Pinnacle Data Systems, Inc. ("PDSi") (NYSE Amex: PNS) today
reported its financial results for the three months ended September
30, 2010.
John D. Bair, Chairman of the Board, President and Chief
Executive Officer, stated, "We are extremely pleased with the
continued profitable results that we have realized over the last
year from our focus on developing our Service business where our
engineering and operational capabilities are highly valued. Our
third quarter Service revenue was a record for PDSi, and was up 36%
compared to Q3 2009. Year-to-date Service revenue has increased 29%
compared to 2009. We have expanded our EMEA facility capabilities
including complex board level repair, BGA replacement, and software
diagnostics. Our ability to provide these higher level services
in-region is a key component of our global growth strategy."
"We are still working to develop our pipeline of Product
business," Mr. Bair continued. "Our renewed focus on specialized
design services and product integration has not yet overcome
downward trends that are a result of our past strategic and
marketing focus on standard embedded products. We are continuing to
deploy resources to develop new Product business to offset this
trend."
Total sales were $6.3 million for the 2010 third quarter, down
$1.7 million, or 21%, versus the second quarter of 2010. However,
because of the shift in mix toward the growing Service segment,
gross profit as a percentage of sales improved to 35% for the
quarter -- PDSi's highest gross margin since 2002. Timothy J.
Harper, Chief Operating Officer, added, "The strong growth that we
continue to see in our Service business has allowed us to maintain
our margins on a dollar-basis, and maintain continued overall
profitability for the Company. As we move forward, we are committed
to devoting additional resources to continue this Service growth
and to develop our Product business by targeting markets requiring
our high value-added engineering."
The $1.7 million, or $0.21 per diluted share, profit reported
for the third quarter includes a $1.3 million, or $0.17 per diluted
share, net benefit related to the reversal of most of the deferred
tax asset valuation allowance that was established in the third
quarter of 2009. This net benefit includes a $1.4 million benefit
from reversing the valuation allowance, partially offset by $0.1
million of tax expense associated with adjusting the U.S. effective
tax rate on earnings generated in the first and second quarters of
2010. "With our third sequential quarter of profitable operating
results since we took actions last year to refocus the business on
our core Service and Product offerings, we have demonstrated that
the Company has made fundamental strategic and structural changes
to better support sustained profitability," commented Nicholas J.
Tomashot, Chief Financial Officer.
Cash generated from operations was $0.1 million, the seventh
sequential quarter with positive operating cash flow. "We are
pleased with the cash flow benefits we are realizing from our
return to profitability and our continued focus on managing our net
working capital," Mr. Bair added. "Cash generated from operations
during 2010 was $1.8 million, and we have reduced our line of
credit balance from $2.4 million at the end of 2009 to $0.3 million
at the end of the third quarter."
Financial Results
Net Income (Loss)
Net income for the third quarter of 2010 was $1.7 million, or
$0.21 per diluted share. This compares to a net loss of $2.1
million, or $0.27 per diluted share, for the same quarter last
year. The third quarters of 2009 and 2010 were both impacted by
adjustments to the Company's deferred tax valuation allowance. The
results for Q3 2009 included a $1.6 million non-cash charge to
establish the allowance, and Q3 2010 includes a $1.3 million
non-cash net benefit related to the reversal of all but the portion
of the allowance related to certain state net operating loss
carryforwards. The following is a summary of the components of the
Company's income tax expense (benefit) for the third quarters of
2010 and 2009 (see the Company's Form 10-Q filing for additional
disclosures related to these tax items).
$ thousands Q3 2010 Q3 2009
-------- --------
Income (loss) before income taxes $ 490 ($ 752)
-------- --------
Income tax expense (benefit)
Income tax expense (benefit) related to the period 155 (274)
True-up 2010 year-to-date tax provision 93 -
Establish (reverse) deferred tax valuation allowance (1,431) 1,611
-------- --------
Net income tax expense (benefit) (1,183) 1,337
-------- --------
Net income (loss) $ 1,673 ($ 2,089)
======== ========
Sales
Total sales declined 10% to $6.3 million for the 2010 third
quarter from $7.1 million for the same quarter a year ago. Third
quarter Product sales declined 43% to $2.3 million in 2010 from
$4.1 million in 2009. This decline primarily was attributable to
significantly lower sales to larger imaging and diversified
computing OEM customers. Service sales increased $1.1 million, or
36%, to $4.0 million for the 2010 third quarter, with the growth
attributable to the ramp of business in the U.S. and EMEA for both
new customers and new programs within existing customers.
Gross Profit
Gross profit improved 42% to $2.2 million for the 2010 third
quarter, from $1.6 million for the same quarter last year. Gross
margin as a percentage of revenue improved from 22% to 35% compared
to last year. The gross profit improvement on lower year-on-year
total sales revenue was attributable to the change in mix driven by
the growth of higher-margin Service segment revenue. Within the
Service segment, margins as a percentage of revenue improved from
29% to 47%, driven by a shift toward higher margin programs and
improved operating leverage on increased sales. Product gross
margin declined compared to prior year from 18% to 16%, driven by
reduced operating leverage on reduced sales, partially offset by a
shift in mix toward higher-contribution Product business.
Operating Expenses
Operating expenses were reduced 24% to $1.7 million for the 2010
third quarter from $2.3 million a year ago, reflecting the benefit
of actions taken over the past year to better focus resources on
the Company's core products and services growth strategy. Wages and
other employee costs accounted for most of the reduction.
Additional savings were realized across multiple areas, including
company funded research and development expenses, reflecting the
Company's strategic focus on developing customer-specific solutions
through customer funded development projects.
Interest Expense
Interest expense for the 2010 third quarter was reduced 90% to
$4,000 from $40,000 for the same quarter last year due to lower
average debt outstanding. Debt outstanding was reduced to $0.3
million from $1.7 million at the end of the prior year third
quarter.
Recent PDSi Highlights
-- Service segment revenue for Q3 2010 of $4.0 million set a new quarterly
record for PDSi, eclipsing the previous high of $3.5 million in Q4
2005.
-- On July 7, PDSi announced it had successfully completed a full
recertification audit of its quality systems registrations, which
include its ISO 9001:2008 Quality Management Systems; ISO 14001:2004
Environmental Management Systems; ISO 13485:2003 Medical
Devices-Quality Management Systems; and TL9000-H,V R5.0/R4.0, a
telecommunications standard published by the Quality Excellence for
Suppliers of Telecommunications (QuEST) Forum. These certifications
reflect PDSi's ongoing commitment to quality, and place it among the
best-in-class companies that have achieved and sustained the high
quality systems standards required for these registrations.
-- On October 4, PDSi announced that it had achieved Gold Partner status
in the Oracle PartnerNetwork (OPN). By attaining Gold Level membership,
Oracle has recognized PDSi for its capability and commitment to design,
deliver and support Oracle-based technology solutions customized to
customers' specialized needs.
Conference Call
PDSi will host a conference call on Thursday, October 28, 2010,
at 11 a.m. EDT. John D. Bair, President, Chief Executive Officer,
and Chief Technology and Innovation Officer; Timothy J. Harper,
Chief Operating Officer; and Nicholas J. Tomashot, Chief Financial
Officer, will discuss the Company's 2010 third quarter results.
The telephone number to participate in the conference call is
(877) 485-3107. A slide presentation will be referenced during the
call, which may be accessed at the PDSi website (www.pinnacle.com)
by clicking on "Investor Relations" and then "Conference Calls." An
audio replay of the call will be available through the Investor
Relations section of the Company's website approximately one hour
following the conference call.
About PDSi
PDSi is a global provider of Electronics Repair and Reverse
Logistics Services, ODM/OEM Integrated Computing Services, and
Embedded Computing Products and Design Services for the Diversified
Computing, Telecom, Imaging, Defense/Aerospace, Medical,
Semiconductor and Industrial Automation markets. PDSi provides a
variety of engineering and manufacturing services for global OEMs
requiring custom product design, system integration, repair
programs, warranty management, and/or specialized production
capabilities. With facilities in the U.S., Europe and Asia, we
ensure seamless support for solutions all around the world.
More than just an ODM, integrator or reverse logistics provider,
PDSi's engineering, technical and operational capabilities span the
entire product lifecycle allowing us to better understand and
develop custom solutions for each of our customer's unique
requirements. Our product capabilities range from board-level
designs to globally certified, fully integrated systems,
specializing in long-life computer products and unique,
customer-centric solutions. Our capability to perform higher-level
repair services in-region allows us to customize solutions for our
customers so that they can deliver world-class service levels to
their customers with reduced logistics, component replacement and
inventory costs.
"PDSi puts computer technologies to work for our customers."
For more information, visit the PDSi website at
www.pinnacle.com.
Safe Harbor Statement
Portions of this release include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, but
not limited to, statements regarding the Company achieving its
financial growth and profitability goals, or its sales, earnings
and profitability expectations for the fiscal year ending December
31, 2010. The words "believe," "expect," "anticipate," "estimate,"
"intend," "seek," "may" and similar expressions identify
forward-looking statements that speak only as of the date of this
release. Investors are cautioned that such statements involve risks
and uncertainties that could cause actual results to differ
materially from historical or anticipated results due to many
factors. These factors include, but are not limited to, the
following:
-- changes in general economic conditions, including prolonged or
substantial economic downturn, and any related financial difficulties
experienced by original equipment manufacturers, end users, customers,
suppliers or others with whom the Company does business;
-- changes in customer order patterns;
-- changes in our business or our relationship with major technology
partners or significant customers;
-- failure to maintain adequate levels of inventory;
-- production components and service parts cease to be readily available
in the marketplace;
-- lack of adequate financing to meet working capital needs or to take
advantage of business and future growth opportunities that may arise;
-- inability of cost reduction initiatives to lead to a realization of
savings in labor, facilities or other operational costs;
-- deviation of actual results from estimates and/or assumptions used by
the Company in the application of its significant accounting policies;
-- lack of success in technological advancements;
-- inability to retain certifications, authorizations or licenses to
provide certain products and/or services;
-- risks associated with new business practices, processes and information
systems;
-- impact of judicial rulings or government regulations, including related
compliance costs;
-- disruption in the business of suppliers, customers or service providers
due to adverse weather, casualty events, technological difficulty, acts
of war or terror, or other causes;
-- risks associated with doing business internationally, including
economic, political and social instability and foreign currency
exposure; and
-- other factors from time to time described in the Company's filings with
the United States Securities and Exchange Commission ("SEC").
The Company undertakes no obligation to publicly update or
revise any such statements, except as required by applicable law.
For more details, please refer to the Company's SEC filings,
including its most recent Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q.
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2010 2009
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 124 $ 323
Accounts receivable, net of allowance for
doubtful accounts of $143 and $232,
respectively 4,830 5,932
Inventory, net 3,385 3,754
Deferred income taxes 809 22
Prepaid expenses and other current assets 473 503
----------- -----------
Total current assets 9,621 10,534
----------- -----------
PROPERTY AND EQUIPMENT
Property and equipment, cost 6,024 5,899
Less accumulated depreciation and amortization (5,297) (5,038)
----------- -----------
Total property and equipment, net 727 861
----------- -----------
OTHER ASSETS
Goodwill 780 821
Other assets 541 359
----------- -----------
Total other assets 1,321 1,180
----------- -----------
TOTAL ASSETS $ 11,669 $ 12,575
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 337 $ 2,413
Accounts payable 1,857 2,694
Accrued wages, payroll taxes and employee
benefits 596 1,014
Unearned revenue 147 85
Other current liabilities 669 555
----------- -----------
Total current liabilities 3,606 6,761
LONG-TERM LIABILITIES
Accrued other 190 226
----------- -----------
TOTAL LIABILITIES 3,796 6,987
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 5,779 5,769
Additional paid-in capital 1,947 1,912
Accumulated other comprehensive income (loss) (71) (29)
Retained earnings (deficit) 218 (2,064)
----------- -----------
Total stockholders' equity 7,873 5,588
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 11,669 $ 12,575
=========== ===========
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------ ------------------
2010 2009 2010 2009
-------- -------- -------- --------
Sales $ 6,314 $ 7,050 $ 23,094 $ 26,975
Cost of sales 4,088 5,478 16,484 21,385
-------- -------- -------- --------
Gross profit 2,226 1,572 6,610 5,590
Operating expenses 1,732 2,284 5,295 7,534
-------- -------- -------- --------
Income (loss) from operations 494 (712) 1,315 (1,944)
Other expense
Interest expense 4 40 45 142
-------- -------- -------- --------
Income (loss) before income
taxes 490 (752) 1,270 (2,086)
Income tax expense (benefit) (1,183) 1,337 (1,012) 974
-------- -------- -------- --------
Net income (loss) $ 1,673 $ (2,089) $ 2,282 $ (3,060)
======== ======== ======== ========
Weighted average common shares
outstanding:
Basic 7,842 7,825 7,831 7,825
Diluted 8,011 7,825 7,960 7,825
Earnings (loss) per common share:
Basic $ 0.21 $ (0.27) $ 0.29 $ (0.39)
Diluted 0.21 (0.27) 0.29 (0.39)
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months Ended
September 30,
------------------------
2010 2009
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,282 $ (3,060)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Bad debt expense (19) 140
Inventory reserves 246 572
Depreciation and amortization 298 423
Provision for deferred income taxes (1,037) 1,611
Share-based payment expense 34 137
Decrease in assets:
Accounts receivable 1,111 5,977
Inventory 113 507
Prepaid expenses and other assets 16 84
Increase (decrease) in liabilities:
Accounts payable (956) (2,237)
Unearned revenue 62 213
Other current liabilities (317) (288)
----------- -----------
Total adjustments (449) 7,139
----------- -----------
Net cash provided by operating
activities 1,833 4,079
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (150) (237)
----------- -----------
Net cash used in investing activities (150) (237)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit (2,076) (3,679)
Net change in outstanding checks 136 (73)
Other 59 (155)
----------- -----------
Net cash used in financing activities (1,881) (3,907)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (1) 8
----------- -----------
DECREASE IN CASH (199) (57)
Cash at beginning of period 323 282
----------- -----------
Cash at end of period $ 124 $ 225
=========== ===========
Contact: Nick Tomashot Chief Financial Officer (614) 748-1150
Email Contact
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