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PC Connection, Inc. Reports Third Quarter Results

10/30/08

MERRIMACK, N.H., Oct 30, 2008 (BUSINESS WIRE) -- --Q3 net sales: $441.4 million, down 3% year over year

--Gross margin: 12.1%

--Net income: $3.2 million

--Diluted earnings per share: $.12 per share

PC Connection, Inc. (NASDAQ: PCCC), a leading direct marketer of information technology (IT) products and services, today announced results for the quarter ended September 30, 2008. Net sales for the three months ended September 30, 2008 decreased by $15.1 million, or 3.3%, to $441.4 million from $456.5 million for the three months ended September 30, 2007. Net income for the quarter was $3.2 million, or $.12 per share, compared to $7.7 million, or $.28 per share, for the corresponding prior year quarter.

The quarter ended September 30, 2008 included $1.4 million of special charges related to workforce reduction and management restructuring that reduced earnings and earnings per share. Had these charges not been incurred, pro forma net income for the quarter ended September 30, 2008 would have been $4.1 million, or $.15 per share, compared to $7.7 million, or $.28 per share, for the quarter ended September 30, 2007. We did not record any special charges for the three- and nine-month periods ended September 30, 2007. A reconciliation between net income on a GAAP basis and pro forma net income is provided in a table below immediately following the Consolidated Income Statements.

Net sales for the nine months ended September30, 2008 increased by $18.8 million, or 1.5%, to $1,314.6million from $1,295.8million for the nine months ended September30, 2007. Net income for the nine months ended September30, 2008 was $13.1million, or $.49 per share, compared to $16.8million, or $.62 per share, for the nine months ended September30, 2007. The nine-month period ended September 30, 2008 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, 2008 would have been $14.0 million, or $.52 per share, compared to $16.8 million, or $.62 per share, for the nine months ended September 30, 2007.

Quarterly Sales Comparisons by Business Segment:

-- Net sales for the small- and medium-sized business (SMB) segment decreased by 7.4% to $217.5 million compared to the third quarter of 2007. Both corporate and consumer sales within the segment declined year over year.

-- Net sales for MoreDirect, Inc., the Company's Large Account segment, decreased by 9.8% to $117.3 million compared to the third quarter of 2007. Our MoreDirect segment experienced decreased revenues as economic instability impacted IT purchases from its larger enterprise customers.

-- Net sales to GovConnection, Inc., the Company's Public Sector segment, increased by $15.1 million, or 16.5%, to $106.7 million compared to the third quarter of 2007. Strong federal government contract sales accounted for most of this double-digit increase.

Quarterly Sales by Product Mix:

-- Net/Com Products sales increased 22% year over year, accounting for 11% of net sales in the third quarter of 2008 compared to 8% of net sales for the corresponding period a year ago. We experienced year-over-year growth for this category in all business segments, and with several strategic vendor partners.

-- Video, Imaging and Sound sales increased 1% year over year, accounting for 15% of net sales in the third quarter of 2008 compared to 14% for the corresponding prior year quarter. Strong video product sales continued to drive the majority of this revenue growth.

-- Sales of Notebooks and PDAs decreased 2% year over year, accounting for 16% of net sales in both third quarters of 2008 and 2007, and sales of Desktops/Servers decreased 10% year over year, accounting for 13% and 14% of net sales in 2008 and 2007, respectively.

Gross profit dollars totaled $53.3 million in the third quarter of 2008, a decline from the corresponding period a year ago due to lower rate and volume in 2008. Gross profit margin, as a percentage of net sales, decreased 50 basis-points from the third quarter of 2007 to 12.1% in the third quarter of 2008, primarily due to increased competitive pricing pressure in 2008.

Overall annualized sales productivity decreased 6% in the third quarter of 2008 compared to the third quarter of 2007. Sales productivity in our Large Account segment decreased 4% in the third quarter of 2008 compared to the third quarter of 2007. Sales productivity in our SMB segment decreased 11% year over year due to the hiring of new sales representatives. Sales productivity in our Public Sector segment increased 10% year over year primarily due to increased Federal contract sales in 2008. On a consolidated basis, the total number of sales representatives was 666 at September 30, 2008, compared to 645 at September 30, 2007.

Total selling, general and administrative expenses for the quarter increased year over year by $1.3million, or 2.9%, and increased as a percentage of net sales to 10.6% for the third quarter of 2008 from 10.0% for the third quarter of 2007. The year-over-year dollar and rate increases were primarily attributable to additional IT investment expected to improve sales productivity in 2009, and an increase in sales representative headcount, as well as the weaker demand environment that adversely affected such expenses as a percentage of net sales. Management implemented a number of cost reduction initiatives in the third quarter given the lower sales levels. These cost savings initiatives are expected to result in annualized savings of approximately $6 million.

"Given the state of the economy, we anticipated the lower sales volume experienced this quarter and began taking steps to decrease our operating costs," said Patricia Gallup, Chairman and Chief Executive Officer. "We will continue to carefully review and monitor every aspect of our business to ensure we have the right programs, people, and resources in place to operate in the most effective and efficient manner possible." Gallup concluded, "With our talented and experienced team, along with our healthy balance sheet, we believe we are well positioned to see our way through the challenges of the current marketplace."

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.

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"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 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 June 30, 2008. More specifically, the statements in this release concerning the Company's outlook for 2008 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. 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,                      2008                                       2007
(Dollars and shares in thousands, except operating data,                                 % of                                       % of             %
price/earnings ratio, and per share data)
                                                                                         Net Sales                                  Net Sales        Change
Operating Data:
Net sales                                                      $    441,444                               $    456,470                               (3   %)
Diluted earnings per share                                     $    .12                                   $    .28                                   (57  )
Gross profit margin                                                 12.1       %                               12.6       %
Operating margin                                                    1.1                                        2.6
Return on equity (1)                                                5.5                                        14.5
Catalogs distributed                                                2,965,000                                  3,199,000                             (7   %)
Orders entered (2)                                                  343,000                                    363,700                               (6   )
Average order size (2)                                         $    1,561                                 $    1,543                                 1
Inventory turns (1)                                                 22                                         22
Days sales outstanding                                              43                                         45
Product Mix:
Notebooks & PDAs                                               $    70,215               16    %          $    71,730               16    %          (2   %)
Video, Imaging & Sound                                              65,776               15                    65,236               14               1
Desktops/Servers                                                    59,169               13                    65,776               14               (10  )
Software                                                            56,039               13                    58,104               13               (4   )
Net/Com Products                                                    46,140               11                    37,924               8                22
Printers & Printer Supplies                                         41,557               9                     43,449               10               (4   )
Storage Devices                                                     35,565               8                     41,233               9                (14  )
Memory & System Enhancements                                        13,716               3                     20,460               4                (33  )
Accessories/Other                                                   53,267               12                    52,558               12               1
Total                                                          $    441,444              100   %          $    456,470              100   %          (3   %)
Net Sales of Enterprise Server and Networking Products (included
in the above Product Mix):
                                                               $    149,615              34    %          $    146,913              32    %          2    %
Stock Performance Indicators:
Actual shares outstanding                                           26,838                                     26,815
Total book value per share                                     $    8.85                                  $    8.10
Tangible book value per share                                  $    6.64                                  $    5.84
Closing price                                                  $    6.69                                  $    12.50
Market capitalization                                          $    179,546                               $    335,188
Trailing price/earnings ratio (3)                                   9                                          16
(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,          2008                               2007
                                              Net              Gross             Net              Gross
(Dollars in thousands)                        Sales            Margin (%)        Sales            Margin (%)
PC Connection Sales Corporation (SMB)         $   217,463      14.2   %          $   234,850      14.3   %
MoreDirect (Large Account)                        117,300      11.1                  130,027      11.5
GovConnection (Public Sector)                     106,681      8.9                   91,593       9.8
Total                                         $   441,444      12.1   %          $   456,470      12.6   %
CONSOLIDATED INCOME STATEMENTS
Three Months Ended September 30,                       2008                                       2007
(amounts in thousands, except per share data)      Amount               % of Net Sales        Amount               % of Net Sales
Net sales                                          $   441,444          100.0    %            $   456,470          100.0    %
Cost of sales                                          388,121          87.9                      398,940          87.4
Gross Profit                                           53,323           12.1                      57,530           12.6
Selling, general and administrative expenses           46,872           10.6                      45,572           10.0
Special charges                                        1,431            0.4                       -                -
Income From Operations                                 5,020            1.1                       11,958           2.6
Interest expense                                       (187     )       (0.1     )                (218     )       (0.1     )
Other, net                                             246              0.1                       192              0.1
Income tax provision                                   (1,865   )       (0.4     )                (4,247   )       (0.9     )
Net Income                                         $   3,214            0.7      %            $   7,685            1.7      %
Weighted average common shares outstanding:
Basic                                                  26,835                                     26,814
Diluted                                                26,892                                     27,017
Earnings per common share:
Basic                                              $   0.12                                   $   0.29
Diluted                                            $   0.12                                   $   0.28
CONSOLIDATED INCOME STATEMENTS
Nine Months Ended September 30,                        2008                                         2007
(amounts in thousands, except per share data)      Amount                 % of Net Sales        Amount                 % of Net Sales
Net sales                                          $   1,314,567          100.0    %            $   1,295,772          100.0    %
Cost of sales                                          1,151,660          87.6                      1,134,287          87.5
Gross Profit                                           162,907            12.4                      161,485            12.5
Selling, general and administrative expenses           140,438            10.7                      134,770            10.4
Special charges                                        1,431              0.1                       -                  -
Income From Operations                                 21,038             1.6                       26,715             2.1
Interest expense                                       (548       )       -                         (668       )       (0.1     )
Other, net                                             610                -                         653                0.1
Income tax provision                                   (8,025     )       (0.6     )                (9,877     )       (0.8     )
Net Income                                         $   13,075             1.0      %            $   16,823             1.3      %
Weighted average common shares outstanding:
Basic                                                  26,834                                       26,765
Diluted                                                26,941                                       27,009
Earnings per common share:
Basic                                              $   0.49                                     $   0.63
Diluted                                            $   0.49                                     $   0.62
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 Ended                        Nine Months Ended
(Amounts in thousands)                           2008                 2007                 2008                  2007
GAAP net income                           $      3,214         $      7,685         $      13,075         $      16,823
Special charges (after tax):
Management restructuring                         906                  -                    906                   -
Total special charges (after tax)                906                  -                    906                   -
Pro forma net income                      $      4,120         $      7,685         $      13,981         $      16,823
CONSOLIDATED BALANCE SHEETS                                       September 30,          December 31,
(amounts in thousands)                                                  2008                   2007
ASSETS
Current Assets:
Cash and cash equivalents                                         $     46,827           $     13,741
Accounts receivable, net                                                182,883                202,216
Inventories--merchandise                                                75,696                 76,090
Deferred income taxes                                                   2,968                  2,858
Income taxes receivable                                                 2,022                  345
Prepaid expenses and other current assets                               3,244                  4,322
Total current assets                                                    313,640                299,572
Property and equipment, net                                             24,900                 20,831
Goodwill                                                                56,867                 56,867
Other intangibles, net                                                  2,488                  3,291
Other assets                                                            303                    318
Total Assets                                                      $     398,198          $     380,879
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligation to affiliate       $     661              $     527
Accounts payable                                                        115,188                111,140
Accrued expenses and other liabilities                                  20,915                 20,557
Accrued payroll                                                         9,111                  10,816
Total current liabilities                                               145,875                143,040
Capital lease obligation to affiliate, less current maturities          3,792                  4,309
Deferred income taxes                                                   6,864                  5,436
Other liabilities                                                       4,037                  3,784
Total Liabilities                                                       160,568                156,569
Stockholders' Equity:
Common stock                                                            273                    273
Additional paid-in capital                                              95,390                 94,132
Retained earnings                                                       145,045                131,970
Treasury stock at cost                                                  (3,078   )             (2,065   )
Total Stockholders' Equity                                              237,630                224,310
Total Liabilities and Stockholders'                               $     398,198          $     380,879
Equity
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
Nine months ended September 30, 2008 (amounts in thousands)
                                                                     Common Stock               Additional                Retained           Treasury Shares
                                                                                                Paid-In Capital           Earnings
                                                                     Shares       Amount                                                     Shares          Amount            Total
Balance -- January 1, 2008                                           27,252       $    273      $      94,132             $     131,970      (327  )         ($2,065  )        $   224,310
Stock compensation expense                                           -                 -               1,096                    -            -               -                     1,096
Issuance of common stock under stock incentive plans, including      33                -               220                      -            -               -                     220
income tax benefits
Issuance of common stock under Employee Stock Purchase Plan          14                -               129                      -            -               -                     129
Repurchase of common stock for Treasury                              -                 -               -                        -            (128  )         (1,200   )            (1,200   )
Nonvested stock awards                                               -                 -               (187    )                -            26              187                   -
Net income                                                           -                 -               -                        13,075       -               -                     13,075
Balance -- September 30, 2008                                        27,299       $    273      $      95,390             $     145,045      (429  )         ($3,078  )        $   237,630
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (amounts in thousands)                   2008                       2007
Cash Flows from Operating Activities:
Net income                                                         $     13,075               $     16,823
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization                                            5,234                      5,158
Provision for doubtful accounts                                          1,396                      1,482
Deferred income taxes                                                    1,318                      512
Stock compensation expense                                               1,096                      202
Income tax benefit related to employee equity awards                     16                         889
Excess tax benefit from exercise of stock options                        (3       )                 (359     )
(Gain) loss on disposal of fixed assets                                  (13      )                 53
Changes in assets and liabilities:
Accounts receivable                                                      17,937                     (18,280  )
Inventories                                                              394                        (6,130   )
Prepaid expenses and other current assets                                (599     )                 256
Other non-current assets                                                 15                         91
Accounts payable                                                         4,225                      6,036
Accrued expenses and other liabilities                                   (1,149   )                 2,182
Net cash provided by operating activities                                42,942                     8,915
Cash Flows from Investing Activities:
Purchases of property and equipment                                      (8,708   )                 (5,184   )
Proceeds from sale of property and equipment                             44                         -
Net cash used for investing activities                                   (8,664   )                 (5,184   )
Cash Flows from Financing Activities:
Proceeds from short-term borrowings                                      37,343                     3,313
Repayment of short-term borrowings                                       (37,343  )                 (3,313   )
Repayment of capital lease obligation                                    (383     )                 (665     )
Purchase of treasury shares                                              (1,200   )                 -
Exercise of stock options                                                204                        2,544
Issuance of stock under Employee Stock Purchase Plan                     129                        134
Net share settlement obligation                                          55                         -
Excess tax benefit from exercise of stock options                        3                          359
Net cash (used for) provided by financing activities                     (1,192   )                 2,372
Increase in cash and cash equivalents                                    33,086                     6,103
Cash and cash equivalents, beginning of period                           13,741                     17,582
Cash and cash equivalents, end of period                           $     46,827               $     23,685
Noncash Financing Activity
Issuance of nonvested stock from Treasury                          $     187                        -

SOURCE: PC Connection, Inc.

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

Copyright Business Wire 2008

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