UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 26, 2006 PC Connection, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Delaware 0-23827 02-0513618 - ------------------------------------------------------------------------------- (State or other juris- (Commission (IRS Employer diction of incorporation File Number) Identification No.) Rt. 101A, 730 Milford Road 03054 Merrimack, NH - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (603) 683-2000 N/A - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))Item 2.02. Results of Operations and Financial Condition On October 26, 2006, PC Connection, Inc. announced its financial results for the quarter ended September 30, 2006. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K. The information in this Form 8-K (including Exhibit 99.1) shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing. Item 9.01. Financial Statements and Exhibits (d) Exhibits The following exhibit relating to Item 2.02 shall be deemed to be furnished, and not filed: 99.1 Press Release issued by PC Connection, Inc. on October 26, 2006. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: October 26, 2006 PC CONNECTION, INC. By: /s/ Jack Ferguson ------------------------------------- Jack Ferguson Senior Vice President, Treasurer and Chief Financial Officer EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 99.1 Press release issued by PC Connection, Inc. on October 26, 2006.
Exhibit 99.1 PC Connection, Inc. Reports Third Quarter Results Company Continues Record Quarterly Sales; Earnings Per Share Double MERRIMACK, N.H.--(BUSINESS WIRE)--Oct. 26, 2006--PC Connection, Inc. (NASDAQ: PCCC) THIRD QUARTER HIGHLIGHTS: -- Net sales: $415 million, 11.9% growth year over year -- Gross profit margin: 12.3%, up in all business segments -- Net income: $4.4 million, 128% increase year over year -- Diluted earnings per share: $.17, compared to $.08 in Q3 2005 PC Connection, Inc. (NASDAQ: PCCC) achieved record quarterly sales and increased earnings per share 112% year over year in the quarter ended September 30, 2006. Net sales for the three months ended September 30, 2006 increased by $44.1 million, or 11.9%, to $415.2 million from $371.1 million for the three months ended September 30, 2005. Net income for the quarter was $4.4 million, or $.17 per share, compared to $1.9 million, or $.08 per share, for the corresponding prior year quarter. Changes in the Company's income tax filing status in certain states decreased tax expense and increased net income by $0.3 million. "We are pleased with our strong financial results for the third quarter of 2006. PC Connection, Inc. continues to grow through profitable customer acquisition strategies implemented across all of our business segments," said Patricia Gallup, Chairman and Chief Executive Officer of PC Connection, Inc. "In addition, gross margins improved in all of our business segments for the third consecutive quarter, and total gross profit dollars increased 21.5% year over year." The three-month periods ended September 30, 2006 and 2005 included special charges that reduced earnings and earnings per share. The Company's subsidiary, GovConnection, Inc., has reached a tentative settlement with the Department of Justice on the 2003 GSA audit matter reported previously and has accrued $1.05 million in the three-month period ended September 30, 2006 in addition to the $1.5 million that had been accrued in prior periods. GovConnection disputed the claims but has agreed to settle the matter without any admission of wrongdoing or fault to avoid the expense and diversion of litigation. GovConnection was awarded a new GSA contract in August 2004. Had these charges not been incurred, pro forma net income for the quarter ended September 30, 2006 would have been $5.0 million, or $.20 per share, compared to $2.5 million, or $.10 per share, for the quarter ended September 30, 2005. A reconciliation between net income on a GAAP basis and pro forma net income is provided in a table immediately following the Consolidated Income Statements. Net sales for the nine months ended September 30, 2006 increased by $158.1 million, or 15.1%, to $1,203.8 million from $1,045.7 million for the nine months ended September 30, 2005. The three- and nine-month periods ended September 30, 2006 included revenue generated by former sales representatives of Amherst Technologies who joined the Company after our purchase of Amherst assets in October 2005. Net income for the nine months ended September 30, 2006 was $9.2 million, or $.36 per share, compared to $4.4 million, or $.18 per share, for the nine months ended September 30, 2005. The nine-month periods ended September 30, 2006 and 2005 included special charges that reduced earnings and earnings per share. Had these charges not been recorded, pro forma net income for the nine months ended September 30, 2006 would have been $10.6 million, or $.42 per share, compared to $5.0 million, or $.20 per share, for the nine months ended September 30, 2005. Business Segments: -- Net sales for the small- and medium-sized business (SMB) segment increased by 8.8% to $221.3 million compared to the third quarter of 2005. -- Net sales to large account customers increased by 41.4% to $113.7 million compared to the third quarter of 2005, due in part to the Amherst transaction referred to above. -- Net sales to government and education customers (the Company's public sector segment) decreased for the quarter by 8.1% to $80.2 million compared to the third quarter of 2005, as a result of management's decision to focus on higher margin sales opportunities. Product Mix: -- Notebooks and PDAs continued to be the Company's largest product category, accounting for 17.4% of net sales in the third quarter of 2006 compared to 19.4% for the corresponding period a year ago. -- Desktop computers and servers accounted for 13.6% of net sales in the third quarter of 2006 compared to 13.9% of net sales for the corresponding period a year ago. -- Video, Imaging, and Sound accounted for 13.8% of net sales in the third quarter of 2006 compared to 11.8% of net sales for the corresponding period a year ago, representing a 30.8% year-over-year growth. -- Net/Com products grew 19.3% in the third quarter of 2006 to 8.3% of net sales due to an increase in infrastructure, switching, and routing solutions sales. -- Sales of accessories and other products increased 16.3% year over year to 11.1% of net sales due to higher attachment sales of services and companion products. Gross profit margin, as a percentage of net sales, increased 100 basis points to 12.3% in the third quarter of 2006 from 11.3% in the third quarter of 2005. Gross margin improved in all three business segments due to greater vendor consideration received in the quarter and increased service revenues and software referral fees. Consolidated annualized productivity was largely unchanged in the third quarter of 2006 compared to the third quarter of 2005 despite the increase in current hires. The total number of sales representatives increased by 93 to 678 as of September 30, 2006 from 585 as of September 30, 2005. Total selling, general and administrative expenses for the quarter increased year over year by $5.8 million, or 15.3%. The year-over-year dollar increase resulted primarily from the additional operating expenses related to the Amherst transaction, increased variable compensation associated with higher gross profit dollars, and incremental operating expenses associated with our new Texas sales office. Ms. Gallup concluded, "PC Connection's positive third quarter results demonstrate that our talented and experienced team is focused on successfully executing our business strategies and initiatives. We believe our business is well-positioned to continue to grow market share, and we are committed to making the investments and changes we feel are necessary to improve our operating performance and enhance long-term shareholder value." About PC Connection, Inc. PC Connection, Inc., a Fortune 1000 company, owns three sales companies: 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 solutions. It offers more than 130,000 brand-name products through its staff of technically trained sales account managers and catalog telesales representatives, catalogs, and publications, and its Web site 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(R) 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 rapid-response provider of IT products and solutions to federal, state, and local government agencies and educational institutions through specialized account managers, catalogs, and publications, and online at www.govconnection.com. pccc-g "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, 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 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 June 30, 2006. More specifically, the statements in this release concerning the Company's outlook for 2006 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, the ability of the Company to improve sales productivity and increase its active customers) 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. 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 September 30, 2006 2005 - -------------------------------------------- ------------------------- (Dollars and shares in thousands, except operating data, % of % of price/earnings ratio, and Net Net % per share data) Sales Sales Change - -------------------------------------------- ------------------------- Operating Data: Net sales $415,213 $371,124 11.9% Diluted earnings per share $0.17 $0.08 Gross profit margin 12.3% 11.3% Operating margin 1.6 1.0 Return on equity (1) 9.8 4.6 Catalogs distributed 3,641,000 5,525,000 -34.1% Orders entered (2) 381,700 350,600 8.9% Average order size (2) $1,295 $1,261 2.7% Inventory turns (1) 22 20 Days sales outstanding 43 46 Product Mix: Notebooks & PDAs $72,123 17.4% $71,958 19.4% 0.2% Desktops/Servers 56,545 13.6 51,730 13.9 9.3 Storage Devices 34,508 8.3 32,119 8.7 7.4 Software 51,692 12.4 44,875 12.1 15.2 Net/Com Products 34,610 8.3 29,023 7.8 19.3 Printers & Printer Supplies 43,535 10.5 40,033 10.8 8.7 Video, Imaging, & Sound 57,250 13.8 43,753 11.8 30.8 Memory & System Enhancements 19,028 4.6 18,152 4.9 4.8 Accessories/Other 45,922 11.1 39,481 10.6 16.3 ---------- ------ ---------- ------ $415,213 100.0% $371,124 100.0% 11.9% ========== ====== ========== ====== Net Sales of Enterprise Server and Networking Products (included in the above Product Mix): $125,766 30.3% $102,502 27.6% 22.7% ========== ========== Stock Performance Indicators: Actual shares outstanding 25,695 25,224 Total book value per share $7.16 $6.79 Tangible book value per share $4.77 $4.63 Closing price $11.55 $5.44 Market capitalization $296,777 $137,219 Trailing price/earnings ratio (3) 32 21 (1) Annualized (2) Does not reflect cancellations or returns (3) Earnings is based on the last four quarters - ---------------------------------------------------------------------- SELECTED SEGMENT INFORMATION - ---------------------------------------------------------------------- For the Three Months Ended September 30, 2006 2005 - -------------------------------------------------- ------------------- Gross Gross Margin Margin (Dollars in thousands) Net Sales (%) Net Sales (%) - -------------------------------------------------- ------------------- PC Connection Sales Corporation (SMB) $221,330 13.3% $203,493 12.9% MoreDirect (Large Account) 113,690 11.4 80,382 9.8 GovConnection (Public Sector) 80,193 10.8 87,249 9.2 --------- --------- --------- --------- Total $415,213 12.3% $371,124 11.3% ========= ========= ========= ========= - ---------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS - ---------------------------------------------------------------------- Three Months Ended September 30, 2006 2005 - ---------------------------------------------------------------------- (Amounts in thousands, except per Amount % of Amount % of share data) Net Net Sales Sales - ----------------------------------------------------- ---------------- Net sales $415,213 100.0% $371,124 100.0% Cost of sales 364,070 87.7 329,044 88.7 --------- ------ --------- ------ Gross Profit 51,143 12.3 42,080 11.3 Selling, general and administrative expenses 43,291 10.4 37,531 10.1 Special charges 1,050 0.3 853 0.2 --------- ------ --------- ------ Income From Operations 6,802 1.6 3,696 1.0 Interest expense (394) (0.1) (289) (0.1) Other, net 38 - 25 - Income tax provision (2,058) (0.4) (1,508) (0.4) --------- ------ --------- ------ Net Income $4,388 1.1% 1,924 0.5% ========= ====== ========= ====== Weighted average common shares outstanding: Basic 25,446 25,224 ========= ========= Diluted 25,667 25,271 ========= ========= Earnings per common share: Basic $0.17 $0.08 ========= ========= Diluted $0.17 $0.08 ========= ========= - ---------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS - ---------------------------------------------------------------------- Nine Months Ended September 30, 2006 2005 - ---------------------------------------------------------------------- % of % of (Amounts in thousands, except Net Net per share data) Amount Sales Amount Sales - --------------------------------------------------- ------------------ Net sales $1,203,785 100.0% $1,045,685 100.0% Cost of sales 1,055,481 87.7 925,907 88.5 ----------- ------ ----------- ------ Gross Profit 148,304 12.3 119,778 11.5 Selling, general and administrative expenses 129,780 10.8 110,326 10.6 Special charges 2,391 0.2 853 0.1 ----------- ------ ----------- ------ Income From Operations 16,133 1.3 8,599 0.8 Interest expense (1,475) (0.1) (846) (0.1) Other, net 34 - 50 - Income tax provision (5,487) (0.4) (3,367) (0.3) ----------- ------ ----------- ------ Net Income $9,205 0.8% $4,436 0.4% =========== ====== =========== ====== Weighted average common shares outstanding: Basic 25,330 25,170 =========== =========== Diluted 25,459 25,275 =========== =========== Earnings per common share: Basic $0.36 $0.18 =========== =========== Diluted $0.36 $0.18 =========== =========== - ---------------------------------------------------------------------- A RECONCILIATION BETWEEN 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. - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- September 30, Three Months Nine Months Ended Ended - ---------------------------------------------------------------------- (Amounts in thousands) 2006 2005 2006 2005 - ---------------------------------------------------------------------- GAAP net income $4,388 $1,924 $9,205 $4,436 Special charges (after tax): GSA review 630 - 900 - Management restructuring - 554 535 554 ------- ------- -------- ------- 630 554 1,435 554 ------- ------- -------- ------- Pro forma net income $5,018 $2,478 $10,640 $4,990 ======= ======= ======== ======= - ---------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS September December 30, 31, - -------------------------------------------------- --------- --------- (Amounts in thousands) 2006 2005 - -------------------------------------------------- --------- --------- ASSETS Current Assets: Cash and cash equivalents $11,819 $9,770 Accounts receivable, net 159,016 162,525 Inventories - merchandise 68,429 75,374 Deferred income taxes 3,878 3,769 Income taxes receivable 987 1,742 Prepaid expenses and other current assets 3,832 4,219 --------- --------- Total current assets 247,961 257,399 Property and equipment, net 19,541 17,700 Goodwill, net 56,867 56,820 Other intangibles, net 4,630 5,427 Other assets 323 359 --------- --------- Total assets $329,322 $337,705 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of capital lease obligations: To affiliate $452 $416 To third party 427 412 Note payable - bank 7,096 19,975 Accounts payable 99,690 114,413 Accrued expenses and other liabilities 26,823 21,290 --------- --------- Total current liabilities 134,488 156,506 Capital lease obligations, less current maturities: To affiliate 4,957 5,299 To third party 73 396 Deferred income taxes 5,750 4,105 --------- --------- Total liabilities 145,268 166,306 --------- --------- Stockholders' Equity: Common stock 261 256 Additional paid-in capital 81,329 77,884 Retained earnings 104,750 95,545 Treasury stock at cost (2,286) (2,286) --------- --------- Total stockholders' equity 184,054 171,399 --------- --------- Total liabilities and stockholders' equity $329,322 $337,705 ========= ========= - ---------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------- Nine months ended September 30, 2006 (Amounts in thousands) - ---------------------------------------------------------------------- Common Stock Add'l. Treasury Shares ------------- Paid-In Retained --------------- Shares Amount Capital Earnings Shares Amount Total - ---------------------------------------------------------------------- Balance - December 31, 2005 25,622 $256 $77,884 $95,545 (362)($2,286) $171,399 Exercise of stock options, including income tax benefits 413 5 3,048 - - - 3,053 Issuance of stock under Employee Stock Purchase Plan 22 - 120 - - - 120 Stock compensation expense - - 277 - - - 277 Net income - - - 9,205 - - 9,205 --------------------------------------------------------- Balance - September 30, 2006 26,057 $261 $81,329 $104,750 (362)($2,286) $184,054 ========================================================= CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------- --------- --------- Nine Months Ended September 30, (Amounts in thousands) 2006 2005 - -------------------------------------------------- --------- --------- Cash Flows from Operating Activities: Net income $9,205 $4,436 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,227 5,340 Provision for doubtful accounts 2,094 2,790 Deferred income taxes 1,536 40 Loss on disposal of fixed assets 63 41 Stock compensation expense 277 - Gross excess tax benefit from exercise of stock options (1) - Changes in assets and liabilities: Accounts receivable 1,415 (30,679) Inventories 6,945 11,446 Prepaid expenses and other current assets 1,142 50 Other non-current assets 36 (187) Accounts payable (14,723) 16,479 Income tax benefits from exercise of stock options 231 80 Accrued expenses and other liabilities 5,533 752 --------- --------- Net cash provided by operating activities 18,980 10,588 --------- --------- Cash Flows from Investing Activities: Purchases of property and equipment (6,401) (5,060) Proceeds from sale of property and equipment 20 13 Payment of acquisition earn-out obligation - (6,921) --------- --------- Net cash used for investing activities (6,381) (11,968) --------- --------- Cash Flows from Financing Activities: Proceeds from short-term borrowings 317,280 180,800 Repayment of short-term borrowings (330,159) (178,044) Repayment of capital lease obligations (614) (600) Exercise of stock options 2,822 348 Gross excess tax benefit from exercise of stock options 1 - Issuance of stock under Employee Stock Purchase Plan 120 168 --------- --------- Net cash (used for) provided by financing activities (10,550) 2,672 --------- --------- Increase in cash and cash equivalents 2,049 1,292 Cash and cash equivalents, beginning of period 9,770 6,829 --------- --------- Cash and cash equivalents, end of period $11,819 $8,121 ========= ========= pccc-g CONTACT: PC Connection, Inc. Stephen Baldridge, 603-683-2322 VP of Finance & Corporate Controller