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PC Connection, Inc. Reports Third Quarter Results

Stocks in this article: PCCC

# # #

“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.

 
CONSOLIDATED SELECTED FINANCIAL INFORMATION
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

(2%)

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.

 
 
REVENUE AND MARGIN INFORMATION
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

12.9

% $ 575,646 12.2 %
 

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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  
 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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  
 
 
A RECONCILIATION BETWEEN GAAP AND PRO FORMA NET INCOME
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
 

 
EBITDA AND ADJUSTED EBITDA
           
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,
CONDENSED CONSOLIDATED BALANCE SHEETS     2012     2011  
(amounts in thousands)
 
ASSETS
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  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
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  
 

     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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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