View:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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) January 27, 2005
-------------------
PC Connection, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-23827 02-0513618
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
Rt. 101A, 730 Milford Road Merrimack, NH 03054
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(603) 683-2000
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- --------------------------------------------------------------------------------
(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 (see General Instruction A.2. below):
|_| 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 January 27, 2005, PC Connection, Inc. announced its financial
results for the quarter ended December 31, 2004. 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
(c) 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
January 27, 2005.
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: January 27, 2005 REGISTRANT
PC CONNECTION, INC.
By: /s/ Jack L. Ferguson
---------------------------------
Jack L. Ferguson
Interim Chief Financial Officer
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.1 Press Release issued by PC Connection, Inc. on
January 27, 2005
Exhibit 99.1
PC Connection, Inc. Reports Fourth Quarter and Year-end Results; Gross Margin
Rates Improve across All Sales Segments; 10.5% Annual Growth in Large Corporate
Account Sales
MERRIMACK, N.H.--(BUSINESS WIRE)--Jan. 27, 2005--PC Connection, Inc.
(NASDAQ: PCCC), a leading direct marketer of information technology products and
solutions, today announced results for the quarter ended December 31, 2004. Net
sales for the three months ended December 31, 2004 decreased by $18.8 million,
or 5.2%, to $339.6 million from $358.4 million for the quarter ended December
31, 2003. Net income for the quarter ended December 31, 2004, on a generally
accepted accounting principles (GAAP) basis, was $2.1 million, or $.08 per
share, compared to $0.7 million, or $.03 per share, for the quarter ended
December 31, 2003. Net income for the quarter included $0.4 million, resulting
from a reduction in the estimate for certain state income tax contingencies. Net
sales for the year ended December 31, 2004 increased by $40.9 million, or 3.1%,
to $1.35 billion from $1.31 billion for the year ended December 31, 2003. Net
income for the year ended December 31, 2004, on a GAAP basis, was $8.3 million,
or $.33 per share, compared to $5.9 million, or $.23 per share, for the
corresponding period a year ago.
The three-month and twelve-month periods ended December 31, 2004
and 2003 included special charges that reduced earnings and earnings
per share. Had these charges not been recorded, pro forma net income
for the quarter ended December 31, 2004 would have been $3.1 million,
or $.12 per share, compared to $1.7 million, or $.07 per share, for
the quarter ended December 31, 2003, an 82.4% increase. Likewise, pro
forma net income for the year ended December 31, 2004 would have been
$11.5 million, or $.46 per share, compared to $7.1 million, or $.28
per share, for the year ended December 31, 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.
Consolidated gross margins, as a percentage of net sales, improved
year over year in the fourth quarter of 2004 by 203 basis points,
including a reclassification described below. Gross margin rates were
12.2% in the fourth quarter of 2004 compared to 10.1% in the fourth
quarter of 2003. As announced in October, the Company revised its
estimates relating to vendor consideration in Issue No. 02-16 of the
Emerging Issues Task Force (EITF) and reclassified additional
advertising reimbursements from vendors in excess of advertising costs
incurred of $3.0 million from selling, general, and administrative
(SG&A) expenses to cost of goods sold and inventory. Such excess
advertising reimbursements had been recorded as an offset to SG&A
expenses, and this reclassification resulted in an increase in gross
margin of 0.9% for the fourth quarter of 2004. The remaining increase
was attributable to the margin enhancement programs initiated in the
first quarter of 2004. These initiatives and the increased agency
revenue in our federal government business accounted for the margin
rate increase in our Public Sector. Gross margin rates increased year
over year in all three business segments, as shown in the table on
page 3. 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, "Our
initiatives to improve gross profit margins continues to be the key
driver behind our growth in earnings per share. We were pleased that
all three business segments were able to achieve gross margin rate
improvements, both sequentially and year over year."
Net sales for the small- and medium-sized business (SMB) segment
in the fourth quarter of 2004 increased by 2.6% from the fourth
quarter of 2003 to $204.9 million and increased sequentially by 4.6%
over the immediately preceding quarter. Sales to government and
education customers (Public Sector segment) declined for the fourth
quarter of 2004 by 35.1% from the fourth quarter of 2003 to $58.0
million. Within this segment, sales to the federal government declined
year over year by 58.3%, primarily as a result of the 2003 loss of our
GSA contract. Although it was replaced with a new GSA contract in
August of 2004, it was too late for GovConnection to take full
advantage of the annual federal buying season. Sales to state, local,
and education customers declined year over year by 4.5% from the
fourth quarter of 2003. Sales to large corporate account customers
increased by 10.5% from the fourth quarter of 2003 to $76.7 million
but decreased sequentially by 1.0% from the immediately preceding
quarter.
Consolidated annualized sales productivity decreased to $2.3
million per sales representative in the fourth quarter of 2004 from
$2.5 million per sales representative in the fourth quarter of 2003,
primarily due to the decline in federal government sales. The total
number of sales representatives increased to 591 at December 31, 2004
from 571 at September 30, 2004 and from 567 at December 31, 2003.
Total SG&A expenses as a percentage of sales were 10.8% in the
fourth quarter of 2004 (including the EITF reclassification referred
to above, which increased this rate by 0.9%), compared to 9.2% in the
corresponding period a year ago. The Company expects that its SG&A
expenses as a percentage of net sales may vary by quarter depending on
changes in sales volume and the effect of any excess vendor
advertising reimbursements, 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 18.9% of net sales in the
fourth quarter of 2004 compared to 19.0% of net sales for the
corresponding period a year ago. Desktop and server computer systems
accounted for 15.1% of net sales in the fourth quarter of 2004,
compared to 15.8% for the corresponding 2003 period. The average
selling prices of computer systems increased 0.2% in the fourth
quarter of 2004 compared to the corresponding period a year ago, and
increased 3.6% compared to the third quarter of 2004.
Ms. Gallup concluded, "During the last quarter, the Company
improved both gross profit and operating margins, grew earnings, and
continued our efforts to enhance the efficiency and effectiveness of
our sales organizations. Our strong and experienced management team
continues to be focused on driving continuous improvement and building
long-term value for our shareholders."
About PC Connection, Inc.
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
is 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 web cast of PC Connection management's discussion of the
fourth quarter and year will be available on the Company's Web site at
www.pcconnection.com and on www.streetevents.com. The web cast 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 September 30, 2004. More
specifically, the statements in this release concerning the Company's
outlook for 2005 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.
CONSOLIDATED SELECTED FINANCIAL HIGHLIGHTS
At or for the Three Months Ended December 31, 2004
(Dollars and shares in thousands, except % of
operating data, price/earnings ratio and per Net
share data) Sales
Operating Data:
Net sales growth (5.2)%
Gross profit margin 12.2
Operating margin 0.9
Return on equity(1) 5.1
Diluted earnings per share $ .08
Catalogs distributed 10,868,000
Orders entered(2) 332,000
Average order size(2) $ 1,132
Inventory turns(1) 14
Days sales outstanding 42
Product Mix:
Notebooks & PDAs $ 64,164 18.9%
Desktop/Servers 51,212 15.1
Storage Devices 29,594 8.7
Software 39,892 11.7
Net/Com Products 24,861 7.3
Printers & Printer Supplies 35,523 10.5
Video, Imaging & Sound 42,265 12.4
Memory & System Enhancements 17,952 5.3
Accessories/Other 34,136 10.1
------------ ------
$ 339,599 100.0%
============ ======
Stock Performance Indicators:
Actual shares outstanding 25,100
Total book value per share $ 6.62
Tangible book value per share $ 4.44
Closing price $ 9.52
Market capitalization $ 238,952
Trailing price/earnings ratio (3) 29
At or for the Three Months Ended December 31, 2003
(Dollars and shares in thousands, except % of
operating data, price/earnings ratio and Net
per share data) Sales % Change
Operating Data:
Net sales growth 11.2%
Gross profit margin 10.1
Operating margin 0.5
Return on equity(1) 1.9
Diluted earnings per share $ .03 166.7%
Catalogs distributed 8,726,000 24.5%
Orders entered(2) 338,000 (1.8)
Average order size(2) $ 1,202 (5.8)
Inventory turns(1) 17
Days sales outstanding 47
Product Mix:
Notebooks & PDAs $ 68,001 19.0% (5.6)%
Desktop/Servers 56,590 15.8 (9.5)
Storage Devices 29,169 8.1 1.5
Software 45,446 12.7 (12.2)
Net/Com Products 27,211 7.6 (8.6)
Printers & Printer Supplies 36,953 10.3 (3.9)
Video, Imaging & Sound 44,251 12.3 (4.5)
Memory & System Enhancements 20,673 5.8 (13.2)
Accessories/Other 30,082 8.4 13.5
---------- ------
$ 358,376 100.0% (5.2)%
========== ======
Stock Performance Indicators:
Actual shares outstanding 24,980
Total book value per share $ 6.29
Tangible book value per share $ 4.34
Closing price $ 8.23
Market capitalization $ 205,585
Trailing price/earnings ratio (3) 34
(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, 2004 2003
----------------- -----------------
Gross Gross
Margin Margin
(Dollars in thousands) Net Sales (%) Net Sales (%)
PC Connection Sales Corporation
(SMB) $204,878 13.4% $199,615 11.1%
GovConnection (Public Sector) 58,022 9.8 89,371 8.0
MoreDirect (Large Account) 76,699 10.7 69,390 10.1
-----------------------------------
Total $339,599 12.2% $358,376 10.1%
===================================
CONSOLIDATED INCOME STATEMENTS
Three Months Ended December 31, 2004 2003
----------------- -----------------
% of % of
(Amounts in thousands, except per Net Net
share data) Amount Sales Amount Sales
Net sales $339,599 100.00% $358,376 100.00%
Cost of sales 298,253 87.83 322,055 89.86
-------- ------- -------- -------
Gross Profit 41,346 12.17 36,321 10.14
Selling, general, and
administrative expenses 36,576 10.77 33,108 9.24
Special charges 1,649 .48 1,532 .43
-------- ------- -------- -------
Income From Operations 3,121 .92 1,681 .47
Interest expense (326) (.09) (456) (.13)
Other, net 16 - (8) -
Income tax provision (738) (.22) (487) (.14)
-------- ------- -------- -------
Net Income $ 2,073 0.61% $ 730 .20%
======== ======= ======== =======
Weighted average common shares
outstanding:
Basic 25,057 24,792
======== ========
Diluted 25,275 25,308
======== ========
Earnings per common share:
Basic $ .08 $ .03
======== ========
Diluted $ .08 $ .03
======== ========
CONSOLIDATED INCOME STATEMENTS
Twelve Months Ended
December 31, 2004 2003
% of % of
(Amounts in thousands, Net Net
except per share data) Amount Sales Amount Sales
Net sales $1,353,834 100.00% $1,312,891 100.00%
Cost of sales 1,202,995 88.86 1,175,212 89.51
---------- ------- ---------- -------
Gross Profit 150,839 11.14 137,679 10.49
Selling, general, and
administrative expenses 131,514 9.71 124,824 9.51
Special charges 5,232 .39 1,929 .15
---------- ------ ---------- -------
Income From
Operations 14,093 1.04 10,926 .83
Interest expense (1,385) (.10) (1,305) (.10)
Other, net 152 .01 117 .01
Income tax provision (4,556) (.34) (3,850) (.29)
---------- ------- ---------- -------
Net Income $ 8,304 0.61% $ 5,888 .45%
========== ====== ========== =======
Weighted average common
shares outstanding:
Basic 25,028 24,713
========== ==========
Diluted 25,272 25,114
========== ==========
Earnings per common
share:
Basic $ .33 $ .24
========== ==========
Diluted $ .33 $ .23
========== ==========
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.
Three Months Twelve Months
Ended Ended
December 31, December 31,
(Amounts in thousands) 2004 2003 2004 2003
-------------- ----------------
GAAP net income $2,073 $ 730 $ 8,304 $5,888
Special charges (after tax):
Workforce reduction 172 7 533 247
GSA review and other 850 913 2,711 920
------ ------ ------- -------
1,022 920 3,244 1,167
------ ------ ------- -------
Pro forma net income $3,095 $1,650 $11,548 $7,055
====== ====== ======= =======
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Amounts in thousands) 2004 2003
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,829 $ 2,977
Restricted cash (1) - 5,000
Accounts receivable, net 120,752 144,337
Inventories - merchandise 78,390 80,140
Deferred income taxes 3,039 3,051
Income taxes receivable 1,325 2,190
Prepaid expenses and other current
assets 3,644 3,649
------------- -------------
Total current assets 213,979 241,344
Property and equipment, net 17,647 20,396
Goodwill, net 51,687 45,264
Other intangibles, net 3,040 3,393
Other assets 189 208
------------- -------------
Total assets $ 286,542 $ 310,605
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease
obligations:
To affiliate $ 373 $ 334
To third parties 391 -
Note payable - bank 4,810 5,614
Accounts payable 79,709 112,538
Accrued expenses and other liabilities 18,138 14,382
Acquisition earn-out obligation 6,921 11,593
------------- -------------
Total current liabilities 110,342 144,461
Capital lease obligations, less current
maturities:
To affiliate 5,715 6,088
To third parties 841 -
Deferred income taxes 3,486 2,867
------------- -------------
Total liabilities 120,384 153,416
------------- -------------
Stockholders' Equity:
Common stock 255 253
Additional paid-in capital 77,091 76,428
Retained earnings 91,098 82,794
Treasury stock at cost (2,286) (2,286)
------------- -------------
Total stockholders' equity 166,158 157,189
------------- -------------
Total liabilities and
stockholders' equity $ 286,542 $ 310,605
============= =============
(1) Cash escrow established for the MoreDirect, Inc. acquisition
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Twelve Months Ended December 31, 2004 (Amounts in thousands)
Treasury
Common Stock Additional Shares
------------ Paid-In Retained ---------------
Shares Amount Capital Earnings Shares Amount Total
-----------------------------------------------------------
Balance
- December
31, 2003 25,342 $253 $76,428 $82,794 (362) $(2,286) $157,189
Exercise
of stock
options,
including
income tax
benefits 47 1 259 - - - 260
Issuance
of stock
under
employee
stock
purchase
plan 73 1 404 - - - 405
Net income - - - 8,304 - - 8,304
------ ---- ------- ------- ----- -------- --------
Balance
- December
31, 2004 25,462 $255 $77,091 $91,098 (362) $(2,286) $166,158
====== ==== ======= ======= ===== ======== ========
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31, (Amounts in thousands)
2004 2003
---------- ----------
Cash Flows from Operating Activities:
Net income $ 8,304 $ 5,888
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 7,127 8,363
Deferred income taxes (688) (888)
Provision for doubtful accounts 4,280 2,953
Loss on disposal of fixed assets 8 41
Changes in assets and liabilities:
Accounts receivable 19,305 (11,976)
Inventories 1,750 (27,661)
Prepaid expenses and other current
assets 870 (1,267)
Other non-current assets 19 126
Accounts payable (32,829) 27,045
Income tax benefits from exercise
of stock options 97 349
Accrued expenses and other
liabilities 5,075 328
---------- ----------
Net cash provided by operating activities 13,318 3,301
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,804) (2,517)
Proceeds from sale of property and equipment 3 2
Payment of acquisition earn-out obligation (11,095) (10,829)
Cash escrow distributed for acquisition 5,000 5,000
---------- ----------
Net cash used for investing activities (8,896) (8,344)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 369,285 238,259
Repayment of short-term borrowings (370,089) (232,645)
Repayment of capital lease obligation
to affiliate (334) (199)
Exercise of stock options 163 381
Issuance of stock under employee stock
purchase plan 405 427
---------- ----------
Net cash (used for) provided by
financing activities (570) 6,223
---------- ----------
Increase in cash and cash equivalents 3,852 1,180
Cash and cash equivalents, beginning of
period 2,977 1,797
---------- ----------
Cash and cash equivalents, end of period $ 6,829 $ 2,977
========== ==========
CONTACT: PC Connection, Inc.
Stephen C. Baldridge, 603-683-2052
VP of Finance and Corporate Controller