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PC Connection, Inc. Reports Third Quarter Results

PC Connection, Inc. (NASDAQ: PCCC), a provider of a full range of information technology (IT) solutions to business, government, and education markets, today announced results for the quarter ended September 30, 2012. Net sales for the three months ended September 30, 2012 decreased by 2.5% year over year to $561.3 million. Overall gross profit dollars for the quarter increased from $70.4 million to $72.2 million, or 2.5%, compared to the third quarter of 2011. Net income for the quarter increased to $9.9 million, or $0.37 per share, compared to net income of $9.4 million, or $0.35 per share, for the corresponding prior year quarter.

Net sales for the nine months ended September 30, 2012 increased by $52.5 million, or 3.4% to $1,602.6 million, compared to $1,550.1 million for the nine months ended September 30, 2011. Net income for the nine months ended September 30, 2012 increased to $24.2 million, or $0.91 per share, compared to net income of $21.4 million, or $0.80 per share, for the comparable prior year period. Excluding special charges, pro forma net income for the nine months ended September 30, 2012 would have been $24.9 million, or $0.93 per share, representing 16.3% growth over prior year. We did not record any special charges for the nine months ended September 30, 2011. Earnings before interest, taxes, depreciation and amortization, stock-based compensation expense, and special charges (“Adjusted EBITDA”) totaled $60.0 million for the twelve months ended September 30, 2012, as compared to $54.3 million for the twelve months ended September 30, 2011.

In the first quarter of 2012, we combined our consumer and small office/home office (“SOHO”) sales company with our small- and medium-sized business (SMB) segment. In order to facilitate comparison with current period results, 2011 revenues and gross margins for the SMB segment have been restated to include consumer and SOHO sales.

Quarterly Sales by Segment:

  • Net sales for the SMB business segment were $219.2 million in the third quarter of 2012. Sales to small and medium businesses increased by 2.2% year over year, however, when combined with lower consumer and SOHO sales, overall sales for this segment decreased by 2.3%.
  • Net sales for the Large Account segment decreased by 6.7% to $192.8 million compared to net sales in the third quarter of 2011. The decrease was due to two, large product roll-outs in the prior year which totaled $36 million that did not repeat in 2012. However, gross profit increased from $20.2 million to $22.3 million due to our strategic focus on improving results through higher-margin sales.
  • Net sales to government and education customers (Public Sector segment) increased year over year by 3.2% to $149.2 million. Sales to state and local government and educational institutions increased by 4.1% compared to last year, and sales to the federal government increased by 1.6% year over year due to higher contract sales.

Quarterly Sales by Product Mix:

  • Notebook sales, the Company’s largest product category, increased by 10.5% year over year and accounted for 19% of net sales in the third quarter of 2012 compared to 17% of net sales in the prior year quarter. The growth was attributable to both increased unit sales and higher average selling prices.
  • Desktop/server sales decreased by 15.1% year over year, accounting for 15% of net sales in the third quarter of 2012 compared to 17% of net sales in the prior year quarter. The decline in desktop sales was primarily a result of the prior year Large Account rollouts which did not repeat this quarter.
  • Software sales were unchanged, accounting for 15% of net sales in the third quarter of 2012, compared to 14% in the prior year quarter. Software sales increased in Large Account, and we experienced increasing demand in virtualization and security.

Consolidated gross margin, as a percentage of net sales, increased year over year by 63 basis points to 12.9% in the third quarter of 2012. As our customers migrate to data center and advanced technology solutions, we have experienced increased sales of higher margin products and services.

Total selling, general and administrative expenses for the quarter increased year over year by $1.4 million, or 2.5%, and increased as a percentage of net sales from 9.4% for the third quarter of 2011 to 10.0% for the third quarter of 2012. The percentage increase was primarily due to lower year-over-year sales. Tight cost control management led to a decline of $1.0 million in selling, general and administrative expenses from the second quarter of 2012, which represents a decrease of 53 basis points as a percentage of net sales. The Company is implementing a Customer Master Data Management system to enhance our capabilities and target additional selling opportunities which is scheduled to be placed into service in 2013. This will conclude the first phase of a comprehensive initiative to improve our internal IT infrastructure. Depreciation expense for this asset is expected to add approximately $2.0 million in SG&A expenses in 2013, which may increase our SG&A rates.

The Company generated significant positive cash flow in the nine months ended September 30, 2012. Total cash was $53.5 million compared to $4.6 million at December 31, 2011. In addition, there were no amounts outstanding on the Company’s line of credit at September 30, 2012, compared to $5.3 million outstanding at December 31, 2011. Days sales outstanding were 41 days at September 30, 2012, and inventory turns were 27 times as of September 30, 2012.

“During the quarter, we continued to strengthen our core and improve our profitability while facing weaker demand as a result of macro-economic uncertainty,” said Timothy McGrath, President and Chief Executive Officer. “As reported throughout the industry, the soft IT market is projected to continue throughout 2013. However, I am pleased with our growth in both gross margin and earnings this quarter. We believe our strong management team and business strategies have positioned us well to enhance long-term shareholder value even in this challenging marketplace.”

Non-GAAP Financial Information

Adjusted EBITDA, pro forma net income, and pro forma earnings per share are non-GAAP financial measures. This information is included to provide information with respect to the Company’s operating performance and earnings. Reconciliations of Adjusted EBITDA, pro forma net income, and pro forma earnings per share to GAAP net income are provided in tables immediately following the Condensed Consolidated Statements of Income.

Conference Call and Webcast

The Company will host a conference call and live web cast today at 4:30 p.m. ET to discuss third quarter 2012 results of operations. To access the conference call, please dial 877-776-4016 (US) or 973-638-3231 (International). The conference call will be available to the general public on a live webcast (in listen only mode) on the Company’s website at To access the replay of the call, please dial 800-585-8367 or 404-537-3406 and enter the access code 18834926.

About PC Connection, Inc.

PC Connection, Inc., a Fortune 1000 company, has four sales companies: PC Connection Sales Corporation, MoreDirect, Inc., GovConnection, Inc., and Professional Computer Center, Inc. d/b/a ValCom Technology, headquartered in Merrimack, NH, Boca Raton, FL, Rockville, MD, and Itasca, IL, respectively. All four companies can deliver custom-configured computer systems overnight from our ISO 9001:2008 certified technical configuration lab at our distribution center in Wilmington, OH. Investors and media can find more information about PC Connection, Inc. at

PC Connection Sales Corporation (800-800-5555), the original business of PC Connection, Inc. serving primarily the small- and medium-sized business sector, is a rapid-response provider of IT products and services. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers and telesales specialists, catalogs, publications, and its website at This company also serves consumer and small office and is, under its MacConnection brand (800-800-2222), one of Apple’s largest authorized online resellers at

MoreDirect, Inc. (561-237-3300),, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and access to over 300,000 products and 1,600 vendors through TRAXX™, a cloud-based eProcurement system. Backed by over 500 technical certifications, MoreDirect’s team of engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

GovConnection, Inc. (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, catalogs, and publications, and online at

Professional Computer Center, Inc. d/b/a ValCom Technology (630-285-0500),, provides technology services to medium-to-large corporate organizations utilizing its proprietary cloud-based IT service management software, WebSPOC™. Through its experienced technical service personnel, ValCom Technology provides network, server, storage, mission-critical onsite support, installation, and hosting of lifecycle services.


# # #

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to, 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, competitive products and pricing, product availability and market acceptance, new products, fluctuations in operating results, and the ability of the Company to manage personnel levels in response to fluctuations in revenue, and other risks that could cause actual results to differ materially from those detailed 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, 2011. More specifically, the statements in this release concerning the Company’s outlook for gross margin and selling, general, and administrative expenses in 2012 and other statements of a non-historical basis (including statements regarding the Company’s ability to grow revenues, improve gross margins, increase market share, control costs, and increase earnings per share) are forward-looking statements that involve certain risks and uncertainties. Such risks and uncertainties include the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, the continued acceptance of the Company's distribution channel by vendors and customers, continuation of key vendor and customer relationships and support programs, the ability of the Company to integrate the operations of ValCom Technology, the ability of the Company to gain or maintain market share, the ability of the Company to match cost levels with changes in revenues, and the ability of the Company to hire and retain qualified sales representatives and other essential personnel. The Company disclaims any 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.

At or for the Three Months Ended September 30,   2012   2011    
    % of   % of %
(Amounts and shares in thousands, except operating data, P/E ratio, and per share data)       Net Sales     Net Sales   Change
Operating Data:
Net sales $ 561,294 $ 575,646


Diluted earnings per share $ 0.37 $ 0.35 6%
Gross margin 12.9% 12.2%
Operating margin 2.9% 2.8%
Return on equity (1) 13.6% 13.8%
Orders entered (2) 328,400 347,000 (5%)
Average order size (2) $ 2,045 $ 2,003 2%
Inventory turns (1) 27 28
Days sales outstanding 41 41
Product Mix:
Notebook $ 108,474 19% $ 98,210 17% 10%
Desktop/Server 84,061 15 98,994 17 (15%)
Software 81,902 15 82,204 14 -
Net/Com Product 54,718 10 56,627 10 (3%)
Video, Imaging and Sound 51,907 9 64,552 11 (20%)
Printer and Printer Supplies 41,227 7 40,691 7 1%
Storage 37,090 7 39,266 7 (6%)
Memory and System Enhancement 18,829 3 17,745 3 6%
Accessory/Other   83,086 15   77,357 14 7%
Total Net Sales $ 561,294 100% $ 575,646 100%   (2%)
Net Sales of Enterprise Server and Networking Products (included in the above Product Mix):
$ 194,493 35% $ 200,580 35% (3%)
Stock Performance Indicators:
Actual shares outstanding 26,463 26,309
Total book value per share $ 11.28 $ 10.49
Tangible book value per share $ 9.18 $ 8.34
Closing price $ 11.51 $ 7.98
Market capitalization $ 304,589 $ 209,946
Pro forma trailing price/earnings ratio 9.5 7.5
LTM Adjusted EBITDA (3) $ 60,001 $ 54,282
Market capitalization/LTM EBITDA 5.1 3.9
(1) Annualized
(2) Does not reflect cancellations or returns

(3) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for stock-based compensation and special charges.

For the Three Months Ended September 30,   2012   2011
  Net   Gross Net   Gross
(amounts in thousands) Sales   Margin Sales   Margin
SMB $ 219,235 15.4 % $ 224,453 15.6 %
Large Account 192,818 11.5 206,564 9.8
Public Sector   149,241 10.8   144,629 10.5
Total $ 561,294


% $ 575,646 12.2 %

Three Months Ended September 30,   2012   2011
(amounts in thousands, except per share data)   Amount   % of Net Sales   Amount   % of Net Sales
Net sales $ 561,294 100.0 % $ 575,646 100.0 %
Cost of sales   489,088   87.1     505,210   87.8  
Gross profit 72,206 12.9 70,436 12.2
Selling, general and administrative expenses   55,906   10.0     54,554   9.4  
Income from operations 16,300 2.9 15,882 2.8
Interest expense, net (63 ) - (61 ) -
Income tax provision   (6,336 ) (1.1 )   (6,435 ) (1.2 )
Net income $ 9,901   1.8 % $ 9,386   1.6 %
Earnings per common share:
Basic $ 0.37   $ 0.35  
Diluted $ 0.37   $ 0.35  
Weighted average common shares outstanding:
Basic   26,470     26,615  
Diluted   26,660     26,692  
Nine Months Ended September 30,   2012   2011
(amounts in thousands, except per share data)   Amount   % of Net Sales   Amount   % of Net Sales
Net sales $ 1,602,626 100.0 % $ 1,550,133 100.0 %
Cost of sales   1,392,238   86.9     1,353,984   87.4  
Gross profit 210,388 13.1 196,149 12.6
Selling, general and administrative expenses 169,259 10.5 160,321 10.3
Special charges   1,135   0.1     -   -  
Income from operations 39,994 2.5 35,828 2.3
Interest expense, net (110 ) - (92 ) -
Income tax provision   (15,682 ) (1.0 )   (14,376 ) (0.9 )
Net income $ 24,202   1.5 % $ 21,360   1.4 %
Earnings per common share:
Basic $ 0.92   $ 0.80  
Diluted $ 0.91   $ 0.80  
Weighted average common shares outstanding:
Basic   26,437     26,788  
Diluted   26,586     26,860  
Nine Months Ended September 30,     2012     2011
(provided for comparison of our operating results without special charges, amounts in thousands)    
GAAP net income $ 24,202 $ 21,360
Special charges (after tax)   681   -
Pro forma net income $ 24,883 $ 21,360
Pro forma diluted earnings per common share $ 0.93 $ 0.80

A reconciliation of EBITDA and Adjusted EBITDA is detailed below. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA means EBITDA adjusted for certain items which are described in the table below. 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 excludes or includes 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.
(amounts in thousands) Three Months Ended September 30, LTM Ended September 30, (1)
  2012   2011 % Change     2012   2011 % Change  
Net income $ 9,901 $ 9,386 $ 31,629 $ 28,238
Depreciation and amortization 1,670 1,484 6,429 5,650
Income tax expense 6,336 6,435 19,950 19,045
Interest expense, net   63   61   198   223
EBITDA 17,970 17,366 58,206 53,156
Stock-based compensation 157 258 1,502 1,126
Other special charges   -   -     293   -  
Adjusted EBITDA $ 18,127 $ 17,624 3 % $ 60,001 $ 54,282 10 %
(1) LTM: Last twelve months
  September 30,   December 31,
(amounts in thousands)
Current Assets:
Cash and cash equivalents $ 53,528 $ 4,615
Accounts receivable, net 270,308 295,188
Inventories 65,478 77,437
Prepaid expenses and other current assets 3,880 4,713
Deferred income taxes 3,398 4,436
Income taxes receivable   1,899     1,927  

Total current assets

398,491 388,316
Property and equipment, net 25,399 22,570
Goodwill 51,276 51,276
Other intangibles, net 4,403 5,205
Other assets   734     652  
Total Assets $ 480,303   $ 468,019  
Current Liabilities:
Current maturities of capital lease obligation to affiliate $ 1,055 $ 971
Borrowings under bank line of credit - 5,267
Accounts payable 128,460 130,900
Accrued expenses and other liabilities 25,182 30,902
Accrued payroll   14,384     12,964  
Total current liabilities 169,081 181,004
Deferred income taxes 9,511 9,026
Other liabilities 3,042 3,471
Capital lease obligation to affiliate, less current maturities   187     989  
Total Liabilities   181,821     194,490  
Stockholders’ Equity:
Common stock 277 276
Additional paid-in capital 101,363 99,957
Retained earnings 206,476 182,274
Treasury stock at cost   (9,634 )   (8,978 )
Total Stockholders’ Equity   298,482     273,529  
Total Liabilities and Stockholders’ Equity $ 480,303   $ 468,019  

Nine Months Ended September 30,     2012     2011  
(amounts in thousands)
Cash Flows from Operating Activities:
Net income $ 24,202 $ 21,360
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,851 4,375
Provision for doubtful accounts 1,453 1,765
Deferred income taxes 1,523 1,933
Stock-based compensation expense 1,376 698
Loss on disposal of fixed assets 80 13
Income tax benefit from stock-based compensation 213 68
Excess tax benefit from exercise of stock options (15 ) -
Fair value adjustment to contingent consideration (44 ) (20 )
Changes in assets and liabilities:
Accounts receivable 23,427 (30,407 )
Inventories 11,959 1,617
Prepaid expenses and other current assets 861 1,786
Other non-current assets (82 ) (157 )
Accounts payable (2,398 ) 22,100
Accrued expenses and other liabilities   (3,725 )   (2,761 )
Net cash provided by operating activities   63,681     22,370  
Cash Flows from Investing Activities:
Purchases of property and equipment (7,010 ) (8,483 )
Proceeds from sale of equipment 10 -
Acquisition of ValCom Technology, net of cash acquired - (4,745 )
Purchase of intangible asset   -     (450 )
Net cash used for investing activities   (7,000 )   (13,678 )
Cash Flows from Financing Activities:
Repayment of short-term borrowings (12,471 ) -
Proceeds from short-term borrowings 7,204 -
Purchase of treasury shares (1,466 ) (3,823 )
Payment of contingent consideration (960 ) -
Payment of payroll taxes on stock-based compensation through shares withheld (504 ) (206 )
Repayment of capital lease obligation to affiliate (718 ) (643 )
Issuance of stock under Employee Stock Purchase Plan 260 183
Exercise of stock options 872 183
Excess tax benefit from exercise of stock options   15     -  
Net cash used for financing activities   (7,768 )   (4,306 )
Increase in cash and cash equivalents 48,913 4,386
Cash and cash equivalents, beginning of period   4,615     35,374  
Cash and cash equivalents, end of period $ 53,528   $ 39,760  
Non-cash Investing and Financing Activities:
Issuance of nonvested stock from treasury $ 1,314 $ 633
Accrued capital expenditures 388 746
Contingent consideration recorded in accrued expenses and other liabilities - 1,900


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