Pomeroy IT Solutions, Inc. Reports Second Quarter 2008 Results

Pomeroy IT Solutions, Inc. (NASDAQ:PMRY) an information technology ("IT") solutions provider with a comprehensive portfolio of hardware, software, technical staffing services, as well as infrastructure and lifecycle services, today reported second quarter revenue of $155.0 million and net income of $1.5 million, or $0.12 per fully diluted share. "We are very pleased to achieve our first quarterly profit in the last year. The positive results reflect improved gross margins in each of our product, technical staffing and infrastructure services segments combined with the cost reductions achieved through the first stage of resizing our workforce to match our current business environment. Additional cost reduction efforts are now nearly complete and we expect to see the benefits of those efforts in the second half of the year. We believe that the Company is now positioned to return to consistent quarterly operating profitability." said Keith Coogan, CEO and President of Pomeroy IT Solutions. CONSOLIDATED FINANCIAL RESULTS       Second Quarter Financial Results   Total Net Revenues: Total net revenues increased $16.7 million or 12.1% in the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007. For the second quarters of fiscal 2008 and fiscal 2007, the net revenues were $155.0 million and $138.3 million, respectively.   Product revenue was $92.7 million and $91.6 million, respectively, for the second quarters of fiscal 2008 and fiscal 2007. Product revenue increased $1.1 million, an increase of 1.2% in the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007. This increase was due primarily to growth in our state, local and education customers and also in our commercial healthcare, retail and financial services accounts offset by continued delays in product deployment.   Service revenue was $62.3 million in the second quarter of fiscal 2008 compared to $46.7 million in the second quarter of fiscal 2007, an increase of $15.6 million or 33.5% from fiscal 2007. The Company groups services revenue into Technical Staffing and Infrastructure Services. Technical Staffing Services support clients' project requirements, ensures regulatory and customer compliance requirements and promotes success of the staffing projects. Infrastructure Services help clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, these services include desktop and mobile computing, server and network environments.   Technical Staffing revenue was $31.6 million and accounted for approximately 50.6% of total service revenues in the second quarter of fiscal 2008, compared to $18.9 million and 40.5% in for the second quarter of fiscal 2007. This increase is primarily the result of recognizing revenue for the gross billings on subcontractor personnel which historically have been recorded as fee based services in our vendor management business. Overall, volume in our staffing business was relatively consistent.   We anticipate technical staffing revenue to decrease in subsequent quarters as a result of the announcement made in June 2008 that we elected to not renew a technical staffing services contract with a major customer because the terms they required meant this business would not be profitable for our company.   Infrastructure Service revenue was $30.7 million and $27.8 million, respectively, for the second quarter of fiscal 2008 and 2007. Infrastructure Service revenues were approximately 49.4% of total service revenues in the second quarter of fiscal 2008, compared to 59.5% for the second quarter of fiscal 2007. The increase in revenue is primarily the result of new service engagements started at the beginning of 2008.   Gross Profit: Gross profit was $19.3 million in the second quarter of fiscal 2008, compared to $15.6 million in the second quarter of 2007. Gross profit, as a percentage of revenue, was 12.4% in second quarter of fiscal 2008, compared to 11.3% in the second quarter of fiscal 2007.   Product gross profit was $9.2 million for the second quarter of fiscal 2008, compared to $7.3 million for the same period of fiscal 2007. Product gross profit as a percentage of product revenue increased to 9.9% in the second quarter of fiscal 2008, compared to 8.0% for the same period of fiscal 2007. The increase in product gross margin is due primarily to margin improvements as a result of increased rebates from improved tracking of OEM partner promotional initiatives and targeting more profitable growth segments such as networking, server, storage and peripherals.   Service gross profit was $10.1 million for the second quarter of fiscal 2008, compared to $8.3 million in the second quarter of fiscal 2007. Service gross profit as a percentage of service revenue decreased to 16.2% in the second quarter of fiscal 2008, compared to 17.8% for the same period of fiscal 2007.   Gross profit from Technical Staffing Services was $3.6 million for the second quarter of fiscal 2008, compared to $3.2 million for the second quarter of fiscal 2007. This increase of $0.4 million is primarily due to increased use of higher-margin Pomeroy employees on staffing projects. Gross profit as a percentage of technical staffing revenues decreased to 11.5% in the second quarter of fiscal 2008 from 17.1% in the second quarter of fiscal 2007. This decrease in gross margin is primarily the result of recognizing revenue for billings on subcontractor personnel which historically have been recorded as fee based services in our vendor management business at very low incremental margin.   Gross profit from Infrastructure Services was $6.5 million for the second quarter of fiscal 2008 compared to $5.1 million for the second quarter of fiscal 2007. Gross profit as a percentage of infrastructure service revenues increased to 21.1% in the second quarter of fiscal 2008 from 18.2% in the second quarter of fiscal 2007. This increase in gross profit and margin is primarily a result of driving higher utilization of personnel, reduction of work force in the Infrastructure Services technical resources and as a result of renegotiation and termination of unprofitable contracts.   Operating Expenses   Total operating expenses were $17.7 million in the second quarter of 2008, compared to $17.0 million in the second quarter of 2007, an increase of $0.7 million. This increase is primarily driven by an increase of $1.0 million in personnel-related expenditures, and related general and administrative expenses, to support our product and service businesses and investments to improve customer, vendor and back office support functions; severance charges of $0.3 million; offset by a decrease of $0.6 million related to professional and outside service provider fees.   Operating expenses as a percentage of revenue were 11.5% for the second quarter of fiscal 2008 compared to 12.3% for the second quarter of fiscal 2007.   Income (Loss) from Operations   Income from operations was $1.6 million in the second quarter of 2008, as compared to a loss of $1.4 million for the same period of 2007. This increase is a result of the increase in gross profit offset by the increase in operating expenses in the second quarter of 2008, as described above.   Net Interest Income (Expense)   Net interest expense was $77 thousand during the second quarter of 2008 as compared to income of $90 thousand during the second quarter of 2007. During the second quarter of 2008, the Company had amounts outstanding under its credit facility due to the timing of payments of accounts payables and payroll and collections of receivables.   Income Tax   For the second quarter of 2008, the Company had no income tax expense or income tax benefit. During the second quarter of fiscal 2008, the Company decreased its tax valuation allowance by $0.6 million for a total allowance of $15.9 million at July 5, 2008. The tax valuation allowance results from the future uncertainty of the Company's ability to utilize its deferred tax assets. For the second quarter of fiscal 2008, the $0.6 million decrease in tax valuation reserve offset what would have been an income tax expense; the effective income tax rate would have been 43.4% prior to recording the tax valuation reserve. The effective income tax rate for the second quarter of fiscal 2007 was 35.4%.   Net Income (Loss)   Net income was $1.5 million in the second quarter of 2008 as compared to a net loss of $0.9 million in the second quarter of 2007, resulting from the factors described above.   Other Second Quarter Financial Information   -- Working Capital $ 77.1 million -- Cash Flow Generated by Operating Activities $ 16.4 million -- Cash, Cash Equivalents and CD's $ 10.3 million -- Capital Expenditures $ 1.1 million -- Purchases of Company stock $ 0.9 million -- Outstanding Debt $ -   July 5, 2008 YTD versus July 5, 2007 YTD   Total Net Revenues: Total net revenues increased $19.9 million or 7.1% in the first six months of fiscal 2008 as compared to the same period of fiscal 2007. For the first six months of fiscal 2008 and fiscal 2007, the net revenues were $300.2 million and $280.3 million, respectively.   Product revenue was $174.2 million and $183.8 million, respectively, for the first six months of fiscal 2008 and fiscal 2007. Product revenue decreased $9.6 million, a decrease of 5.3% in the first six months of fiscal 2008 as compared to the first six months of fiscal 2007. This decrease was due primarily to continued delays of product deployments.   Service revenue was $126.0 million in the first six months of fiscal 2008 compared to $96.4 million in the first six months of fiscal 2007, an increase of $29.6 million or 30.7% from fiscal 2007. The Company groups services revenue into Technical Staffing and Infrastructure Services. Technical Staffing Services support clients' project requirements, ensures regulatory and customer compliance requirements and promotes success of the staffing projects. Infrastructure Services help clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, these services include desktop and mobile computing, server and network environments.   Technical Staffing revenue was $64.1 million and accounted for approximately 50.8% of total service revenues in the first six months of fiscal 2008, compared to $39.3 million and 40.8% in for the first six months of fiscal 2007. This increase is primarily the result of recognizing revenue for billings on subcontractor personnel which historically have been recorded as fee based services in our vendor management business.   We anticipate technical staffing revenue to decrease in subsequent quarters as a result of the announcement made in June 2008 that we elected to not renew a technical staffing services contract with a major customer because the terms they required meant this business would not be profitable for our company.   Infrastructure Service revenue was $61.9 million and $57.1 million, respectively, for the first six months of fiscal 2008 and 2007. Infrastructure Service revenues were approximately 49.2% of total service revenues in the first six months of fiscal 2008, compared to 59.2% for the first six months of fiscal 2007. The increase in revenue is primarily the result of new service engagements started at the beginning of 2008.   Gross Profit: Gross profit was $34.5 million in the first six months of fiscal 2008, compared to $32.8 million in the first six months of 2007. Gross profit, as a percentage of revenue, was 11.5% in the first six months of fiscal 2008, compared to 11.7% in the first six months of fiscal 2007.   Product gross profit was $17.2 million for the first six months of fiscal 2008, compared to $15.2 million for the same period of fiscal 2007. Product gross profit as a percentage of product revenue increased to 9.9% in the first six months of fiscal 2008, compared to 8.3% for the same period of fiscal 2007. The increase in product gross margin is due primarily to margin improvements as a result of the increased rebates from improved tracking of OEM partner promotional initiatives and targeting more profitable growth segments such as networking, server, storage and peripherals.   Service gross profit was $17.4 million for the first six months of fiscal 2008, compared to $17.6 million in the first six months of fiscal 2007 for a decline in service gross profit of $0.2 million. Service gross profit as a percentage of service revenue decreased to 13.8% in the first six months of fiscal 2008, compared to 18.2% for the same period of fiscal 2007.   Gross profit from Technical Staffing Services was $6.2 million for the first six months of fiscal 2008, compared to $6.7 million for the first six months of fiscal 2007. Gross profit as a percentage of technical staffing revenues decreased to 9.7% in the first six months of fiscal 2008 from 17.1% in the first six months of fiscal 2007. This decrease in gross margin is primarily the result of recognizing revenue for billings on subcontractor personnel which historically have been recorded as fee based services in our vendor management business at very low incremental margin.   Gross profit from Infrastructure Services was $11.2 million for the first six months of fiscal 2008 compared to $10.9 million for the first six months of fiscal 2007 due to the increase in revenue related to new service engagements started at the beginning of 2008. Gross profit as a percentage of infrastructure service revenues decreased to 18.0% in the first six months of fiscal 2008 from 19.0% in the first six months of fiscal 2007. This decrease in gross profit margin is primarily the result of unprofitable customer contracts during the first quarter that were exited during the second quarter and reduced utilization and productivity of infrastructure services technical resources in the first quarter of 2008.   Operating Expenses   Total operating expenses were $37.1 million in the first six months of 2008, compared to $31.4 million in the first six months of 2007, an increase of $5.7 million. This increase is primarily driven by an increase of $0.9 million in sales and marketing costs, primarily related to increased commissions relating to improved product margins; an increase of $2.5 million in personnel-related expenditures, and related general and administrative expenses, to support our product and service businesses and investments to improve customer, vendor and back office support functions; a net charge of approximately $0.9 million to reserve against the collection of amounts incorrectly billed by subcontractors in our technical staffing business for years 2005 and 2006, as a result of an audit by our largest staffing customer; an increase related to severance charges of $0.9 million; an increase of $0.3 million for start up expenses related to new engagements; and an increase of $0.2 million related to costs for the retirement of directors.   Operating expenses as a percentage of revenue were 12.4% for the first six months of fiscal 2008 compared to 11.2% for the first six months of fiscal 2007.   Income (Loss) from Operations   Loss from operations was $2.6 million in the first six months of 2008, as compared to income of $1.4 million for the same period of 2007. This decrease is primarily the result of an increase in operating expenses for the first six months of fiscal 2008, as described above.   Net Interest Income (Expense)   Net interest expense was $147 thousand during the first six months of 2008 as compared to income of $261 thousand during the first six months of 2007. During the first six months of 2008, the Company had amounts outstanding under its credit facility due to the timing of payments of accounts payables and payroll and collections of receivables.   Income Tax   For the first six months of 2008, the Company had no income tax expense or income tax benefit. During the first six months of fiscal 2008, the Company increased its tax valuation allowance by $931 thousand for a total allowance of $15.9 million at July 5, 2008. The tax valuation allowance results from the future uncertainty of the Company's ability to utilize its deferred tax assets. For the first six months of fiscal 2008, the $931 thousand increase in tax valuation reserve offset what would have been an income tax benefit; the effective income tax rate would have been 34.3% prior to recording the tax valuation reserve. The effective income tax rate for the first quarter of fiscal 2007 was 42.5%.   Net Income (Loss)   Net loss was $2.7 million in the first six months of 2008 as compared to net income of $1.0 million in the first six months of 2007, resulting from the factors described above. CONFERENCE CALL To participate in a conference call and questions and answer session with senior management regarding the second quarter of fiscal 2008 results, call 1-877-842-7108, using pass code 59151724 at 4:30 p.m. (ET) on Wednesday, August 6, 2008. For your convenience, a replay will be available shortly after the call by dialing 1-800-642-1687. ABOUT POMEROY IT SOLUTIONS, INC. Pomeroy IT Solutions, Inc. is a leading provider of IT infrastructure solutions focused on enterprise, network and end-user technologies. Leveraging its core competencies in IT Outsourcing and Professional Services, Pomeroy delivers consulting, deployment, operational, staffing and product sourcing solutions through the disciplines of Six-Sigma, program and project management, and industry best practices. Pomeroy's consultative approach and adaptive methodology enables Fortune 2000 corporations, government entities, and mid-market clients to realize their business goals and objectives by leveraging information technology to simplify complexities, increase productivity, reduce costs, and improve profitability. For more information, go to www.pomeroy.com. FORWARD-LOOKING STATEMENTS Certain of the statements in the preceding paragraphs regarding financial results constitute forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our markets' actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, expressed or implied by such forward-looking statements. These risks, and other factors you should specifically consider, include but are not limited to: changes in customer demands or industry standards; existing market and competitive conditions, including the overall demand for IT products and services; the nature and volume of products and services anticipated to be delivered; the mix of the products and services businesses; the type of services delivered; the ability to fully utilize personnel and increase the use of higher-margin service employees; the ability to successfully attract and retain customers, sell additional products and services to existing customers; the ability to timely bill and collect receivables; the ability to avoid non-profitable service contracts; the ability to maintain a broad customer base to avoid dependence on any single customer; the need to successfully attract and retain outside consulting services; new acquisitions by the Company; terms of vendor agreements and certification programs and the assumptions regarding the ability to perform there under; the ability to implement the Company's best practices strategies; the ability to manage costs and expenses; the ability to manage risks associated with customer projects; adverse or uncertain economic conditions; loss of key personnel; litigation; and the ability to attract and retain technical and other highly skilled personnel. In some cases, you can identify forward-looking statements by such terminology as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue", "projects", "intends", "prospects", "priorities", or negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)     (in thousands) July 5, January 5, 2008 2008 ASSETS   Current Assets: Cash and cash equivalents $ 9,158 $ 13,282 Certificates of deposit 1,128 1,113   Accounts receivable: Trade, less allowance of $3,283 and $3,522, respectively 133,988 140,167 Vendor, less allowance of $1,138 and $562, respectively 13,257 11,352 Net investment in leases 336 756 Other   284   1,288 Total receivables   147,865   153,563   Inventories 15,665 15,811 Other   6,734   10,196 Total current assets   180,550   193,965   Equipment and leasehold improvements: Furniture, fixtures and equipment 17,556 15,180 Leasehold Improvements   7,262   7,262 Total 24,818 22,442   Less accumulated depreciation   14,849   12,645 Net equipment and leasehold improvements   9,969   9,797   Intangible assets, net 1,732 2,017 Other assets   727   805 Total assets $ 192,978 $ 206,584   POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)     (in thousands) July 5, January 5, 2008 2008 LIABILITIES AND EQUITY   Current Liabilities: Accounts payable: Floor plan financing $ 19,698 $ 26,328 Trade   56,346   57,016 Total accounts payable   76,044   83,344   Deferred revenue 1,657 1,949 Employee compensation and benefits 9,487 10,248 Accrued facility closing cost and severance 1,653 1,678 Other current liabilities   14,581   15,542 Total current liabilities   103,422   112,761   Accrued facility closing cost and severance 340 1,056   Equity: Preferred stock, $.01 par value; authorized 2,000 shares, (no shares issued or outstanding) - - Common stock, $.01 par value; authorized 20,000 shares, (13,611 and 13,513 shares issued, respectively) 141 140 Paid in capital 92,808 91,399 Accumulated other comprehensive income 39 20 Retained earnings   11,489   14,200 104,477 105,759 Less treasury stock, at cost (1,683 and 1,323 shares, respectively)   15,261   12,992 Total equity   89,216   92,767 Total liabilities and equity $ 192,978 $ 206,584   POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)   (in thousands, except per share data) Three Months Ended     July 5, July 5, 2008 2007     Net revenues: Product $ 92,678 $ 91,599 Service   62,315     46,662   Total net revenues   154,993     138,261     Cost of revenues: Product 83,489 84,280 Service   52,207     38,373   Total cost of revenues   135,696     122,653     Gross profit   19,297     15,608     Operating expenses: Selling, general and administrative 16,512 15,870 Depreciation and amortization   1,218     1,149   Total operating expenses   17,730     17,019     Income (loss) from operations   1,567     (1,411 )   Interest income 42 220 Interest expense   (119 )   (130 ) Interest income (expense)   (77 )   90     Income (loss) before income tax 1,490 (1,321 ) Income tax expense (benefit)   -     (468 ) Net income (loss) $ 1,490   $ (853 )   Weighted average shares outstanding: Basic   11,946     12,330   Diluted (1)   12,343     12,330     Earnings (loss) per common share: Basic $ 0.12   $ (0.07 ) Diluted (1) $ 0.12   $ (0.07 )   (1)   Dilutive loss per common share for the 3 months ended July 5, 2007 would have been anti-dilutive if the number of weighted average shares outstanding were adjusted to reflect the dilutive effect of outstanding stock options and unearned restricted shares. POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)   (in thousands, except per share data) Six Months Ended     July 5, July 5, 2008 2007     Net revenues: Product $ 174,155 $ 183,809 Service   126,007     96,445   Total net revenues   300,162     280,254     Cost of revenues: Product 156,987 168,560 Service   108,629     78,845   Total cost of revenues   265,616     247,405     Gross profit   34,546     32,849     Operating expenses: Selling, general and administrative 34,677 29,149 Depreciation and amortization   2,434     2,269   Total operating expenses   37,111     31,418     Income (loss) from operations   (2,565 )   1,431     Interest income 127 530 Interest expense   (274 )   (269 ) Interest income (expense)   (147 )   261     Income (loss) before income tax (2,712 ) 1,692 Income tax expense   -     719   Net income (loss) $ (2,712 ) $ 973     Weighted average shares outstanding: Basic   12,027     12,339   Diluted (1)   12,027     12,647     Earnings (loss) per common share: Basic $ (0.23 ) $ 0.08   Diluted (1) $ (0.23 ) $ 0.08     (1)   Dilutive loss per common share for the 6 months ended July 5, 2008 would have been anti-dilutive if the number of weighted average shares outstanding were adjusted to reflect the dilutive effect of outstanding stock options and unearned restricted shares. POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)     (in thousands) Six Months Ended Cash Flows from Operating Activities: July 5, 2008 July 5, 2007 Net income (loss) (2,712 ) 973 Adjustments to reconcile net income (loss) to net cash flows from (used in) operating activities: Depreciation and amortization 2,499 2,525 Stock option, restricted stock compensation and employee purchase plan expense 1,237 226 Facility closing cost and severance 889 - Provision for doubtful accounts 600 650 Amortization of unearned income (4 ) (27 ) Deferred income taxes - 564 Changes in working capital accounts: Accounts receivable 4,678 7,041 Inventories 146 (1,048 ) Other current assets 3,462 387 Net investment in leases 424 546 Accounts payable - floor plan financing (6,631 ) (1,335 ) Accounts payable trade (668 ) (11,193 ) Deferred revenue (291 ) (109 ) Employee compensation and benefits (761 ) 175 Other, net   (2,511 )   155   Net operating activities   357     (470 ) Cash Flows used in Investing Activities: Capital expenditures (2,386 ) (1,662 ) Purchases of certificate of deposits   (15 )   (18 ) Net investing activities   (2,401 )   (1,680 ) Cash Flows from Financing Activities: Proceeds from exercise of stock options - 90 Purchase of treasury stock (2,270 ) (405 ) Proceeds from issuance of common shares for employee stock purchase plan   172     146   Net financing activities   (2,098 )   (169 ) Effect of exchange rate changes on cash and cash equivalents   18     (78 ) Decrease in cash and cash equivalents (4,124 ) (2,397 ) Cash and cash equivalents: Beginning of period   13,282     13,562   End of period $ 9,158   $ 11,165     POMEROY IT SOLUTIONS, INC. 2007 QUARTERS AND FULL YEAR FINANCIAL STATEMENT (UNAUDITED)   For fiscal 2008, the Company has reclassified amounts previously included in operating expenses. The tables below reflect the fiscal 2007 financial statements as previously reported in the Company's 2007 10K Report as well as the fiscal 2007 financial statements as restated after these reclassifications. (in thousands)                       First Quarter of Fiscal 2007 Second Quarter of Fiscal 2007 As Previously Reported   As Restated As Previously Reported   As Restated Net revenues $ 141,993 $ 141,993 Net revenues $ 138,261 $ 138,261 Cost of revenues   118,291     124,752   Cost of revenues   116,238     122,653   Gross profit 23,702 17,241 Gross profit 22,023 15,608   Operating expenses   20,861     14,400   Operating expenses   23,434     17,019     Loss from operations 2,841 2,841 Loss from operations (1,411 ) (1,411 )   Net Interest - income 172 172 Net Interest - income 90 90   Income taxes 1,188 1,188 Income taxes benefit (468 ) (468 )         Net income $ 1,825   $ 1,825   Net loss $ (853 ) $ (853 )             Third Quarter of Fiscal 2007 Fourth Quarter of Fiscal 2007 As Previously Reported As Restated As Previously Reported As Restated Net revenues $ 144,392 $ 144,392 Net revenues $ 162,261 $ 162,261 Cost of revenues   123,662     129,637   Cost of revenues   144,731     152,155   Gross profit 20,730 14,755 Gross profit 17,530 10,106   Operating expenses   124,265     118,290   Operating expenses   26,691     19,267     Loss from operations (103,535 ) (103,535 ) Loss from operations (9,161 ) (9,161 )   Net Interest - income 70 70 Net Interest - income 119 119   Income taxes benefit (11,671 ) (11,671 ) Income taxes 12,369 12,369         Net loss $ (91,794 ) $ (91,794 ) Net loss $ (21,411 ) $ (21,411 )       2007 Fiscal Year As Previously Reported As Restated Net revenues $ 586,907 $ 586,907 Cost of revenues   502,922     529,197   Gross profit 83,985 57,710   Operating expenses   195,251     168,976     Loss from operations (111,266 ) (111,266 )   Net Interest - income 451 451   Income taxes 1,418 1,418     Net loss $ (112,233 ) $ (112,233 )