4,499
(3,719
)
20,869
(41,782
)
Inventories
17,491
9,842
66,439
(6,761
)
Prepaid expenses and other current assets
4,097
3,273
(9,556
)
(79
)
Other non-current assets
94
(22
)
234
5
Accounts payable
(12,936
)
(19,823
)
31,648
(23,268
)
Accrued expenses and other liabilities
5,644
6,006
(720
)
1,432
Net cash provided by operating activities
50,220
24,084
185,665
15,689
Cash Flows from Investing Activities: Purchases of
short-term investments
(48,699
)
-
(48,699
)
-
Purchases of property and equipment
(2,495
)
(2,410
)
(7,355
)
(6,975
)
Net cash used in investing activities
(51,194
)
(2,410
)
(56,054
)
(6,975
)
Cash Flows from Financing Activities: Proceeds from
short-term borrowings
2,982
10,409
70,877
36,463
Repayment of short-term borrowings
(2,982
)
(10,409
)
(70,877
)
(36,463
)
Purchase of common stock for treasury shares
-
-
(5,392
)
-
Dividend payments
(2,101
)
-
(6,307
)
-
Issuance of stock under Employee Stock Purchase Plan
-
-
537
-
Payment of payroll taxes on stock-based compensation through shares
withheld
(399
)
(380
)
(870
)
(834
)
Net cash used in financing activities
(2,500
)
(380
)
(12,032
)
(834
)
Increase (decrease) in cash and cash equivalents
(3,474
)
21,294
117,579
7,880
Cash and cash equivalents, beginning of period
243,983
94,896
122,930
108,310
Cash and cash equivalents, end of period
$
240,509
$
116,190
$
240,509
$
116,190
Non-cash Investing Activities: Accrued purchases of
property and equipment
$
408
$
362
408
362
Accrued excise tax on treasury purchases
$
-
$
-
54
-
Supplemental Cash Flow Information: Income taxes paid
$
6,841
$
9,250
$
34,251
$
30,759
Interest paid
$
1
$
1
$
19
$
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 (defined as 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)
2023
2022
%Change
2023
2022
%Change Net income
$
25,598
$
23,206
10
%
$
78,316
$
92,781
(16
%)
Depreciation and amortization
3,289
3,020
9
%
12,434
12,037
3
%
Income tax expense
9,112
8,841
3
%
27,414
35,485
(23
%)
Interest expense
1
1
0
%
27
14
93
%
EBITDA
38,000
35,068
8
%
118,191
140,317
(16
%)
Restructuring and other charges (2)
44
-
100
%
2,687
-
(100
%)
Stock-based compensation
1,789
1,282
40
%
7,028
5,185
36
%
Adjusted EBITDA
$
39,833
$
36,350
10
%
$
127,906
$
145,502
(12
%)
(1) LTM: Last twelve months (2) Restructuring and other
charges in 2023 consist of severance and other charges related to
internal restructuring activities.
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 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 share 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 EBITDA and Adjusted EBITDA for a description of
non-GAAP financial measures). The Company believes that Adjusted
Net Income and Adjusted Diluted Earnings per Share provide helpful
information with respect to the Company's operating performance.
When analyzing our operating performance, investors should use
Adjusted Net Income and Adjusted Diluted Earnings per Share in
addition to, and not as alternatives for Net income and Diluted
Earnings per Share 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, except per share data)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
%Change
2023
2022
%Change Net income
$
25,598
$
23,206
10
%
$
59,493
$
70,396
-15
%
Restructuring and other charges (1)
44
-
100
%
2,687
-
100
%
Tax benefit
(12
)
-
100
%
(715
)
-
100
%
Restructuring and other charges, net of tax
32
-
100
%
1,972
-
100
%
Adjusted Net Income
$
25,630
$
23,206
10
%
$
61,465
$
70,396
-13
%
Diluted shares
26,434
26,455
26,406
26,432
Diluted Earnings per Share
$
0.97
$
0.88
10
%
$
2.25
$
2.66
-15
%
Adjusted Diluted Earnings per Share
$
0.97
$
0.88
11
%
$
2.33
$
2.66
-13
%
(1) Restructuring and other charges in 2023 consist
of severance and other charges related to internal restructuring
activities.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231101507593/en/
Investor Relations Contact: Thomas Baker, 603.683.2505
Senior Vice President, CFO, and Treasurer tom@connection.com
PC Connection (NASDAQ:CNXN)
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