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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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): July 22, 2004
PC Connection, Inc.
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(Exact name of registrant as specified in charter)
Delaware 0-23827 02-0513618
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(State or other jurisdiction (Commission (IRS Employer
of incorporation File Number) Identification No.)
Rt. 101A, 730 Milford Road 03054
Merrimack, NH
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 683-2000
N/A
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(Former name or former address, if changed since last report)
Item 12. Disclosure of Results of Operations and Financial Condition.
On July 22, 2004, PC Connection, Inc. announced its financial results for
the three and six-month periods ended June 30, 2004. The full text of the press
release issued in connection with the announcement is attached as Exhibit 99.1
to this Current Report on Form 8-K.
The information in this Form 8-K 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.
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: July 22, 2004 PC CONNECTION, INC.
By: /s/ Mark A. Gavin
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Mark A. Gavin
Senior Vice President of Finance and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
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99.1 Press release dated July 22, 2004
EXHIBIT 99.1
PC Connection, Inc. Reports Second Quarter Results; Second Quarter
Highlights: 50% Growth in Earnings Per Share; 50 Basis Point
Improvement in Gross Margin; 30% Net Sales Growth in
Large Corporate Account Segment
MERRIMACK, N.H.--(BUSINESS WIRE)--July 22, 2004--PC Connection,
Inc. (NASDAQ:PCCC), a leading direct marketer of information
technology products and solutions, today announced results for the
quarter ended June 30, 2004. Net sales for the three months ended June
30, 2004 increased by $13.7 million, or 4.3%, to $335.3 million from
$321.6 million for the quarter ended June 30, 2003. Net income for the
quarter ended June 30, 2004, on a generally accepted accounting
principles (GAAP) basis, was $2.3 million, or $.09 per share, compared
to $1.4 million, or $.06 per share, for the quarter ended June 30,
2003.
The three-month periods ended June 30, 2004 and 2003 included
charges related to workforce reductions and other special charges that
reduced earnings and earnings per share. Had these charges not been
recorded, pro forma net income for the quarter ended June 30, 2004
would have been $2.7 million, or $.11 per share, compared to $1.6
million, or $.07 per share, for the quarter ended June 30, 2003. 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 six months ended June 30, 2004 increased by
$57.9 million, or 9.6%, to $663.0 million from $605.1 million for the
corresponding period a year ago. Net income for the six months ended
June 30, 2004, on a GAAP basis, was $3.4 million, or $.14 per share,
compared to $3.0 million, or $.12 per share, for the corresponding
period a year ago. The six-month periods ended June 30, 2004 and 2003
included charges related to workforce reductions and other special
charges that reduced earnings and earnings per share. Had these
charges not been recorded, pro forma net income for the six months
ended June 30, 2004 would have been $4.5 million, or $.18 per share,
compared to $3.2 million, or $.13 per share, for the comparable period
a year ago.
Consolidated gross margins, as a percentage of net sales, improved
in the second quarter of 2004 by 50 basis points over the second
quarter a year ago. Gross profit margin as a percentage of net sales
was 10.8% in the second quarter of 2004, compared to 10.4% in the
first quarter of 2004, and 10.3% in the second quarter of 2003. As
previously stated, the Company expects that its gross profit margin as
a percentage of net sales may vary by quarter based upon vendor
support programs, product mix, pricing strategies, market conditions,
and other factors.
Patricia Gallup, Chairman and Chief Executive Officer, said, "I am
encouraged by our second quarter results, which showed increasing
sales, rising gross margins, and growth in earnings per share. Our
first quarter initiatives to improve gross margins along with our
increase in net sales produced the strong earnings per share growth in
the second quarter. As the results show, we are working harder and
smarter to both better serve our customers and run our business more
efficiently."
Net sales for the small- and medium-sized business (SMB) segment
increased by 4.0% from the second quarter of 2003 to $194.1 million
but decreased sequentially by 6.4% over the immediately preceding
quarter. Sales to government and education customers (Public Sector
segment) declined for the quarter by 15.6% over the second quarter of
2003 to $63.3 million, but increased sequentially by 17.6% from the
immediately preceding quarter. Sales to the federal government
declined sequentially by 24.0% and declined year-over-year by 65.0%.
However, sales to state, local, and education customers grew
sequentially this quarter by 32.9% and rose year-over-year by 20.2%.
Gross margins for both the SMB and the Public Sector segments improved
in the quarter by 1.0% and 1.2%, respectively, over the year ago
quarter. Sales to large corporate account customers increased by 30.0%
from the second quarter of 2003 to $77.9 million and increased
sequentially by 17.5% over the immediately preceding quarter.
Consolidated annualized sales productivity was equal to the second
quarter of 2003 at $2.4 million per sales representative. The total
number of sales representatives increased to 570 at June 30, 2004 from
558 at March 31, 2004 and 546 at June 30, 2003.
Total selling, general, and administrative expenses (SG&A) as a
percentage of sales were 9.4% in the second quarter of 2004, compared
to 9.3% in the corresponding period a year ago. The Company expects
that its SG&A as a percentage of net sales may vary by quarter
depending on changes in sales volume, as well as the levels of
continuing investments in key growth initiatives.
Notebook computer systems and PDAs continued to be the Company's
largest product category, accounting for 20.1% of net sales in the
second quarter of 2004 compared to 20.6% of net sales for the
corresponding period a year ago. Desktop and server computer systems
accounted for 13.8% of net sales in the second quarter of 2004,
compared to 14.1% for the corresponding 2003 period. The average
selling prices of computer systems decreased 3.7% in the second
quarter of 2004 compared to the corresponding period a year ago, and
decreased 3.3% compared to the first quarter of 2004.
Ms. Gallup concluded, "With the continuation of our gross margin
initiatives, and with the traditionally strong quarters for our
business still ahead of us, we are optimistic that the Company will
continue to experience improved results for the second half of 2004.
It is anticipated our new General Services Administration ("GSA")
schedule will be forthcoming; this will help us to expand our sales to
the federal government. Overall, we believe PC Connection remains in a
strong position to gain market share and enhance long-term shareholder
value."
PC Connection, Inc., a Fortune 1000 company, operates three sales
subsidiaries, PC Connection Sales Corporation of Merrimack, NH,
GovConnection, Inc. of Rockville, MD, and MoreDirect, Inc. of Boca
Raton, FL. PC Connection Sales Corporation (1-800-800-5555) is a
rapid-response provider of information technology (IT) products and
solutions offering more than 100,000 brand-name products to businesses
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. 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. MoreDirect, Inc. (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. All three subsidiaries can deliver custom-configured
computer systems overnight.
A live webcast of PC Connection management's discussion of the
second quarter will be available on the Company's Web site at
www.pcconnection.com and on www.streetevents.com. The webcast will
begin today at 10:00 a.m. Eastern Time.
"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 other risks detailed under the caption
"Factors That May Affect Future Results and Financial Condition" in
the Company's Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission for the quarter ended March 31, 2004. More
specifically, the statements in this release concerning the Company's
outlook for the remainder of 2004 and the statements concerning the
Company's gross margin percentage 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
put in place a new GSA schedule, 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.
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*T
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CONSOLIDATED SELECTED FINANCIAL HIGHLIGHTS
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At or for the Three Months
Ended June 30, 2004 2003
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(Dollars and shares in
thousands, except
operating data, price/ % of % of %
earnings ratio and per Net Sales Net Sales Change
share data)
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Operating Data:
Net sales growth 4.3% 10.4%
Diluted earnings per
share change 50.0 500.0
Gross profit margin 10.8 10.3
Operating margin 1.2 0.8
Return on equity (1) 5.7 3.7
Catalogs distributed 7,205,000 7,910,000 (8.9)%
Orders entered(2) 308,700 335,900 (8.1)
Average order size(2) $1,318 $1,110 18.7
Inventory turns(1) 16 20
Days sales outstanding 41 45
Active customers 437,000 483,000 (9.5)
Product Mix:
Notebooks & PDAs $67,413 20.1 $66,269 20.6% 1.7%
Desktop/Servers 46,228 13.8 45,364 14.1 1.9
Storage Devices 26,710 8.0 28,582 8.9 (6.6)
Software 39,435 11.8 30,370 9.5 29.9
Net/Com Products 23,680 7.0 26,129 8.1 (9.4)
Printers & Printer
Supplies 39,737 11.8 39,341 12.2 1.0
Video, Imaging & Sound 42,157 12.6 38,242 11.9 10.2
Memory & System
Enhancements 17,593 5.2 18,248 5.7 (3.6)
Accessories/Other 32,382 9.7 29,023 9.0 11.6
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$335,335 100.0% $321,568 100.0% 4.3
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Net Sales of Enterprise Server and Networking Products
(included in the above Product Mix):
$83,696 25.0% $84,493 26.3% (.9)%
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Stock Performance
Indicators:
Actual shares outstanding 25,045 24,731
Total book value
per share $6.43 $6.21
Tangible book value
per share $4.51 $4.70
Closing price $6.53 $6.89
Market capitalization $163,544 $170,397
Trailing price/earnings
ratio(3) 25 21
(1) Annualized
(2) Does not reflect cancellations or returns
(3) Earnings is based on the last four quarters
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SELECTED SEGMENT INFORMATION
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For the Three Months
Ended June 30, 2004 2003
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Net Gross Net Gross
(Dollars in thousands) Sales Margin(%) Sales Margin(%)
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PC Connection Sales Corporation
(SMB) $194,058 11.7% $186,576 10.7%
GovConnection (Public Sector) 63,335 9.1 75,023 7.9
MoreDirect (Large Accounts) 77,942 9.8 59,969 11.7
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Total $335,335 10.8% $321,568 10.3%
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CONSOLIDATED INCOME STATEMENTS
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Three Months Ended
June 30, 2004 2003
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(Amounts in thousands, Amount % of Net Amount % of Net
except per share data) Sales Sales
Net sales $335,335 100.00% $321,568 100.00%
Cost of sales 299,173 89.22 288,611 89.75
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Gross Profit 36,162 10.78 32,957 10.25
Selling, general and
administrative expenses 31,483 9.39 30,018 9.34
Restructuring costs and other
special charges 753 .22 397 .12
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Income From Operations 3,926 1.17 2,542 .79
Interest expense (341) (.10) (276) (.08)
Other, net 54 .02 54 .02
Income tax provision (1,383) (.41) (917) (.29)
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Net Income $2,256 .67% $1,403 .44%
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Weighted average common shares
outstanding:
Basic 25,008 24,665
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Diluted 25,225 25,013
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Earnings per common share:
Basic $ .09 $ .06
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Diluted $ .09 $ .06
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CONSOLIDATED INCOME STATEMENTS
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Six Months Ended June 30, 2004 2003
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(Amounts in thousands,
except per share data) Amount % of Net Amount % of Net
Sales Sales
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Net sales $662,970 100.00% $605,095 100.00%
Cost of sales 592,883 89.43 539,663 89.19
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Gross Profit 70,087 10.57 65,432 10.81
Selling, general and
administrative expenses 62,173 9.38 59,657 9.85
Restructuring costs and
other special charges 1,783 .27 397 .07
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Income From Operations 6,131 .92 5,378 .89
Interest expense (725) (.11) (579) (.10)
Other, net 101 .02 98 .02
Income tax provision (2,093) (.32) (1,919) (.32)
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Net Income $ 3,414 .51% $ 2,978 .49%
====================================
Weighted average common shares
outstanding:
Basic 25,003 24,658
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Diluted 25,295 24,960
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Earnings per common share:
Basic $ .14 $ .12
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Diluted $ .14 $ .12
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A RECONCILIATION BETWEEN GAAP AND PRO FORMA NET INCOME
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This information is being provided so as to allow for a comparison
of our operating results without workforce reduction and other special
charges.
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Three Months Ended Six Months Ended
June 30, June 30,
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(Amounts in thousands) 2004 2003 2004 2003
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GAAP net income $ 2,256 $ 1,403 $ 3,414 $ 2,978
Restructuring costs and
other special charges
(after tax):
Workforce reduction 16 240 356 241
GSA review and other 451 - 749 -
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467 240 1,105 241
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Pro forma net income $ 2,723 $ 1,643 $ 4,519 $ 3,219
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CONSOLIDATED BALANCE SHEETS June 30, December 31,
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(Amounts in thousands) 2004 2003
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ASSETS
Current Assets:
Cash and cash equivalents $ 1,456 $ 2,977
Restricted cash(1) - 5,000
Accounts receivable, net 119,820 144,337
Inventories - merchandise 80,372 80,140
Deferred income taxes 1,972 1,732
Income taxes receivable 868 2,190
Prepaid expenses and
other current assets 4,066 3,649
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Total current assets 208,554 240,025
Property and equipment, net 18,034 20,396
Goodwill, net 44,766 45,264
Other intangibles, net 3,217 3,393
Other assets 206 208
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Total assets $274,777 $309,286
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital $ 352 $ 334
lease obligation to affiliate
Note payable - bank - 5,614
Accounts payable 88,962 112,538
Accrued expenses and other liabilities 15,901 13,063
Acquisition earn-out obligation - 11,593
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Total current liabilities 105,215 143,142
Capital lease obligation to affiliate,
less current maturities 5,907 6,088
Deferred income taxes 2,704 2,867
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Total liabilities 113,826 152,097
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Stockholders' Equity:
Common stock 254 253
Additional paid-in capital 76,775 76,428
Retained earnings 86,208 82,794
Treasury stock at cost (2,286) (2,286)
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Total stockholders' equity 160,951 157,189
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Total liabilities and
stockholders' equity $274,777 $309,286
========= =========
(1) Cash escrow established for the MoreDirect, Inc. acquisition
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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Six Months Ended June 30, 2004 (Amounts in thousands)
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Additional
Common Stock Paid In Retained Treasury Shares
Shares Amount Capital Earnings Shares Amount Total
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Balance-
December
31, 2003 25,342 $253 $76,428 $82,794 (362) $(2,286) $157,189
Exercise
of stock
options,
including
income tax
benefits 28 1 142 - - - 143
Issuance of
stock under
employee
stock
purchase
plan 37 - 205 - - - 205
Net income - - - 3,414 - - 3,414
----------------------------------------------------------
Balance -
June 30,
2004 25,407 $254 $76,775 $86,208 (362) $(2,286) $160,951
============================================================
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended June 30, (Amounts in thousands) 2004 2003
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Cash Flows from Operating Activities:
Net income $3,414 $2,978
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation and amortization 3,539 4,408
Deferred income taxes (403) (829)
Provision for doubtful accounts 2,076 1,294
Loss on disposal of fixed assets 1 -
Changes in assets and liabilities:
Accounts receivable 22,441 12,010
Inventories (232) (9,696)
Prepaid expenses and other current assets 905 (2,869)
Other non-current assets 2 146
Accounts payable (23,576) 4,844
Income tax benefits from exercise of
stock options 85 110
Accrued expenses and other liabilities 2,838 1,166
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Net cash provided by operating activities 11,090 13,562
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Cash Flows from Investing Activities:
Purchases of property and equipment (1,002) (1,325)
Payment of acquisition earn-out obligation (11,095) (10,800)
Cash escrow distributed for acquisition 5,000 5,000
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Net cash used for investing activities (7,097) (7,125)
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 174,121 76,465
Repayment of short-term borrowings (179,735) (76,465)
Repayment of capital lease obligation to
affiliate (163) (92)
Exercise of stock options 58 42
Issuance of stock under employee stock
purchase plan 205 212
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Net cash provided by (used for)
financing activities (5,514) 162
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Increase (decrease) in cash and cash equivalents (1,521) 6,599
Cash and cash equivalents, beginning of period 2,977 1,797
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Cash and cash equivalents, end of period $ 1,456 $ 8,396
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*T
CONTACT: PC Connection, Inc.
Mark A. Gavin, 603-683-2451