Pinnacle Data Systems Reports Record Sales and NI for Second Quarter

7/22/2004 - Pinnacle Data Systems, Inc. (PDSi) (AMEX: PNS) announced record sales and net income for its second fiscal quarter of 2004, the thirteen-week period ended June 26, 2004.

Sales for the second quarter of 2004 totaled $11.3 million, an increase of 95% over sales of $5.8 million reported in the comparable period of 2003. Net income for the second quarter of 2004 was $497,000, or $0.08 per diluted share, an increase of 178% compared to net income of $179,000, or $0.03 per share, for the second quarter of 2003.

Sales for the two quarters ended June 26, 2004, totaled $18.3 million, an increase of 85% over $9.9 million for the comparable period of 2003, and resulting in net income of $860,000, or $0.14 per diluted share, an increase of 238% over net income of $254,000, or $0.04 per diluted share, for the comparable 2003 period.

The quarter and year-to-date results were significantly impacted by the two largest orders in the company’s history: a $3 million order for controller boards for medical diagnostic equipment announced in November of 2003, followed by a $4 million telecommunications equipment order announced in April of 2004. About 25% of the $3 million order shipped in the fourth quarter of 2003 and both orders were completed in the first half of 2004.

John D. Bair, Chairman, President and CEO, said the record results show the kind of earnings leverage the Company can achieve with large increases in product sales, a major tenet of the Company’s earnings growth strategy. “We attribute the overall sales increase to our on-going efforts to grow our business through additional investment in sales, marketing and infrastructure and the improving economy. In the second quarter, those efforts also resulted in new program wins and expanded partner relationships,” Bair said.

“We are focusing on year-over-year improvements and on the execution of our long-term growth strategies. Our base business of repair and logistics programs and customer-specific product programs is steadily growing and our pipeline of new service and product opportunities is the strongest in our company history,” Bair continued. “However, our customers’ ordering patterns continue to make the Company’s overall sales growth difficult to project on a quarter-to-quarter basis.”

Highlights of the Quarter
Highlights of the second quarter of 2004 include:

Additional Operating Results
For the second quarter of 2004, product sales totaled $9.8 million, an increase of 182% over product sales of $3.5 million for the second quarter of 2003, due to increases in medical diagnostic, telecommunications, commercial imaging, remote management diagnostic and semiconductor product sales. The gross profit margin percentage on products decreased to 22% in the 2004 quarter from 24% in the 2003 quarter due to the product mix. Gross profit on product sales for the 2004 quarter totaled $2.1 million, compared with $820,000 for the same period in 2003.

For the second quarter of 2004, service sales totaled $1.5 million, a decrease of 35% from service sales of $2.3 million for the second quarter in 2003, when in-coming and out-going Hewlett-Packard (HP) repair programs overlapped and additional inventory was required by HP to ease the transition of the out-going program. The gross profit margin percentage on service sales increased to 37% in the 2004 quarter from 34% in the 2003 quarter due to mix changes and some additional costs incurred in 2003 to transition in-coming and out-going repair programs. Gross profit on service sales for the 2004 quarter totaled $550,000, compared to $786,000 for the same period in 2003.

For the quarter ended June 26, 2004, sales, general and administrative (SG&A) expenses, including research and development (R&D), totaled $1.8 million, compared to $1.3 million in the comparable quarter of 2003 due to costs directly tied to the Company’s increasing sales, profitability and investment in the company’s growth. In the second quarter of 2004, operating expenses were 16% of sales compared to 22% in the second quarter of 2003.

On June 26, 2004, accounts receivable had increased to $5.9 million from $5.1 million on December 31, 2003, and inventory increased to $3.8 million from $2.0 million over the same time period. Both increases are related to the current strength of the business and the timing of shipments to meet customers’ requirements.

On June 26, 2004, borrowing on the line of credit had increased to $2.9 million from $2.5 million on December 31, 2003, to help finance the increase in sales. Availability on the line at June 26, 2004, was approximately $3.9 million, which reflects an additional $2.0 million on a 120-day note taken out in May to effectively increase the line of credit from $5 million to $7 million during this time period.

Outlook
“Over the past few quarters, we have increased our investment in sales, marketing and infrastructure, including additions to our sales and sales support staff, participation in targeted trade shows, and trade journal advertisements,” said Michael R. Sayre, Executive Vice President and CFO. “We have been pleased with the resulting increases in sales and earnings and plan to continue prudently investing with the goal of improving results over the long-term. We expect second-half 2004 sales to show an increase over second-half 2003 sales. However, the investment in growing our company may result in lower short-term earnings to achieve longer-term growth. Earnings in the second half of 2004 are expected to be in the range of the second half of last year, but could be lower with the added expenses.”

“We are measuring our success on year-over-year growth in both sales and earnings,” Sayre continued. “In 2004, we expect to achieve that growth and prepare for more in 2005.”

Conference Call
PDSi will host a conference call today at 11:00 a.m. EDT to discuss 2004 second-quarter results and the company’s strategic direction. The conference call may be accessed by calling (888) 880-1525. The passcode for the conference call is “Pinnacle Data” and the conference identification number is 8479167. Please be prepared to provide both the passcode and the conference identification number to access the call.

About PDSi
PDSi provides technical services, encompassing the development and production of computer systems and components, and the testing and repair of computer systems, components and peripherals, to Original Equipment Manufacturers (OEMs) in, among others, the aerospace, computer, computer peripheral, data storage, digital-imaging, medical diagnostic, process-control, and telecommunications equipment industries. PDSi offers a full range of services to increase product speed to market and engineered product life, and to provide service and support to units in the field through comprehensive product lifecycle management programs encompassing depot repair, advanced exchange, contact center support and end-of-life control. For more information, visit the PDSi Website at www.pinnacle.com.

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