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

February 5, 2009

MERRIMACK, N.H., Feb 05, 2009 (BUSINESS WIRE) -- 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.

Quarterly Sales Comparisons by Business Segment:

  • Net sales for the SMB segment decreased by 14.7% to $225.1 million compared to the fourth quarter of 2007. Corporate outbound sales within the segment declined year over year, offsetting increased consumer web sales. Approximately half of this year's decrease resulted from lower sales of Video products from three customers.
  • Net sales for MoreDirect, Inc., the Company's Large Account segment, decreased by 19.5% to $113.4 million compared to the fourth quarter of 2007. MoreDirect's revenues continue to be impacted by declines in spending by its larger enterprise customers.
  • Net sales for GovConnection, Inc., the Company's Public Sector segment, increased by $15.6 million, or 18.4%, to $100.6 million compared to the fourth quarter of 2007. Increased customer acquisitions and strong federal government contract sales accounted for most of this double-digit increase.

Quarterly Sales by Product Mix:

  • Net/Com Product sales increased 24% year over year, accounting for 12% of net sales in the fourth quarter of 2008 compared to 9% of net sales for the corresponding prior year period. We experienced year-over-year growth for this category in all business segments and with several strategic vendor partners.
  • Sales of Notebooks and PDAs decreased 9% year over year, accounting for 15% of net sales in both fourth quarters of 2008 and 2007. Notebook units' sales increased slightly year over year but were impacted by a decline in average selling prices.
  • Video, Imaging and Sound sales decreased 21% year over year, accounting for 15% of net sales in the fourth quarter of 2008 compared to 18% for the corresponding prior year quarter.
  • Accessories/Other sales increased 4% year over year, accounting for 12% of net sales in the fourth quarter of 2008 compared to 10% for the corresponding prior year quarter. The fastest growing products within this category were power management and point-of-sales equipment.

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."

About PC Connection, Inc.

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(TM) 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   52,08812     50,18610   4
Total $439,113100% $489,607100% (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
                   
 
SELECTED SEGMENT INFORMATION                            
For the Three Months Ended December 31,       20082007
NetGrossNetGross
(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 %
 
 
CONSOLIDATED INCOME STATEMENTS          
Three Months Ended December 31,2008   2007
(amounts in thousands, except per share data)Amount% of Net SalesAmount% 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 SalesAmount% 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 SHEETSDecember 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       RetainedTreasury 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, 200827,326$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  

pccc-g

SOURCE: PC Connection, Inc.

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

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