FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2007
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 (IRS Employer
incorporation 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 a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
The number of shares of common stock outstanding as of May 5, 2007was 12,322,303
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
Consolidated Balance Sheets as of April 5,
2007 (Unaudited) and January 5, 2007 1
Consolidated Statements of Operations for the
Three Months Ended April 5, 2007 and
2006 (Unaudited) 3
Consolidated Statements of Comprehensive
Income (Loss) for the Three Months
Ended April 5, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Three Months Ended April 5, 2007 and
2006 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURE 19
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2007 2007
------------ -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 12,353 $ 13,562
Certificates of deposit 1,085 1,076
Accounts receivable:
Trade, less allowance of $4,526 at April 5, 2007 and
$4,390 at January 5, 2007 139,081 136,055
Vendor receivables, less allowance of $155 at
April 5, 2007 and January 5, 2007 7,008 8,095
Net investment in leases 1,289 1,587
Other 866 1,016
------------ -----------
Total receivables 148,244 146,753
------------ -----------
Inventories 16,127 16,274
Other 9,758 10,791
------------ -----------
Total current assets 187,567 188,456
------------ -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment 23,676 22,540
Leasehold improvements 8,477 8,459
------------ -----------
Total 32,153 30,999
Less accumulated depreciation 19,579 18,406
------------ -----------
Net equipment and leasehold improvements 12,574 12,593
------------ -----------
Net investment in leases, net of current portion 30 42
Goodwill 98,314 98,314
Intangible assets, net 2,472 2,634
Other assets 1,894 3,403
------------ -----------
Total assets $ 302,851 $ 305,442
============ ===========
See notes to consolidated financial statements.
1
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) April 5, January 5,
2007 2007
------------ -----------
(Unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $ 68,858 $ 74,375
Deferred revenue 2,763 2,604
Employee compensation and benefits 10,796 8,642
Accrued restructuring and severance charges 1,246 1,286
Other current liabilities 10,413 11,242
------------ -----------
Total current liabilities 94,076 98,149
------------ -----------
Accrued restructuring and severance charges 2,012 2,313
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares
(no shares issued or outstanding) - -
Common stock, $.01 par value; authorized 20,000 shares
(13,500 and 13,476 shares issued at April 5, 2007
and January 5, 2007, respectively) 138 137
Paid-in capital 90,388 89,992
Accumulated other comprehensive income (67) 15
Retained earnings 128,258 126,433
------------ -----------
218,717 216,577
Less treasury stock, at cost (1,172 and 1,130 shares at
April 5, 2007 and January 5, 2007) 11,954 11,597
------------ -----------
Total equity 206,763 204,980
------------ -----------
Total liabilities and equity $ 302,851 $ 305,442
============ ===========
See notes to consolidated financial statements.
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) Three Months Ended
--------------------------
April 5, April 5,
2007 2006
------------ ------------
(Unaudited) (Unaudited)
Product and service revenues:
Product $ 92,210 $ 88,877
Service 55,573 61,815
------------ ------------
Total revenues 147,783 150,692
------------ ------------
Cost of product and service revenues:
Product 84,067 81,985
Service 40,014 47,669
------------ ------------
Total cost of revenues 124,081 129,654
------------ ------------
Gross profit 23,702 21,038
------------ ------------
Operating expenses:
Selling, general and administrative 19,741 21,621
Depreciation and amortization 1,120 1,334
------------ ------------
Total operating expenses 20,861 22,955
------------ ------------
Income (loss) from operations 2,841 (1,917)
Interest Income (310) (146)
Interest Expense 138 455
------------ ------------
Interest expense, net (172) 309
------------ ------------
Income (loss) before income tax 3,013 (2,226)
Income tax (benefit) 1,188 (807)
------------ ------------
Net income (loss) $ 1,825 $ (1,419)
============ ============
Weighted average shares outstanding:
Basic 12,349 12,615
============ ============
Diluted 12,604 12,615*
============ ============
Earnings (loss) per common share:
Basic $ 0.15 $ (0.11)
============ ============
Diluted $ 0.14 $ (0.11)*
============ ============
*Dilutive loss per common share for the three months ended April 5, 2006 would
have been anti-dilutive if the number of weighted average shares outstanding
were adjusted to reflect the dilutive effect of outstanding stock options.
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands) Three Months Ended
--------------------------
April 5, April 5,
2007 2006
------------ ------------
(Unaudited) (Unaudited)
Net income (loss) $ 1,825 $ (1,419)
Other comprehensive income (loss):
Foreign currency translation adjustment (82) -
------------ ------------
Comprehensive income (loss) $ 1,743 $ (1,419)
============ ============
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,
2007 2006
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 1,825 $ (1,419)
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 1,336 1,334
Stock option, restricted stock compensation
and employee purchase plan expense 242 609
Restructuring and severance charges - 133
Bad debt expense 150
Amortization of unearned income (20)
Deferred income taxes 727 468
Loss on disposal of fixed assets - 5
Changes in working capital accounts
Accounts receivable (1,938) 5,839
Inventories 147 3,465
Other current assets 1,585 (1,205)
Net investment in leases 330 (373)
Accounts payable (5,517) 240
Deferred revenue 160 (284)
Income tax payable 5 (43)
Employee compensation and benefits 2,154 2,167
Other, net (946) (4,014)
------------ ------------
Net operating activities 240 6,922
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,155) (682)
Purchases of certificates of deposit (9) (44)
Payment for covenant not-to-compete - (285)
Acquisition of businesses 0 (250)
------------ ------------
Net investing activities (1,164) (1,261)
------------ ------------
Cash flows from financing activities:
- (6,320)
Proceeds from exercise of stock options 7 49
Purchase of treasury stock (357) -
Proceeds from issuance of common
shares for employee stock purchase plan 146 163
------------ ------------
Net financing activities (204) (6,108)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (81) -
------------ ------------
Change in cash and cash equivalents (1,209) (447)
Cash and cash equivalents:
Beginning of period 13,562 447
------------ ------------
End of period $ 12,353 $ -
============ ============
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.
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, 2007
are not necessarily indicative of the results that may be expected for future
interim periods or for the year ending January 5, 2008.
2. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 ("FIN 48"). Effective January 5, 2007,
we adopted the provisions of Financial Standards Accounting Board Interpretation
FIN 48. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with SFAS
No. 109 and prescribes a recognition threshold of more-likely-than-not to be
sustained upon examination. As a result of the implementation of FIN 48, we
recognized a $231,000 increase in the liability for unrecognized tax benefits
related to tax positions taken in prior periods. This increase was accounted for
as an adjustment to retained earnings in accordance with the provisions of this
statement.
The Company's policy is to include interest and penalties related to gross
unrecognized tax benefits within our provision for income taxes. As of January
5, 2007, we had accrued $309,000 for payment of such interest.
Our total unrecognized tax benefits as of January 5, 2007 (the date of adoption)
totaled approximately $1,823,000. Also, our unrecognized benefits that, if
recognized, would affect our effective tax rate totaled approximately $342,000
as of January 5, 2007.
The Company and its subsidiaries file income tax returns in various tax
jurisdictions, including the United States and several U.S. states. The Company
has substantially concluded all US Federal and State income tax matters for
years up to and including 2002.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS No.
157 are effective as of the beginning of the Company's 2008 fiscal year. The
Company is currently evaluating the impact of adopting SFAS No. 157 on its
financial statements.
3. Cash and Short-Term Borrowings
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At April 5, 2007, these lines of credit totaled
$78.5 million, including $75.0 million with GE Commercial Distribution Finance
("GECDF") and $3.5 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. Overall, the average 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 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 and a
revolver, collateralized primarily by accounts receivable, of up to $110.0
million.
6
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. As of April 5, 2007, the adjusted
LIBOR rate was 7.57%. 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, 2007 and January 5, 2007, the Company
had no outstanding balance under the Company's credit facility.
Under the terms of the credit facility, the Company is subject to various
financial covenants including maintenance of a minimum level of tangible net
worth, a minimum fixed charge coverage ratio, a maximum ratio of total funded
indebtedness to EBITDA, and a maximum net loss after tax. As of April 5, 2007,
the Company was in compliance with those financial covenants.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. The Company's credit facility expires
June 28, 2007. The Company intends to negotiate a new credit facility with terms
sufficient for its financing needs and does not anticipate any problems securing
a new credit facility before June 28, 2007. However if the Company is unable to
negotiate a new credit facility, it could adversely effect the Company's ability
to operate.
At April 5, 2007 and January 5, 2007, the Company had several outstanding
letters of credit issued to worker's compensation insurance providers totaling
$1.2 million and $1.4 million, respectively, that have various expiration dates
through December 2007. The outstanding letters of credit reduce the amount
available under the credit facility.
During first quarter 2007, 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.
4. Stock-Based Compensation
During the three months ended April 5, 2007, the Company awarded 144,603 shares
of restricted common stock, which vest over a 4-year period. Restricted stock
awards are valued at the closing market value of the Company's common stock on
the date of the grant, and the total value of the award is recognized as expense
ratably over the vesting period of the employees receiving the grants. Total
compensation expense recognized in the three months ended April 5, 2007 for
vested shares was $116 thousand. During the three months ended April 5, 2006,
the Company made no restricted stock awards. As of April 5, 2007, the total
amount of unrecognized compensation expense related to nonvested restricted
stock awards was approximately $2.4 million, which is expected to be recognized
over a weighted-average period of approximately 3.0 years.
Weighted Average
Shares Exercise price
----------------- -----------------
Restricted common stock outstanding January 5, 2006 123,261 10.27
Granted 60,258 7.81
Vested - -
Forfeitures - -
-----------------
Restricted common stock outstanding January 5, 2007 183,519 $ 9.46
Granted 144,603 7.44
Vested - -
Forfeitures (6,795) -
-----------------
Restricted common stock outstanding April 5, 2007 321,327 $ 8.57
=================
The approximate unamortized stock option compensation as of April 5, 2007, which
will be recorded as expense in future periods, is $328 thousand. The weighted
average time over which this expense will be
7
recorded is approximately 8.8 months. Total compensation expense recognized in
the three months ended April 5, 2007 for stock options was $112 thousand.
For the three months ended April 5, 2007, the Company recognized approximately
$14 thousand in expense related to the stock purchase plan due to it being
compensatory under FAS 123R.
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic EPS
and diluted EPS computations:
Three Months Ended April 5,
----------------------------------------------
2007 2006
---------------------- ----------------------
Per Share Per Share
Shares Amount Shares Amount
--------- ----------- --------- -----------
Basic EPS 12,349 $ 0.15 12,615 $ (0.11)
Effect of dilutive
stock options 255 (0.01) -* -*
--------- ----------- --------- -----------
Diluted EPS 12,604 $ 0.14 12,615 $ (0.11)
========= =========== ========= ===========
* Not presented herein since effect on loss per common share is
anti-dilutive for the three months ended April 5, 2006.
6. Treasury Stock
On March 31, 2006, the Board of Directors of the Company authorized a program to
repurchase up to 500,000 shares at an aggregate price of no more than $5.0
million. The Company intends to effect such repurchases in compliance with Rule
10b-18 under the Securities Exchange Act of 1934. The acquired shares will be
held in treasury or cancelled. The Company anticipates financing the repurchase
program out of working capital. This stock redemption program was approved to
remain in place and in full force/effect for a period of 18 months. The Company
purchased 42,200 shares at an average price per share of $8.46 during the first
quarter ended April 5, 2007 and 362,615 shares at an average price per share of
$7.81 since the buy back program inception.
8
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,
----------------------------
2007 2006
------------- -------------
Interest paid $ 97 $ 373
============= =============
Income taxes paid $ 9 $ 89
============= =============
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. Restructuring and Severance Charges
The Company recorded during fiscal 2004 a charge for severance in the amount of
$1.447 million related to the resignation of David B. Pomeroy II as CEO of the
Company. Mr. Pomeroy will continue to serve as Chairman of the Board of the
Company. Mr. Pomeroy will continue to receive severance payments through January
2009.
As of April 5, 2007, the restructuring and severance charge accrual, consisted
of the following:
(in thousands) Severance
-----------
Accrual balance at January 5, 2007 $ 160
Cash payments (60)
-----------
Accrual balance at April 5, 2007 $ 100
===========
Also, the Company 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 October
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 primarily for
acquired leases included in the currently approved plans of restructuring
through July 23, 2005 were recorded as an increase or decrease in goodwill, with
any increases in estimates thereafter charged to operations.
9
Facility
(in thousands consolidation
--------------
Liability balance at January 5, 2007 $ 3,425
--------------
Cash payments (278)
--------------
Liability balance at April 5, 2007 $ 3,147
==============
Additionally, as part of the acquisition of ARC, the Company acquired the
remaining obligations of ARC's existing restructuring plan, which was initially
recorded by ARC in fiscal 2002. The total obligations assumed in connection with
this restructuring plan was approximately $2.1 million at July 23, 2004.
As of April 5, 2007, the balance of the ARC fiscal 2002 accrued restructuring
costs recorded consisted of the following:
(in thousands)
Fiscal 2002 Restructuring Charge
Other
charges
---------
Balance at January 5, 2007 14
Cash payments (3)
---------
Balance at April 5, 2007 $ 11
=========
10
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 our Annual Report on Form 10-K under
"Item 1A Risk Factors" and 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of operations expressed as a percentage of
product and service revenues:
11
Net Product and Service Revenues
Financial Results For the Three Months Ended April 5,
- -------------------------------------- ----------------------------------------------
% of % of
2007 Revenues 2006 Revenues
----------------------------------------------
Net product and service revenues:
Product $ 92,210 62.4% $ 88,877 59.0%
Service 55,573 37.6% 61,815 41.0%
----------------------------------------------
Total revenues 147,783 100.0% 150,692 100.0%
----------------------------------------------
Gross profit
Product 8,143 5.5% 6,892 4.6%
Service 15,559 10.5% 14,146 9.4%
----------------------------------------------
Total gross profit 23,702 16.0% 21,038 14.0%
----------------------------------------------
Gross profit %
Product % 8.8% 7.8%
Service % 28.0% 22.9%
Operating expenses:
Selling, general and administrative 19,741 13.4% 21,621 14.3%
Depreciation and amortization 1,120 0.8% 1,334 0.9%
----------------------------------------------
Total operating expenses 20,861 14.1% 22,955 15.2%
----------------------------------------------
Income (loss) from operations 2,841 1.9% (1,917) -1.3%
Interest income (310) -0.2% (146) -0.1%
Interest expense 138 0.1% 455 0.3%
----------------------------------------------
Interest expense (income), net (172) -0.1% 309 0.2%
----------------------------------------------
Income (loss) before income tax 3,013 2.0% (2,226) -1.5%
Income tax expense (benefit) 1,188 0.8% (807) -0.5%
----------------------------------------------
Net income (loss) $ 1,825 1.2% $ (1,419) -0.9%
==============================================
12
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total Net Product and Service Revenues. Total net product and service revenues
decreased to $147.8 million in the first quarter of fiscal 2007 from $150.7
million in the first quarter of 2006.
Product sales increased $3.3 million to $92.2 million in the first quarter of
2007 from $88.9 million in the first quarter 2006. The increase in product
sales is primarily the result of an increase in sales activity and an increase
in the number of sales reps specializing in product sales. Product margins
increased to 8.8% in first quarter 2007 compared to 7.8% in first quarter 2006.
The improvement in margin is related to sales mix and increased focus on
leveraging vendor programs.
Service revenues decreased $6.2 million to $55.6 million in first quarter 2007
from $61.8 million in first quarter 2006. This decline was primarily due to a
reduction in IT project deployments and reduced staffing headcount requirements
by our customers. Service margins increased to 28.0% in the first quarter 2007
compared to 22.9% in the first quarter 2006. The Company continues to take
steps to improve utilization and productivity in order to increase margins.
Gross Profit. Gross profit increased $2.7 million to $23.7 million in the first
quarter 2007 from $21.0 million in the first quarter 2006. Gross profit, as a
percentage of revenue, increased to 16.0% in the first quarter 2007 from 14.0%
in the first quarter 2006. This increase in gross margin is primarily due to
the increase in both product and service margins.
Operating Expenses. Total operating expenses decreased $2.2 million to $20.8
million in the first quarter 2007 from $23.0 million in the first quarter 2006.
The decrease is primarily the result of decreases in payroll and related
expenses and professional fees of $0.6 million. Expressed as a percentage of
total net product and service revenues, these expenses decreased to 14.1% in the
first quarter 2007 from 15.2% for the first quarter 2006.
Income (Loss) from Operations. Income from operations increased $4.7 million,
to $2.8 million in the first quarter 2007 from a loss of $1.9 million in the
first quarter of 2006. The Company's operating margin increased to 1.9% in the
first quarter 2007 as compared to a negative 1.2% in the first quarter 2006.
This increase is a result of the increase in gross profit and the decrease in
operating expenses as described above.
Net Interest Income (Expense). Net interest income was $0.2 million during the
first quarter 2007 as compared to expense of $0.3 million during the first
quarter 2006. This decrease in net interest expense was a result of decreased
borrowings under the Company's credit facility and an increase in interest
earned due to cash on hand.
Income Taxes. The Company's effective income tax rate was 39.4% in the first
quarter 2007 compared to 36.3% for the first quarter 2006. This fluctuation was
principally related to the book loss in the first quarter 2006 compared to book
income in the first quarter 2007. Income tax expense was $1.2 million during the
first quarter 2007 as compared to a benefit of $0.8 million during the first
quarter 2006.
Net Income (Loss). Net income increased $3.2 million, to $1.8 million in the
first quarter 2007 from a $1.4 million net loss in the first quarter 2006. The
increase was a result of the factors described above.
13
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $0.2 million in the first quarter
2007. Cash used in investing activities was $1.2 million, which included $1.2
million for capital expenditures. Cash used in financing activities was $0.2
million which included $0.4 million for the purchase of treasury stock, and was
offset by $0.2 million proceeds from the employee stock purchase plan.
The amount of cash derived from operating activities will vary based on a number
of business factors which may change from time to time, including terms of
available financing from vendors, downturns in the Company's business and/or
downturns in the businesses of the Company's customers. However, a growth or
decline in services revenue in conjunction with a change in the proportion of
services revenue to total revenue is an underlying driver of operating cash flow
during the period of growth because a majority of the Company's service revenue
is generated based upon the billings of the Company's technicians. The cash
outlay for these labor/payroll costs is incurred bi-weekly with each pay period.
The invoicing for the service is generated on various billing cycles as dictated
by the customers, and the respective cash inflow typically follows within 30 to
60 days of invoice date, which may be as long as 60 to 120 days from the time
the services are performed. This differs from product revenue in that the time
period between the time that the Company incurs the cost to purchase the
products and collects the revenue from its customer is typically shorter,
usually from 0 to 60 days, and the Company primarily orders inventory for a
particular customer rather than stocking large amounts of inventory. If an
increase in service revenue and in the proportion of service revenue to total
revenue occurs, it may result in a significant decrease in cash flows from
operating activities during periods of significant growth or periods of excess
technical capacity. In addition, certain services, primarily outsourcing
contracts for the Company's Life Cycle Services, require that the Company
maintain a specific parts inventory for servicing the customer; thus, an
increase or decrease in the type of services provided can impact inventory
levels and operating cash flows.
Cash flows provided by operating activities in first quarter 2007 were $0.2
million as compared to cash flows used in operating activities of $6.9 million
in the first quarter 2006. The decrease in cash flows from operating activities
resulted primarily from timing of payments on accounts payable and accounts
receivable. Accounts payable decreased operating cash flow by $5.5 million,
primarily due to timing of payments. Trade, vendor and other receivables
decreased operating cash flow by $1.9 million primarily due to timing of
payments from customers and vendors. These decreases were offset by an increase
of other current assets of $1.6 million.
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At April 5, 2007, these lines of credit totaled
$78.5 million, including $75.0 million with GE Commercial Distribution Finance
("GECDF") and $3.5 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. Overall, the average 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 million Syndicated Credit Facility Agreement with GECDF.
The credit facility has a three-year term and its components include a maximum
of $75 million for inventory financing and a revolving line of credit,
collateralized primarily by accounts receivable, of up to $110 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 million. Under the
agreement, the credit facility provides a letter of credit facility of $5
million. Under the credit facility, the interest rate is based on the London
InterBank Offering Rate ("LIBOR") and a pricing grid. As of April 5, 2007 the
adjusted LIBOR rate was 7.57%. This credit facility expires June 28, 2007.
At April 5, 2007 and 2006 the Company did not have a balance outstanding under
the credit facility. At April 5, 2007 the amount available was $55.7 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, the Company is subject to
various financial covenants. As of April 5, 2007 the Company was in compliance
with those financial covenants.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. The Company's credit facility expires
June 28, 2007. The Company intends to negotiate a new credit facility with terms
sufficient for its financing needs and does not anticipate any problems securing
a new credit facility before June 28, 2007. However if the company is unable to
negotiate a new credit facility, it could adversely affect the Company's ability
to operate.
14
On March 31, 2006, the Board of Directors of the Company authorized a program to
repurchase up to 500,000 shares, at an aggregate price of no more than $5.0
million. The Company intends to effect such repurchases, in compliance with Rule
10b-18 under the Securities Exchange Act of 1934. The acquired shares will be
held in treasury or cancelled. The Company anticipates financing the repurchase
program out of working capital. This stock redemption program was approved to
remain in place and in full force/effect for a period of 18 months. The Company
purchased 42,200 shares at an average price per share of $8.46 during the first
quarter ended April 5, 2007 and 362,615 shares at an average price per share of
$7.81 since the buy back program inception.
15
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 debt position, the Company did
not experience a material impact from interest rate risk for the first quarter
of fiscal 2007.
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
MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive and principal
financial officers, has evaluated the effectiveness of our disclosure controls
and procedures over financial reporting designed to ensure that the information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and to
ensure that such information is accumulated and communicated to management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on
such evaluation, our principal executive and principal financial officers have
concluded that such disclosure controls and procedures were effective, as of
April 5th, 2007 (the end of the period covered by this Quarterly Report on Form
10-Q).
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
16
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 1A-RISK FACTORS
Refer to the risk factors included in Part I (Item 1A-risk factors) in our
annual report on Form 10-K for the fiscal year ended January 5, 2007 for
explanation.
ITEM 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 31, 2006, the Board of Directors of the Company authorized a program to
repurchase up to 500,000 shares, at an aggregate price of no more than $5.0
million. The Company intends to effect such repurchases in compliance with Rule
10b-18 under the Securities Exchange Act of 1934. The acquired shares will be
held in treasury or cancelled. The Company anticipates financing the repurchase
program out of working capital. This stock redemption program was approved to
remain in place and in full force/effect for a period of 18 months.
Issuer Purchases of Equity Securities
(c) Total
number of shares d) Maximum number
(b) Average purchased as part of shares that may yet
(a) Total number of price paid of publicly be purchased under the
Period shares purchased per share announced plan plan
4/6/06 - 5/5/06 - $ - - 500,000
5/6/06 - 6/5/06 - $ - - 500,000
6/6/06 - 7/5/06 20,000 $ 7.17 20,000 480,000
7/6/06-8/5/06 11,980 $ 7.21 11,980 468,020
8/6/06-9/5/06 49,750 $ 7.78 49,750 418,270
9/6/06-10/5/06 90,908 $ 7.97 90,908 327,362
10/6/06-11/5/06 - $ - - 327,362
11/6/06-12/5/06 50,399 $ 7.42 50,399 276,963
12/6/06-1/5/07 97,378 $ 7.63 97,378 179,585
1/6/07-2/5/07 14,000 $ 8.00 14,000 165,585
2/6/07-3/5/07 - - 165,585
3/6/07-4/5/07 28,200 $ 8.69 28,200 137,385
------------------- -----------------------------------------
Total 362,615 362,615 137,385
=================== =========================================
During the three months ended April 5, 2007, the Company did not pay any cash
dividends. The Company has no plans to pay cash dividends in the foreseeable
future, and the payment of such dividends is restricted under the Company'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
17
ITEM 5-OTHER INFORMATION
None
ITEM 6-EXHIBITS
(a) Exhibits
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 15, 2007 By: /s/ Kevin G. Gregory
-------------------------------------------
Kevin G. Gregory
Senior Vice President and
Chief Financial Officer