$ thousands Q4 2010 Q4 2009
---------- ----------
Income (loss) before income taxes $ 403 $ (699)
---------- ----------
Income tax expense (benefit)
Income tax expense (benefit) related to the
quarter 102 (18)
R&D tax credit benefit (480) -
Deferred tax carryback benefit - (291)
---------- ----------
Net tax benefit (378) (309)
---------- ----------
Net income (loss) $ 781 $ (390)
========== ==========
Sales
Total sales declined 27% to $6.4 million for the 2010 fourth quarter from
$8.7 million for the same quarter a year ago. Fourth quarter Product sales
declined 51% to $2.6 million in 2010 from $5.3 million in 2009. This
decline primarily was attributable to significantly lower sales to larger
imaging and diversified computing OEM customers. Service sales increased
$0.4 million, or 12%, to $3.7 million for the 2010 fourth 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 24% to $2.1 million for the 2010 fourth quarter, from
$1.7 million for the same quarter last year. The 2009 fourth quarter gross
profit included a nonrecurring inventory charge of $0.1 million, or 1.6% of
revenue, related to implementing the plan described earlier to refocus the
business. Gross margin as a percentage of revenue improved from 20% to 34%
compared to last year. The gross profit improvement on lower year-on-year
total sales largely 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 35% to 41%,
driven by a shift toward higher margin programs and improved operating
leverage on increased sales. Product gross margin improved compared to the
prior year quarter from 10% to 24%, driven by a shift in mix toward higher
margin Product business.
Operating Expenses
Operating expenses were reduced 27% to $1.7 million for the 2010 fourth
quarter from $2.4 million a year ago. The fourth quarter of 2009 included
$0.8 million in severance expenses related to implementing the
aforementioned plan to refocus the business.
Interest Expense
Interest expense for the 2010 fourth quarter was reduced 82% to $6,000 from
$34,000 for the same quarter last year due to lower average debt
outstanding. Debt outstanding was reduced to less than $0.3 million from
$2.4 million at the end of the prior year fourth quarter.
2010 Annual Financial Results
Net Income (Loss)
Net income for 2010 was $3.1 million, or $0.38 per diluted share. This
compares to a net loss of $3.5 million, or $0.44 per diluted share, for
2009. In addition to the $1.0 million of severance and other charges
related to the Q4 2009 implementation of the Company's plan to focus on its
core Service business and current product offerings, flatten its
organizational structure, and reduce overhead costs, both 2009 and 2010
were impacted by several significant nonrecurring tax items. These tax
items (which for clarity are broken out in the table below) included a Q3
2009 $1.6 million non-cash charge to establish a deferred tax valuation
allowance; a Q3 2010 $1.5 million non-cash net benefit for the reversal of
all but the portion of the valuation allowance related to certain state net
operating loss carryforwards; a Q4 2009 $0.3 million tax benefit associated
with Federal tax law changes allowing a longer carryback of losses for
application against previous years' earnings; and a Q4 2010 $0.5 million
R&D tax credit benefit. (See the Company's upcoming Form 10-K filing for
the year ended December 31, 2010 for additional disclosures related to
these tax items).
$ thousands FY 2010 FY 2009
---------- ----------
Income (loss) before income taxes $ 1,673 $ (2,785)
---------- ----------
Income tax expense (benefit)
Income tax expense (benefit) related to the year 582 (615)
Deferred tax valuation allowance expense
(benefit) (1,492) 1,571
R&D tax credit benefit (480) -
Deferred tax carryback benefit - (291)
---------- ----------
Net tax expense (benefit) (1,390) 665
---------- ----------
Net income (loss) $ 3,063 $ (3,450)
========== ==========
Sales
Total sales declined 17% to $29.4 million for 2010 from $35.6 million for
2009. Product sales declined 36% to $15.7 million in 2010 from $24.5
million in 2009. This decline primarily was attributable to significantly
lower sales to larger imaging, medical and diversified computing OEM
customers. Service sales increased $2.6 million, or 23%, to $13.7 million
for 2010, 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 20% to $8.8 million for 2010, from $7.3 million for
2009. The 2009 gross profit included a fourth quarter nonrecurring
inventory charge of $0.1 million, or 0.4% of revenue, related to
implementing the plan described earlier to refocus the business. Gross
margin as a percentage of revenue improved from 21% to 30% compared to last
year. The gross profit and gross margin improvement on lower year-on-year
total sales 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 33% to 42%, driven by a shift
toward higher margin programs and improved operating leverage on increased
sales. Product gross margin improved compared to prior year from 15% to
20%, driven by a shift in mix toward higher margin Product business.
Operating Expenses
Operating expenses were reduced 29% to $7.0 million for 2010 from $9.9
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 R&D expenses, reflecting the Company's strategic
focus on developing customer-specific solutions through customer funded
development projects. The fourth quarter of 2009 included $0.8 million in
severance expenses discussed previously related to implementing this plan.
Interest Expense
Interest expense for 2010 was reduced 70% to $51,000 from $176,000 in 2009
due to lower average debt outstanding. Debt outstanding was reduced to
$0.3 million from $1.7 million at the end of 2009.
Recent PDSi Highlights
-- Service segment revenue for 2010 of $13.7 million set an annual record
for PDSi, eclipsing the previous high of $11.1 million in 2009.
-- On December 2, 2010, PDSi announced a powerful upgrade to its
military-proven ATCA-F1 Compute Blade. Incorporating Dual, Six Core
AMD Istanbul processors delivers 12 cores, providing a performance
boost versus the Shanghai (8 cores) or Santa Rosa (4 cores)
configurations. In addition, a new 32 GB memory option brings enhanced
virtualization performance.
-- On October 4, 2010, PDSi announced that it had achieved Gold Partner
status in the Oracle PartnerNetwork. 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, March 3, 2011, at 11:00 a.m.
EST. 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 fourth quarter and annual 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 year
ending December 31, 2011. 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)
December 31,
--------------------------
2010 2009
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 465 $ 323
Accounts receivable, net of allowance for
doubtful accounts of $106 and $232,
respectively 4,469 5,932
Inventory, net 3,226 3,754
Deferred income taxes 762 22
Prepaid expenses and other current assets 492 503
------------ ------------
Total current assets 9,414 10,534
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment, cost 6,056 5,899
Less accumulated depreciation and amortization (5,371) (5,038)
------------ ------------
Total property and equipment, net 685 861
------------ ------------
OTHER ASSETS
Goodwill 767 821
Deferred income taxes 929 52
Other assets 193 307
------------ ------------
Total other assets 1,889 1,180
------------ ------------
TOTAL ASSETS $ 11,988 $ 12,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 273 $ 2,413
Accounts payable 1,404 2,694
Accrued wages, payroll taxes and employee
benefits 581 1,014
Unearned revenue 30 85
Other current liabilities 743 555
------------ ------------
Total current liabilities 3,031 6,761
LONG-TERM LIABILITIES
Accrued other 296 226
------------ ------------
TOTAL LIABILITIES 3,327 6,987
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 5,790 5,769
Additional paid-in capital 1,962 1,912
Accumulated other comprehensive income (loss) (90) (29)
Retained earnings (deficit) 999 (2,064)
------------ ------------
Total stockholders' equity 8,661 5,588
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 11,988 $ 12,575
============ ============
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
For the Three Months For the Years Ended
Ended December 31, December 31,
------------------------ ------------------------
2010 2009 2010 2009
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Sales $ 6,351 $ 8,663 $ 29,445 $ 35,638
Cost of sales 4,205 6,935 20,689 28,320
----------- ----------- ----------- -----------
Gross profit 2,146 1,728 8,756 7,318
Operating expenses 1,737 2,393 7,032 9,927
----------- ----------- ----------- -----------
Income (loss) from
operations 409 (665) 1,724 (2,609)
Other expense
Interest expense 6 34 51 176
----------- ----------- ----------- -----------
Income (loss)
before income taxes 403 (699) 1,673 (2,785)
Income tax expense
(benefit) (378) (309) (1,390) 665
----------- ----------- ----------- -----------
Net income (loss) $ 781 $ (390) $ 3,063 $ (3,450)
=========== =========== =========== ===========
Weighted average common
shares outstanding:
Basic 7,854 7,825 7,837 7,825
Diluted 8,098 7,825 8,021 7,825
Earnings (loss) per
common share:
Basic $ 0.10 $ (0.05) $ 0.39 $ (0.44)
Diluted 0.10 (0.05) 0.38 (0.44)
PINNACLE DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
--------------------------
2010 2009
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,063 $ (3,450)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Bad debt expense (55) 169
Inventory reserves 318 1,084
Depreciation and amortization 387 538
Loss on disposal of equipment - 6
Provision (benefit) for deferred income
taxes (1,638) 992
Share-based payment expense 50 115
(Increase) decrease in assets:
Accounts receivable 1,492 5,460
Inventory 197 612
Prepaid expenses and other assets 36 380
Increase (decrease) in liabilities:
Accounts payable (1,392) (1,810)
Unearned revenue (54) (53)
Other liabilities (143) 85
------------ ------------
Total adjustments (802) 7,578
------------ ------------
Net cash provided by operating
activities 2,261 4,128
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (190) (287)
------------ ------------
Net cash used in investing
activities (190) (287)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit (2,140) (2,995)
Net change in outstanding checks 126 (662)
Other 87 (147)
------------ ------------
Net cash used in financing
activities (1,927) (3,804)
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH (2) 4
------------ ------------
INCREASE IN CASH 142 41
Cash at beginning of year 323 282
------------ ------------
Cash at end of year $ 465 $ 323
============ ============
Contact Information: Contact: Nick Tomashot Chief Financial Officer (614) 748-1150