PC Connection, Inc. Reports Preliminary Fourth Quarter and Full Year Results

MERRIMACK, N.H.--(BUSINESS WIRE)--February 5, 2009--PC Connection, Inc. (NASDAQ: PCCC):

FOURTH QUARTER SUMMARY:		FULL YEAR SUMMARY:

Net sales: $439.1 million, down 10% y/y		Net sales: $1,753.7 million, down 2% y/y
Gross margin: 11.8%		Gross margin: 12.3%
Preliminary net income: $1.9 million		Preliminary net income: $15.0 million
Preliminary diluted earnings per share: $.07 per share		Preliminary diluted earnings per share: $.56 per share

PC Connection, Inc. (NASDAQ: PCCC), a leading direct marketer of information technology (IT) products and services, today announced preliminary results for the quarter ended December 31, 2008. Net sales for the three months ended December 31, 2008 decreased by $50.5 million, or 10.3%, to $439.1 million from $489.6 million for the three months ended December 31, 2007. Preliminary net income for the quarter was $1.9 million, or $.07 per share, compared to $6.2 million, or $.23 per share, for the corresponding prior year quarter.

The three-month periods ended December 31, 2008 and 2007 included special charges that reduced earnings and earnings per share. In the fourth quarter of 2008, the Company’s small- and medium-sized business (SMB) segment incurred a preliminary special charge of $1.2 million related to a non-cash goodwill impairment adjustment, which represented the entire goodwill balance for this reporting unit. In the fourth quarter of 2007, the Company’s large account segment incurred a special charge of $0.5 million related to management restructuring. Had these charges not been incurred, pro forma net income for the quarter ended December 31, 2008 would have been $2.7 million, or $.10 per share, compared to $6.5 million, or $.24 per share, for the quarter ended December 31, 2007. A reconciliation between preliminary net income on a GAAP basis and pro forma net income is provided in a table below immediately following the Consolidated Income Statements.

Due to the economic downturn and the subsequent decline in the market value of the Company’s stock, management is performing a goodwill impairment assessment as required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." The Company has not yet completed its review of the goodwill attributed to its public sector and large account segments. The completion of this review may result in an additional non-cash impairment charge, which could be material and would decrease the Company’s reported preliminary GAAP net income and earnings per share for the fourth quarter and the year 2008. The review is expected to be completed and the additional charge, if any, determined prior to the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2008. Total goodwill at December 31, 2008 attributed to the public sector and large account segments aggregated $55.7 million.

The Company’s effective income tax rate for the quarter ended December 31, 2008 was 57.2%, compared to 37.8% for the corresponding prior year quarter. The increase was due primarily to an increase in valuation allowances associated with certain state tax credits which reduced earnings per share by $0.02.

Net sales for the year ended December 31, 2008 decreased by $31.7 million, or 1.8%, to $1,753.7 million from $1,785.4 million for the year ended December 31, 2007. Preliminary net income for the year ended December 31, 2008 was $15.0 million, or $.56 per share, compared to $23.0 million, or $.85 per share, for the year ended December 31, 2007. Both 2008 and 2007 included special charges that reduced earnings and earnings per share. Had these charges not been recorded, pro forma net income for the year ended December 31, 2008 would have been $16.7 million, or $.62 per share, compared to $23.3 million, or $.86 per share, for the year ended December 31, 2007. Preliminary net income and earnings per share for the year ended December 31, 2008 are subject to a potential non-cash goodwill impairment adjustment, as noted above. A reconciliation between preliminary net income on a GAAP basis and pro forma net income is provided in a table below immediately following the Consolidated Income Statements.

Gross profit dollars totaled $51.9 million in the fourth quarter of 2008, representing a 10% decline from the corresponding period a year ago and reflecting lower volumes. Gross profit margin, as a percentage of net sales, increased 10 basis-points year over year to 11.8% in the fourth quarter of 2008. Higher invoice product margins and increased vendor consideration offset lower agency fee revenues in the fourth quarter of 2008.

Overall annualized sales productivity decreased 14% in the fourth quarter of 2008 compared to the fourth quarter of 2007. Sales productivity in our Large Account segment decreased 16% year over year. Sales productivity in our SMB segment decreased 15% year over year. Sales productivity in our Public Sector segment decreased 5% year over year primarily due to the hiring of sales representatives late in the quarter. On a consolidated basis, the total number of sales representatives was 712 at December 31, 2008, compared to 683 at December 31, 2007.

Total selling, general and administrative expenses for the quarter decreased year over year by $0.6 million, or 1%, but increased as a percentage of net sales to 10.5% for the fourth quarter of 2008 from 9.5% for the fourth quarter of 2007. Lower variable compensation associated with reduced sales levels contributed to the dollar decline in SG&A expenses. The fourth quarter of 2008 was negatively impacted by a $0.6 million charge related to a fixed asset disposal. The year-over-year rate increase was primarily attributable to lower sales volumes as the weaker demand environment adversely affected such expenses as a percentage of net sales. Management implemented a number of cost reduction initiatives in the third quarter and continues to review operating expenses to adjust for changes in revenues.

Patricia Gallup, Chairman and Chief Executive Officer said, “Our results for the quarter reflected the decline in demand for IT products. Customers are taking a wait-and-see attitude toward IT spending as they try to determine what their own demand, technology budgets, and staffing levels will be for the year. Nonetheless, our customers rely on us to provide them with the advanced technology solutions they need to help them run their operations more effectively. Our ability to offer valued services in concert with the industry’s leading brand-name products gives us confidence PC Connection will continue to stand out as an industry leader."

PC Connection, Inc., a Fortune 1000 company, has three sales subsidiaries: PC Connection Sales Corporation, MoreDirect, Inc., and GovConnection, Inc., headquartered in Merrimack, NH, Boca Raton, FL, and Rockville, MD, respectively. All three companies can deliver custom-configured computer systems overnight. Investors and media can find more information about PC Connection, Inc. at http://ir.pcconnection.com.

PC Connection Sales Corporation (1-800-800-5555), the original business of PC Connection, Inc. serving the small- and medium-sized business sector (SMB), is a rapid-response provider of information technology (IT) products and services. It offers more than 150,000 brand-name products through its staff of technically trained sales account managers and catalog telesales representatives, catalogs, and publications, and its website at www.pcconnection.com. The subsidiary serves the Apple/Macintosh community through its MacConnection division (1-800-800-2222), which also publishes specialized catalogs and is online at www.macconnection.com.

MoreDirect, Inc. (561-237-3300), www.moredirect.com, provides corporate technology buyers with a comprehensive web-based e-procurement solution and in-depth IT supply-chain expertise, serving as a one-stop source by aggregating more than 300,000 products from the inventories of leading IT wholesale distributors and manufacturers. MoreDirect’s TRAXX™ system is a seamless end-to-end interface that empowers clients to electronically source, evaluate, compare prices, and track related technology product purchases in real-time.

GovConnection, Inc. (1-800-800-0019) is a 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 www.govconnection.com.

“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, completion and valuation of any goodwill impairment, 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 hire and retain essential personnel, and other risks that could cause actual results to differ materially from these detailed under the caption “Risk Factors” in the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 2008. More specifically, the statements in this release concerning the Company’s outlook for 2009 and the statements concerning the Company’s gross margin percentage, productivity, and selling and administrative costs and other statements of a non-historical basis (including statements regarding implementing strategies for future growth and the ability of the Company to improve sales productivity) 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 and the ability of the Company to hire and retain qualified sales representatives and other essential personnel. Except for the reporting of any adjustments required upon completion of its goodwill impairment review, 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.

CONSOLIDATED SELECTED FINANCIAL HIGHLIGHTS
At or for the Three Months Ended December 31,	2008					2007
(Dollars and shares in thousands, except operating data, price/earnings ratio, and per share data)				% of Net Sales					% of Net Sales		% Change

Operating Data:
Net sales	$	439,113				$	489,607				(10	%)
Diluted earnings per share	$	.07				$	.23				(70	%)

Gross profit margin		11.8	%				11.7	%
Operating margin		1.0					2.1
Return on equity ⁽¹⁾		3.3					11.2

Catalogs distributed		3,126,000					3,563,000				(12	%)
Orders entered ⁽²⁾		361,800					367,100				(1	)
Average order size ⁽²⁾	$	1,330				$	1,515				(12	)

Inventory turns ⁽¹⁾		20					21
Days sales outstanding		45					43


Product Mix:
Notebooks & PDAs	$	66,553		15	%	$	72,962		15	%	(9	%)
Video, Imaging & Sound		68,114		15		$	86,657		18		(21	)
Desktops/Servers		53,736		12			64,984		13		(17	)
Software		56,102		13			63,511		13		(12	)
Net/Com Products		51,126		12			41,281		9		24
Storage Devices		37,940		9			45,383		9		(16	)
Printers & Printer Supplies		36,713		8			44,118		9		(17	)
Memory & System Enhancements		16,741		4			20,525		4		(18	)
Accessories/Other		52,088		12			50,186		10		4
Total	$	439,113		100	%	$	489,607		100	%	(10	%)


Net Sales of Enterprise Server and Networking Products (included in the above Product Mix):

	$	164,140		37	%	$	164,922		34	%	-


Stock Performance Indicators:
Actual shares outstanding		26,829					26,892
Total book value per share	$	8.94				$	8.34
Tangible book value per share	$	6.79				$	6.10
Closing price	$	5.12				$	11.35
Market capitalization	$	137,364				$	305,224
Trailing price/earnings ratio ⁽³⁾		9					13

(1) Annualized
(2) Does not reflect cancellations or returns
(3) Earnings is based on the last four quarters



CONSOLIDATED INCOME STATEMENTS
Three Months Ended December 31,	2008						2007
(amounts in thousands, except per share data)	Amount			% of Net Sales			Amount			% of Net Sales

Net sales	$	439,113			100.0	%	$	489,607			100.0	%
Cost of sales		387,176			88.2			432,122			88.3
Gross Profit		51,937			11.8			57,485			11.7

Selling, general and administrative expenses		46,291			10.5			46,870			9.5
Special charges		1,172			0.3			541			0.1
Income From Operations		4,474			1.0			10,074			2.1

Interest expense		(133	)		-			(264	)		-
Other, net		201			-			111			-
Income tax provision		(2,598	)		(0.6	)		(3,749	)		(0.8	)
Net Income	$	1,944			0.4	%	$	6,172			1.3	%


Weighted average common shares outstanding:
Basic		26,808						26,844
Diluted		26,855						27,052
Earnings per common share:
Basic	$	0.07					$	0.23
Diluted	$	0.07					$	0.23




CONSOLIDATED INCOME STATEMENTS
Years Ended December 31,	2008						2007
(amounts in thousands, except per share data)	Amount			% of Net Sales			Amount			% of Net Sales

Net sales	$	1,753,680			100.0	%	$	1,785,379			100.0	%
Cost of sales		1,538,836			87.7			1,566,409			87.7
Gross Profit		214,844			12.3			218,970			12.3

Selling, general and administrative expenses		186,729			10.6			181,640			10.2
Special charges		2,603			0.2			541			-
Income From Operations		25,512			1.5			36,789			2.1

Interest expense		(681	)		-			(932	)		-
Other, net		811			-			764			-
Income tax provision		(10,623	)		(0.6	)		(13,626	)		(0.8	)
Net Income	$	15,019			0.9	%	$	22,995			1.3	%


Weighted average common shares outstanding:
Basic		26,828						26,785
Diluted		26,896						27,024
Earnings per common share:
Basic	$	0.56					$	0.86
Diluted	$	0.56					$	0.85




A RECONCILIATION BETWEEN PRELIMINARY GAAP AND PRO FORMA NET INCOME
This information is being provided so as to allow for a comparison of our operating results without special charges.

December 31,	Three Months Ended						Years Ended
(Amounts in thousands)		2008			2007			2008			2007

GAAP net income	$	1,944		$	6,172		$	15,019		$	22,995
Special charges (after tax):
Goodwill impairment		729			-			729			-
Management restructuring		-			336			906			336
Total special charges (after tax)		729			336			1,635			336

Pro forma net income	$	2,673		$	6,508		$	16,654		$	23,331



CONSOLIDATED BALANCE SHEETS	December 31,			December 31,
(amounts in thousands)	2008			2007

ASSETS
Current Assets:
Cash and cash equivalents	$	47,003		$	13,741
Accounts receivable, net		185,885			202,216
Inventories–merchandise		60,813			76,090
Deferred income taxes		2,807			2,858
Income taxes receivable		1,448			345
Prepaid expenses and other current assets		3,626			4,322
Total current assets		301,582			299,572
Property and equipment, net		24,483			20,831
Goodwill		55,695			56,867
Other intangibles, net		2,220			3,291
Other assets		385			318
Total Assets	$	384,365		$	380,879

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Current maturities of capital lease obligation to affiliate	$	699		$	527
Accounts payable		101,783			111,140
Accrued expenses and other liabilities		19,993			20,557
Accrued payroll		6,337			10,816
Total current liabilities		128,812			143,040
Capital lease obligation to affiliate, less current maturities		3,610			4,309
Deferred income taxes		7,727			5,436
Other liabilities		4,238			3,784
Total Liabilities		144,387			156,569
Stockholders’ Equity:
Common stock		273			273
Additional paid-in capital		95,998			94,132
Retained earnings		146,989			131,970
Treasury stock at cost		(3,282	)		(2,065	)
Total Stockholders’ Equity		239,978			224,310
Total Liabilities and Stockholders’ Equity	$	384,365		$	380,879



CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Year ended December 31, 2008 (amounts in thousands)
	Common Stock			Additional			Retained		Treasury Shares
	Shares	Amount		Paid-In Capital			Earnings		Shares		Amount		Total

Balance – January 1, 2008	27,252	$	273	$	94,132		$	131,970	(327	)	($2,065	)	$	224,310

Stock compensation expense	-		-		1,823			-	-		-			1,823

Issuance of common stock under stock incentive plans, including income tax benefits	33		-		106			-	-		-			106

Issuance of common stock under Employee Stock Purchase Plan	41		-		257			-	-		-			257

Repurchase of common stock for Treasury	-		-		-			-	(211	)	(1,537	)		(1,537	)

Nonvested stock awards	-		-		(320	)		-	46		320			-

Net income	-		-		-			15,019	-		-			15,019

Balance – December 31, 2008	27,326	$	273	$	95,998		$	146,989	(492	)	($3,282	)	$	239,978



CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (amounts in thousands)		2008			2007

Cash Flows from Operating Activities:

Net income	$	15,019		$	22,995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,965			6,781
Provision for doubtful accounts		2,277			1,587
Deferred income taxes		2,342			670
Stock compensation expense		1,823			579
Goodwill impairment		1,172			-
Loss on disposal of fixed assets		614			68
Income tax (deficiency) benefit related to employee equity awards		(98	)		974
Excess tax benefit from exercise of stock options		(3	)		(447	)

Changes in assets and liabilities:
Accounts receivable		14,054			(33,581	)
Inventories		15,277			(6,683	)
Prepaid expenses and other current assets		(407	)		(158	)
Other non-current assets		(67	)		37
Accounts payable		(9,191	)		163
Accrued expenses and other liabilities		(4,623	)		7,448
Net cash provided by operating activities		45,154			433


Cash Flows from Investing Activities:

Purchases of property and equipment		(10,370	)		(7,066	)
Proceeds from sale of property and equipment		44			-
Net cash used for investing activities		(10,326	)		(7,066	)


Cash Flows from Financing Activities:

Proceeds from short-term borrowings		37,343			53,280
Repayment of short-term borrowings		(37,343	)		(53,280	)
Repayment of capital lease obligation		(527	)		(859	)
Purchase of treasury shares		(1,537	)		-
Exercise of stock options		204			2,910
Issuance of stock under Employee Stock Purchase Plan		257			294
Net share settlement obligation		34			-
Excess tax benefit from exercise of stock options		3			447
Net cash (used for) provided by financing activities		(1,566	)		2,792
Increase (decrease) in cash and cash equivalents		33,262			(3,841	)
Cash and cash equivalents, beginning of period		13,741			17,582
Cash and cash equivalents, end of period	$	47,003		$	13,741


Noncash Financing Activity
Issuance of nonvested stock from Treasury	$	320			158

CONTACT:
PC Connection, Inc.
Stephen Baldridge, 603-683-2322
Sr. Vice President of Finance & Corporate Controller



SELECTED SEGMENT INFORMATION
For the Three Months Ended December 31,	2008				2007
	Net		Gross		Net		Gross
(Dollars in thousands)	Sales		Margin (%)		Sales		Margin (%)

PC Connection Sales Corporation (SMB)	$	225,069	13.6	%	$	263,785	12.6	%
MoreDirect (Large Account)		113,422	10.4			140,826	11.0
GovConnection (Public Sector)		100,622	9.5			84,996	10.3
Total	$	439,113	11.8	%	$	489,607	11.7	%