UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 5, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20022
POMEROY IT SOLUTIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
- -------- ----------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares of common stock outstanding as of April 30, 2005 was
12,583,945
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of April
5, 2005 (Unaudited) and January 5, 2005 3
Consolidated Statements of Income for
the Three Months Ended April 5, 2005
and 2004 (Unaudited) 5
Consolidated Statements of
Comprehensive Income for the Three 6
Months Ended April 5, 2005 and 2004
(Unaudited)
Consolidated Statements of Cash Flows
for the Three Months Ended April 5, 2005
and 2004 (Unaudited) 7
Notes to Consolidated Financial
Statements (Unaudited) 8
Management's Discussion and Analysis of
Financial Condition and Results of
Item 2. Operations 12
Quantitative and Qualitative Disclosure
Item 3. about Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information 18
Item 1. Legal Proceedings 18
Unregistered Sales of Equity Securities
Item 2. and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Submission of Matters to a Vote of
Item 4. Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2005 2005
------------ -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 30 $ 13,108
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . 4,576 4,561
Accounts receivable:
Trade, less allowance of $2,031 at April 5, 2005 and $1,462
at January 5, 20053BT . . . . . . . . . . . . . . . . . . 121,773 143,113
Vendor receivables, less allowance of $100 at
April 5, 2005 and January 5, 2005 . . . . . . . . . . . . 5,804 5,790
Net investment in leases. . . . . . . . . . . . . . . . . . . 3,118 3,814
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905 2,902
------------ -----------
Total receivables. . . . . . . . . . . . . . . . . . . . 132,600 155,619
------------ -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,650 17,188
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,858 10,302
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . 161,714 200,778
------------ -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . . . . . . 30,036 30,113
Leasehold Improvements. . . . . . . . . . . . . . . . . . . . 6,323 6,187
------------ -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 36,359 36,300
Less accumulated depreciation. . . . . . . . . . . . . . . . . 21,626 21,061
------------ -----------
Net equipment and leasehold improvements . . . . . . . . 14,733 15,239
------------ -----------
Net investment in leases, net of current portion. . . . . . . . . 2,425 1,650
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,902 109,913
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 3,434 3,702
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,753 1,606
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 294,961 $ 332,888
============ ===========
See notes to consolidated financial statements.
1
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2005 2005
------------ ------------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable. . . . . . . . . . . . . . . . $ - $ 912
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . 1,584 20,153
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 56,938 72,656
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 2,898 3,490
Employee compensation and benefits. . . . . . . . . . . . . . . 5,141 8,245
Accrued restructuring and severance charges . . . . . . . . . . 4,914 7,585
Other current liabilities . . . . . . . . . . . . . . . . . . . 5,393 6,778
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . 76,868 119,819
------------ ------------
Notes payable, less current portion . . . . . . . . . . . . . . - 250
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 375 97
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares
(no shares issued or outstanding). . . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares
(13,341 and 13,188 shares issued at April 5, 2005 and
January 5, 2005, respectively) . . . . . . . . . . . . . . 133 132
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 87,229 85,231
Accumulated other comprehensive income (loss) . . . . . . . . 24 (78)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 139,078 136,183
------------ ------------
226,464 221,468
Less treasury stock, at cost ( 778 shares at April 5, 2005
and January 5, 2005) . . . . . . . . . . . . . . . . . . . 8,746 8,746
------------ ------------
Total equity . . . . . . . . . . . . . . . . . . . . . . 217,718 212,722
------------ ------------
Total liabilities and equity . . . . . . . . . . . . . . $ 294,961 $ 332,888
============ ============
See notes to consolidated financial statements.
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data) Three Months Ended
--------------------------
April 5, April 5,
2005 2004
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing . . . . $ 111,313 $ 124,599
Service . . . . . . . . . . . . . . . . . . . 54,277 30,615
------------ ------------
Total net sales and revenues . . . . . . . 165,590 155,214
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing . . . . 102,424 114,573
Service . . . . . . . . . . . . . . . . . . . 37,309 22,272
------------ ------------
Total cost of sales and service. . . . . . 139,733 136,845
------------ ------------
Gross profit. . . . . . . . . . . . . 25,857 18,369
------------ ------------
Operating expenses:
Selling, general and administrative . . . . 18,575 12,967
Rent expense. . . . . . . . . . . . . . . . 854 768
Depreciation. . . . . . . . . . . . . . . . 1,073 889
Amortization. . . . . . . . . . . . . . . . 268 40
------------ ------------
Total operating expenses. . . . . . . 20,770 14,664
------------ ------------
Income from operations . . . . . . . . . . . . 5,087 3,705
------------ ------------
Other expense (income):
Interest, net . . . . . . . . . . . . . . . 221 (12)
Other . . . . . . . . . . . . . . . . . . . - 2
------------ ------------
Total other expense (income). . . . . 221 (10)
------------ ------------
Income before income tax. . . . . . . . . . . 4,866 3,715
Income tax expense . . . . . . . . . . . . . . 1,971 1,439
------------ ------------
Net income . . . . . . . . . . . . . . . . . . $ 2,895 $ 2,276
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . 12,469 12,231
============ ============
Diluted . . . . . . . . . . . . . . . . . . 12,717 12,401
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.19
============ ============
Diluted . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.18
============ ============
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Three Months Ended
--------------------------
April 5, April 5,
2005 2004
------------ ------------
(unaudited) (unaudited)
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,895 $ 2,276
Other comprehensive income:
Foreign currency translation adjustment, net of tax. 102 -
------------ ------------
Comprehensive income . . . . . . . . . . . . . . . . . . $ 2,997 $ 2,276
============ ============
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended
--------------------------
April 5, April 5,
2005 2004
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,895 $ 2,276
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,073 889
Amortization . . . . . . . . . . . . . . . . . . . . . . . 268 40
Deferred income taxes. . . . . . . . . . . . . . . . . . . 998 197
Loss on sale of fixed assets . . . . . . . . . . . . . . . 1 3
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . 22,019 14,480
Inventories . . . . . . . . . . . . . . . . . . . . . . 350 (9,932)
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . 1,723 225
Net investment in leases. . . . . . . . . . . . . . . . 226 (281)
Accounts payable. . . . . . . . . . . . . . . . . . . . (15,718) 564
Deferred revenue. . . . . . . . . . . . . . . . . . . . (592) (906)
Income tax payable. . . . . . . . . . . . . . . . . . . (322) 363
Employee compensation and benefits. . . . . . . . . . . (3,104) 1,345
Other, net. . . . . . . . . . . . . . . . . . . . . . . (4,823) 201
------------ ------------
Net operating activities . . . . . . . . . . . . . . . . . 4,994 9,464
------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . (386) (251)
Proceeds from sale of fixed assets . . . . . . . . . . . . 6 -
Purchases of certificates of deposit . . . . . . . . . . . (15) (1,506)
Acquisition of businesses, net of
cash acquired . . . . . . . . . . . . . . . . . . . . . (547) (438)
------------ ------------
Net investing activities . . . . . . . . . . . . . . . . . (942) (2,195)
------------ ------------
Cash flows from financing activities:
Payments of notes payable. . . . . . . . . . . . . . . . . (662) (662)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . . . . . . . . 1,999 320
Payments of short-term borrowings. . . . . . . . . . . . . (18,569) -
------------ ------------
Net financing activities . . . . . . . . . . . . . . . . . (17,232) (342)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents. 102 -
------------ ------------
Change in cash and cash equivalents . . . . . . . . . . . . . (13,078) 6,927
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . 13,108 37,183
------------ ------------
End of period. . . . . . . . . . . . . . . . . . . . . . . $ 30 $ 44,110
============ ============
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("US GAAP") for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by US
GAAP for complete financial statements. Except as disclosed herein, there
has been no material change in the information disclosed in the notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K and Form 10-K/A for the year ended January 5, 2005. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the interim periods have
been made. The results of operations for the three-month period ended April
5, 2005 are not necessarily indicative of the results that may be expected
for future interim periods or for the year ending January 5, 2006.
2. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter
4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4,
"Inventory Pricing," that inventories are presumed to be stated at cost;
however, it amends ARB No. 43 to clarify that abnormal amounts of idle
facilities, freight, handling costs and spoilage should be recognized as
current period expenses. Also, SFAS No. 151 requires fixed overhead costs
be allocated to inventories based on normal production capacity. The
guidance in SAFS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company believes that
implementing SFAS No. 151 should not have any material impact on its
financial condition, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual period of
an entity's first fiscal year beginning after June 15, 2005, with early
adoption encouraged. The Company expects to adopt SFAS No. 123R effective
January 6, 2006. The pro forma disclosures previously permitted under SFAS
123 no longer will be an alternative to financial statement recognition.
Under SFAS 123R, we must determine the appropriate fair value model to be
used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption.
SFAS No. 123R will apply to awards granted or modified by the Company
after January 5, 2006. Compensation cost will also be recorded for prior
option grants that vest after that date. The effect of adopting SFAS 123 on
the Company's consolidated results of operations will depend on the level
of future option grants and the fair value of the options granted at such
future dates, as well as the vesting periods provided by such awards and,
therefore, cannot currently be estimated. We are evaluating the
requirements of SFAS 123R and have not yet determined the method of
adoption or the effect of adopting SFAS 123R, and we have not determined
whether the adoption will result in amounts that are similar to the current
pro forma disclosures under SFAS 123.
6
3. Cash and Short-Term Borrowings
The Company has a $165.0 million Syndicated Credit Facility Agreement
with GE Commercial Distribution Finance. The credit facility has a
three-year term and its components include a maximum of $75.0 million for
inventory financing as described above and a revolver, collateralized
primarily by accounts receivable, of up to $110.0 million. The credit
facility also provides a letter of credit facility of $5.0 million.
Interest on outstanding borrowings under the credit facility is payable
monthly based on the LIBOR rate and a pricing grid. This credit facility
expires June 28, 2007.
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards balances
outstanding under the Company's credit facility. As of April 5, 2005, the
Company had an outstanding balance under the Company's credit facility of
$1.6 million. As of January 5, 2005, the Company had an outstanding balance
under the Company's credit facility of $20.2 million.
Under the terms of the credit facility, Pomeroy is subject to various
financial covenants including maintenance of a minimum level of tangible
net worth, a minimum fixed charge coverage ratio and a maximum ratio of
total funded indebtedness to EBITDA. As of April 5, 2005, Pomeroy was in
compliance with those financial covenants.
4. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the amount an
employee must pay to acquire the stock. The Company adopted SFAS No. 123
for disclosure purposes and for non-employee stock options.
Had compensation cost for the Company's stock option plans been
determined based on the fair value of the awards at the grant date
consistent with the provisions of SFAS No. 123, as amended by SFAS No.148,
"Accounting for Stock-Based Compensation-Transition and Disclosure," the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
(in thousands, except per Three Months Ended April 5,
share amounts) 2005 2004
------------- ---------------
Net income - as reported $ 2,895 $ 2,276
Stock-based compensation expense-net of tax 1,092 539
------------- ---------------
Net income - pro forma $ 1,803 $ 1,737
============= ===============
Net income per common share - as reported
Basic $ 0.23 $ 0.19
============= ===============
Diluted $ 0.23 $ 0.18
============= ===============
Net income per common share - pro forma
Basic $ 0.14 $ 0.14
============= ===============
Diluted $ 0.14 $ 0.14
============= ===============
7
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the
basic EPS and diluted EPS computations: (in thousands, except per share
data)
Three Months Ended April 5,
----------------------------------------------------------------
2005 2004
----------------------------- ---------------------------------
Per Share Per Share
Shares Amount Shares Amount
------------ --------------- --------------- ----------------
Basic EPS 12,469 $ 0.23 12,231 $ 0.19
Effect of dilutive
stock options 248 - 170 0.01)
------------ --------------- --------------- ----------------
Diluted EPS 12,717 $ 0.23 12,401 $ 0.18
============ =============== =============== ================
6. Goodwill and Long-Lived Assets
Intangible assets with definite lives are amortized using
straight-line and accelerated methods over their estimated useful lives.
The following table provides a summary of the Company's intangible assets
with definite lives as of April 5, 2005 and January 5, 2005:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
4/5/2005 4/5/2005 4/5/2005 1/5/2005 1/5/2005 1/5/2005
----------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 2,024 $ 1,805 $ 219 $ 2,024 $ 1,769 $ 255
Customer lists 2,877 748 2,129 2,877 559 2,318
Other Intangibles 1,200 114 1,086 1,200 71 1,129
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 6,101 $ 2,667 $ 3,434 $ 6,101 $ 2,399 $ 3,702
========= ============= ========= ========= ============= =========
8
Amortized intangible assets are being amortized over periods ranging
from 1 to 15 years for covenants not-to-compete, 7 to 15 years for customer
lists and 7 years for other intangibles. For the quarter ended April 5,
2005, amortization expense related to intangible assets was $268 thousand.
For the quarter ended April 5, 2004, amortization expense related to
intangible assets was $40 thousand.
Projected future amortization expense related to intangible assets
with definite lives are as follows:
(in thousands)
Fiscal Years:
2005 $ 496 April 6, 2005 - January 5, 2006
2006 543
2007 504
2008 461
2009 421
2010 + 1,009
------
Total $3,434
======
The change in the net carrying amount of goodwill for the three months
ended April 5, 2005 by segment are as follows:
(in thousands) Products Services Consolidated
---------- --------- --------------
Net carrying amount as of 1/5/05 $ 36,060 $ 73,853 $ 109,913
Net goodwill recorded during first quarter (54) 43 (11)
---------- --------- --------------
Net carrying amount as of 4/5/05 $ 36,006 $ 73,896 $ 109,902
========== ========= ==============
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and
non-cash investing and financing activities are as follows: (in thousands)
Three Months Ended April 5,
-------------------------------
2005 2004
-------------- ---------------
Interest paid $ 286 $ 88
============== ===============
Income taxes paid $ 527 $ 978
============== ===============
Adjustments to purchase price
of acquisition assets and goodwill $ (558) $ 92
============== ===============
Business combinations accounted for
as purchases:
Assets acquired $ 547 $ 438
Liabilities assumed - -
-------------------------------
Net cash paid $ 547 $ 438
===============================
9
8. Litigation
There are various legal actions arising in the normal course of
business that have been brought against the Company. Management believes
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
9. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended April 5, 2005
------------------------------------------------------
Products Services Leasing Consolidated
----------- ------------ ------------ -------------
Revenues $ 111,285 $ 54,277 $ 28 $ 165,590
Income from operations 1,748 3,320 19 5,087
Total assets 171,122 117,523 6,316 294,961
Capital expenditures 133 253 - 386
Depreciation and amortization 362 979 - 1,341
Three Months Ended April 5, 2004
------------------------------------------------------
Products Services Leasing Consolidated
----------- ------------ ------------ -------------
Revenues $ 124,586 $ 30,615 $ 13 $ 155,214
Income from operations 1,533 2,171 1 3,705
Total assets 173,475 91,665 7,745 272,885
Capital expenditures 137 114 - 251
Depreciation and amortization 505 423 1 929
10. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation.
11. Restructuring and Severance Charges
During the third quarter of 2004, in connection with certain strategic
initiatives, the Company recorded restructuring and severance charges
aggregating $1.0 million. The restructuring and severance charge was
associated with legacy Pomeroy costs of facilities and processes that have
or will become duplicative or redundant as Alternative Resources
Corporation ("ARC") operations are integrated into the Company. These costs
consisted of facility closing and involuntary employee reduction severance
costs of $576 thousand and $400 thousand, respectively. These costs were
accounted for under FAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," and were included as a charge to the results of
operations for the three and nine-month periods ended October 5, 2004.
Going forward, any changes to the estimates of executing the currently
approved plans of restructuring will be reflected in current results of
operations.
The Company also recorded during the third quarter of 2004 a
non-recurring, one-time charge for severance in the amount of $1.447
million related to the resignation of founder and former CEO David B.
Pomeroy II. Mr. Pomeroy will continue to serve as Chairman of the Board and
as a consultant.
As of April 5, 2005, the restructuring and severance charge accrual
consisted of the following:
10
Total Initial Cash Accrued balance at
(in thousands) Accrual payments April 5, 2005
-----------------------------------------------
Severance $ 1,847 $ (1,637) $ 210
Facility consolidations 576 (295) 281
-----------------------------------------------
$ 2,423 $ (1,932) $ 491
===============================================
Also, the Company's management recorded a restructuring charge
liability in connection with the ARC acquisition to eliminate certain
duplicative activities and reduced facility requirements. As a result,
approximately $6.4 million of costs were recorded as part of the
liabilities assumed in the ARC acquisition in July 2004. The restructuring
charge consisted of costs of vacating duplicative leased facilities of ARC
and severance costs associated with exiting activities. These costs are
accounted for under EITF 95-3, "Recognition of Liabilities in Connection
with Purchase Business Combinations." These costs were recognized as a
liability assumed in the purchase business combination and included in the
allocation of the cost to acquire ARC. Changes to the estimates of
executing the currently approved plans of restructuring through July 23,
2005 will be recorded as an increase or decrease in goodwill with any
increases in estimates thereafter charged to operations.
Total Initial Cash Liability balance at
(in thousands) Liability payments April 5, 2005
-------------------------------------------------
Severance $ 2,682 $ (1,786) $ 896
Facility consolidations 3,715 (410) 3,305
-------------------------------------------------
$ 6,397 $ (2,196) $ 4,201
=================================================
Additionally, as part of the acquisition of ARC, the Company acquired
the remaining obligations of ARC's existing restructuring plans, which were
initially recorded by ARC in fiscal 2003 and fiscal 2002. The total
obligations assumed in connection with these restructuring plans was $2.1
million at July 23, 2004.
As of April 5, 2005, the balance of the ARC fiscal 2003 and fiscal
2002 accrued restructuring costs recorded consisted of the following:
(in thousands)
Fiscal 2003 Restructuring Charge
Total Accrual as Cash Balance at April
of 7/23/04 payments 5, 2005
--------------------------------------------------
Severance $ 647 $ (642) $ 5
--------------------------------------------------
$ 647 $ (642) $ 5
==================================================
Fiscal 2002 Restructuring Charge
Total Accrual as Cash Balance at April
of 7/23/04 payments 5, 2005
--------------------------------------------------
Facility consolidations $ 756 $ (573) $ 183
Other charges 696 (662) 34
--------------------------------------------------
$ 1,452 $ (1,235) $ 217
==================================================
11
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contain certain
forward looking statements regarding future financial results of the Company.
The words "expect," "estimate," "anticipate," "predict," and similar expressions
are intended to identify forward-looking statements. Such statements are
forward-looking statements for purposes of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in this document including, without
limitation, those statements made in conjunction with the forward-looking
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by such
factors.
12
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of income expressed as a percentage of net
sales and revenues:
Percentage of Net Sales and Revenues
Financial Results Three months ended April 5,
- ------------------------------------- -------------------- ------------------
2005 2004
-------------------- ------------------
Net sales and revenues:
Equipment, supplies and leasing 67.2% 80.3%
Service 32.8% 19.7%
-------------------- ------------------
Total net sales and revenues 100.0% 100.0%
==================== ==================
Cost of sales and servce:
Equipment, supplies and leasing 61.9% 73.8%
Service 22.5% 14.3%
-------------------- ------------------
Total cost of sales and service 84.4% 88.1%
==================== ==================
Gross profit:
Equipment, supplies and leasing 5.3% 6.5%
Service 10.3% 5.4%
-------------------- ------------------
Total gross profit 15.6% 11.9%
==================== ==================
Operating expenses:
Selling, general and administrative 11.2% 8.4%
Rent 0.5% 0.5%
Depreciation 0.6% 0.6%
Amortization 0.2% 0.0%
-------------------- ------------------
Total operating expenses 12.5% 9.5%
==================== ==================
Income from operations 3.1% 2.4%
-------------------- ------------------
Net other expense 0.1% 0.0%
==================== ==================
Income before income tax 3.0% 2.4%
Income tax expense 1.2% 0.9%
-------------------- ------------------
Net income 1.8% 1.5%
==================== ==================
13
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues increased $10.4
million, or 6.7%, to $165.6 million in the first quarter of fiscal 2005 from
$155.2 million in the first quarter of fiscal 2004. Products and leasing
sales decreased $13.3 million, or 10.7%, to $111.3 million in the first quarter
of fiscal 2005 from $124.6 million in the first quarter of fiscal 2004. This
decrease is due to the pace of IT spending in the latter portion of our fiscal
quarter whereby multiple projects were slowed or delayed. Service revenues
increased $23.7 million, or 77.3%, to $54.3 million in the first quarter of
fiscal 2005 from $30.6 million in the first quarter of fiscal year 2004. This
increase is due to the acquisition of Alternative Resources Corporation ("ARC")
on July 23, 2004.
GROSS PROFIT. Gross profit increased $7.5 million, or 40.8%, to $25.9 million in
the first quarter of fiscal 2005 from $18.4 million in the first quarter of
fiscal 2004. The increase resulted primarily from the increase in service
revenues as a percentage of total revenues and the increase in service gross
margin as a percentage of total gross margins due to the acquisition of
Alternative Resources Corporation. Gross profit, as a percentage of revenue,
increased to 15.6% in the first quarter of fiscal 2005 as compared to 11.9% in
the first quarter of fiscal 2004. This increase in gross margin resulted
primarily from the increase in service margins, increase in service revenues as
a percentage of total revenues and the increase in service gross margin as a
percentage of total gross margin. On a forward looking basis, the Company
expects to be aggressive in product and service pricing in order to increase
market share, which could have an unfavorable impact on overall gross margin.
Additionally, the Company expects to continue increasing the breadth and depth
of its service offerings, which will have a continued impact on service gross
margin. Factors that may have an impact on gross margin in the future include
the continued changes in hardware margins, changes in personnel utilization
rates, the mix of products sold and services provided, a change in unit prices,
the percentage of equipment or service sales with lower-margin customers, the
ratio of service revenues to total net sales and revenues, and the Company's
decision to aggressively price certain products and services.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense) expressed as a percentage of total net sales and revenues
increased to 11.7% in the first quarter of fiscal 2005 from 8.9% in the first
quarter of fiscal 2004. Total operating expenses expressed as a percentage of
total net sales and revenues increased to 12.5% in the first quarter of fiscal
2005 from 9.5% in the first quarter of fiscal 2004. The increases are primarily
the result of the acquisition of Alternative Resources Corporation.
INCOME FROM OPERATIONS. Income from operations increased $1.4 million, or
37.3%, to $5.1 million in the first quarter of fiscal 2005 from $3.7 million in
the first quarter of fiscal 2004. The Company's operating margin increased to
3.0% in the first quarter of fiscal 2005 as compared to 2.4% in the first
quarter of fiscal 2004. This increase is primarily due to higher net sales and
revenues and increase in gross margin offset by the increase in operating
expenses.
INTEREST INCOME/EXPENSE. Net interest expense was $0.2 million during first
quarter of fiscal 2005 as compared to net interest income of $0.012 million
during first quarter of fiscal 2004. This increase in net interest expense was
a result of increased borrowings under our credit facility relating to the ARC
acquisition and lower interest rates on invested funds.
INCOME TAXES. The Company's effective tax rate was 40.5% in the first quarter
of fiscal 2005 compared to 38.7% in the first quarter of fiscal 2004. This
increase was principally related to the increase in state and local income
taxes.
NET INCOME. Net income increased $0.6 million, or 27.2%, to $2.9 million in the
first three months of fiscal 2005 from $2.3 million in the first three months of
fiscal 2004 due to the factors described above.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $5.0 million in the first three months
of fiscal 2005. Cash used in investing activities was $0.9 million, which
included $0.5 million for prior year acquisitions and $0.4 million for capital
expenditures. Cash used in financing activities was $17.2 million, which
included $18.5 million for repayment of short-term borrowings and $0.7 million
for payments of notes payable offset by $2.0 million of proceeds from exercise
of stock options.
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At April 5, 2005, these lines of credit totaled
$85.0 million, including $75.0 million with GE Commercial Distribution Finance
("GECDF") and $10.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on fifteen-day notes.
All such borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to subsidies by
manufacturers. Overall, the average interest rate on these arrangements is less
than 1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company has a $165.0 million Syndicated Credit Facility Agreement with
GECDF. The credit facility has a three-year term and its components include a
maximum of $75.0 million for inventory financing as described above and a
revolving line of credit, collateralized primarily by accounts receivable, of up
to $110.0 million; provided that the total amount outstanding at any time under
the inventory financing facility and the revolving line of credit may not exceed
$165.0 million. The credit facility also provides a letter of credit facility
of $5.0 million. The interest rate under the credit facility is based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid. As of April 5,
2005 the adjusted LIBOR rate was 4.87%. This credit facility expires June 28,
2007.
As of April 5, 2005, the Company had an outstanding balance under the Company's
credit facility of $1.6 million. As of January 5, 2005, the Company had an
outstanding balance under the Company's credit facility of $20.2 million. The
credit facility is collateralized by substantially all of the assets of Pomeroy,
except those assets that collateralize certain other financing arrangements.
Under the terms of the credit facility, Pomeroy is subject to various financial
covenants. Currently, Pomeroy is not in violation of any financial covenants.
Pomeroy believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy Pomeroy's capital
requirements for the next twelve months. Historically, Pomeroy has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. Pomeroy anticipates that future acquisitions will be
financed in a similar manner.
On October 11, 2004, the Board of Directors approved the repurchase of up to
100,000 shares of the Company's common stock. This stock redemption program was
approved to remain in place and in full force/effect for a period of one year.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Aggregated information about the Company's contractual obligations as of April
5, 2005 are presented in the following table:
(in thousands) Payments due by period
-------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ---------------------------------------------------------------------------------
Operating leases $16,330 $ 5,121 $ 6,411 $ 4,281 $ 517
Floor plan notes payable 13,889 13,889 - - -
Short-term borrowings 1,584 1,584 - - -
-------------------------------------------------------
Total contractual cash
obligations $31,803 $ 20,594 $ 6,411 $ 4,281 $ 517
=======================================================
15
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business. The
expected timing or payment of obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be
different depending on changes to agreed-upon amounts for some obligations.
16
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk for the first
quarter of fiscal 2005.
Currently, the Company does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 4-CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) designed to provide reasonable assurance that the
information required to be reported in its Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and
pursuant to the regulations of the Securities and Exchange Commission, including
controls and procedures designed to ensure that this information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. It should be noted that, because of inherent
limitations, the Company's disclosure controls and procedures, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the disclosure controls and procedures are met.
As more fully described in Item 9A of the Company's Annual Report on Form 10-K/A
for the year ended January 5, 2005, the Company reported that it identified
material weaknesses in its internal control over financial reporting related to
(1) the accuracy of service billing calculations and revenue recognition related
to service activity, and (2) appropriately applying generally accepted
accounting principles ensuring the adequacy and completeness of disclosures in
the consolidated financial statements as of January 5, 2005. As a result, the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, concluded that as of January 5, 2005, the Company's disclosure controls
and procedures were not effective at a reasonable level of assurance, based on
the evaluation of these controls and procedures required by Exchange Act Rules
13(a)-15(e) or 15(d)-15(e).
Changes in Internal Control Over Financial Reporting
Pomeroy IT Solutions, Inc. acquired Alternative Resources Corporation ("ARC") in
July of 2004. As previously disclosed in the Company's Form 10-K/A for the year
ended January 5, 2005, ARC, whose core competency was the staffing of technical
resources for customers, was excluded from management's assessment of internal
control over financial reporting. During the three-month period ended April 5,
2005, the integration of the two companies was substantially completed. This
integration involved implementing Recruitmax, a packaged resource management job
order application, and interfacing it with Pomeroy's financial and payroll
legacy systems. The completion of this implementation and its integration with
other Pomeroy systems paved the way for the full integration of the combined
companies' business processes. All financial transactions and financial
reporting for the Company are currently maintained in Pomeroy's legacy systems.
17
PART II - OTHER INFORMATION
ITEM 1-LEGAL PROCEEDINGS
There are various legal actions arising in the normal course of business that
have been brought against the Company. Management believes these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
ITEM 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 11, 2004, the Board of Directors approved the repurchase of up to
100,000 shares of the Company's common stock. This stock redemption program was
approved to remain in place and in full force/effect for a period of one year.
Issuer Purchases of Equity Securities
(c) Total number of (d) Maximum number
(b) Average shares purchased of shares that may
(a) Total number of price paid per as part of publicly yet be purchased
Period shares purchased share announced plan under the plan
1/6/05 - 2/5/05 - $ - - 100,000
2/6/05 - 3/5/05 - - - 100,000
3/6/05 - 4/5/05 - - - 100,000
-----------------------------------------------------------------------------
Total - $ - - 100,000
=============================================================================
During 2004, the Company did not pay any cash dividends. Pomeroy has no plans
to pay cash dividends in the foreseeable future, and the payment of such
dividends are restricted under Pomeroy's current credit facility. Under such
credit facility, cash dividends and stock redemptions are limited to $5 million
annually.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . None
ITEM 5-OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . None
ITEM 6-EXHIBITS
(a) Exhibits
10 (iii) Material Employee Benefit and Other Agreements
(j)(10) Amended and restated employment agreement by and between
Pomeroy IT Solutions, Inc. and Michael E. Rohrkemper, dated March
7, 2005.
31.1 Section 302 CEO Certification
31.2 Section 302 CFO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO Certification
18
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 thereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
--------------------------
(Registrant)
Date: May 16, 2005 By: /s/ Michael E. Rohrkemper
--------------------------
Michael E. Rohrkemper
Chief Financial Officer
and Chief Accounting
Officer
19