Since Pinnacle Data Systems, Inc. (PDSi) was founded in 1989, we have been guided by people and principles committed to core values and a desire to provide value-added services and products to our customers. The Company has grown significantly during the past 18 years and has developed a number of competencies in manufacturing and repairing the computer technologies deployed in the products of its original equipment manufacturer (OEM) customer base.
Today, PDSi is engaged in the Electronics Manufacturing Services (EMS) industry, servicing niche market needs in this $200+ billion industry that is highly competitive and where differentiation is our key to success. Our strategy is to offer full product lifecycle services to OEMs on a global basis that most small EMS or specialty service companies cannot provide, and at lower volumes than are attractive to the larger global EMS companies that dominate the industry.
Following my election as President and Chief Executive Officer in March 2006, I initiated efforts to focus our resources and energies on building a higher level of professional service offerings to complement and aid the growth of our manufacturing and repair businesses.
My first priority was to instill the purpose of a mission and the goals of a vision to guide us through the challenges and opportunities of becoming an enduring company of great character, and capable of providing significant returns for all of our stakeholders well into the future.
Our MISSION is to improve the lives of all of the stakeholders of the Company by:
- Increasing the value of our SHAREHOLDERS’ investments consistently over time by building a perpetual earnings per share growth engine;
- Creating a work environment that our ASSOCIATES embrace every day with opportunity to grow in their careers and the ability to provide for themselves and/or their families;
- Gaining and maintaining the status of “Most Valued Partner” to our CUSTOMERS by their definition;
- Providing opportunities for our best SUPPLIERS to grow and prosper with us; and
- Giving back to the COMMUNITIES in which we live.
Our VISION is to be the BEST IN THE BUSINESS at delivering COLLABORATIVE technology solutions to INDUSTRY-LEADING technology companies.
Our GUIDING PHILOSOPHY is the Golden Rule. We consistently treat our associates, customers, suppliers, shareholders and people with whom we come into contact every day as we would like to be treated.
Using phrases like “perpetual earnings growth engine” and “best in the business” and “treating others like you would want to be treated” is not typical in most companies today. However, embedding these goals throughout PDSi encourages and enables us to think and act differently.
My second priority was to assess the current state of our business and develop a clearly defined path to achieve our mission and vision.
2006 marked the fourth consecutive year of significant sales growth, with average annual sales growth of approximately 50%. Over the past four years, sales have grown from $16 million in 2002 to $76 million in 2006. During this period we more than tripled the number of large customers (over $250,000 in annual sales) and diversified our business into key OEM markets.
These achievements, highlighted by 70% sales growth in 2006, challenged our ability to scale operations to service the higher volume and lower margin business added in recent years. Early in 2006, we developed a strategy to address these issues and strengthen our capabilities going forward. The strategy required fundamental changes in our management team, cost structure and the implementation of more rigorous processes to effectively scale our business to profitably meet current and future demands.
To build a company that can achieve sustained growth and profitability, we must have the right people in place to execute a business strategy that proactively adapts to change in products or technologies on the market, while continuing to service current products as part of lifecycle management. During 2006, we added experienced professionals to our management team to execute our strategies. George Troutman, an executive with broad-based industry and financial experience, joined PDSi as Chief Financial Officer and Treasurer in May. Sue Rothberg, a manufacturing executive with more than 20 years of experience at IBM, was appointed to the new position of Vice President of Operations and Supply Chain in October. Also in October, our founder, John Bair, assumed responsibility for PDSi’s repair operations in addition to his responsibilities as the Company’s Chief Technology and Innovation Officer. We are making solid progress improving our operations and expect that under this new leadership we will continue to enhance our capabilities and lower costs during 2007. In August 2006, we elected Benjamin Brussell, an industry veteran specializing in corporate strategies and financial transactions for technology companies, to our Board of Directors.
In June 2006, we announced a performance improvement plan to upgrade the manufacturing and repair operations at our headquarters facility in Groveport, Ohio, to open a warehouse and logistics facility nearby, and to consolidate our domestic production operations at the Groveport locations. The completion of the consolidation involved one-time charges of approximately $1.6 million, with expected annual savings of approximately $1.6 million once the California facility is re-leased. The cost of our facility in California, acquired in August 2005, was four times the cost per square foot of our facilities in Ohio, which contributed to margins below our target.
Beyond the financial costs associated with the consolidation in 2006, we also faced significant integration issues due to the timing of our move from California. Sales volume in two key accounts began to soar in the second half of the year, exposing gaps in an infrastructure in transition. The record $26 million of sales in the fourth quarter was an exceptional achievement that was only possible because of the commitment of our entire PDSi team. It also helped us identify the items to be addressed in order to achieve our goals.
Consistent with our strategy, we have been conducting an in-depth analysis of our business model to determine key factors that will contribute to sustained profitability. We have determined that productive business for PDSi:
- Has a high level of complexity in either technology or process;
- Is of low to medium volume not attractive to much larger electronics manufacturing services (EMS) companies; and
- Has global business requirements most smaller EMS or specialty service companies cannot provide.
We recognize that business with these attributes has increased value-added characteristics and higher margin potential. Not all of our business fit this profile in 2006. A recent customer profitability analysis has given us a better understanding of what business is or is not a good fit for PDSi. This more disciplined approach to our business may result in slower growth than in recent years as we sharpen our focus on profitability. Initial feedback from this process is encouraging and we anticipate seeing improvement in our margins as we progress through 2007.
We are committed to profitable growth. The team we are building, full implementation of the operational improvement plan announced in June 2006, the scalability improvements initiated in the fourth quarter of 2006 and the comprehensive review of our business will position us to better balance revenue growth with profitability objectives going forward. Our sales efforts are now more focused on opportunities with customers who recognize our role as an enabler to meet their specialized product and service needs rather than a commodity service provider. These initiatives will sharpen our focus and contribute to improved long-term performance.
Many of our customers are global Fortune 500 companies with operations located on several continents. In order to serve their specialized needs, PDSi will continue to gradually expand its geographic presence beyond North America into Europe, the Middle East and Africa (EMEA) and the Asia Pacific (APAC) regions consistent with clearly defined business opportunities. In November 2006, we announced a non-binding letter of intent to acquire Aspan Computer Repair Laboratories B.V. (Aspan), located near Amsterdam, The Netherlands. Aspan’s capabilities and corporate culture are a solid fit for PDSi. It is located in a region near the headquarters of some of the world’s largest global OEMs with some of the world’s best logistics capabilities. We have established our first APAC repair and integration facility in Hong Kong. These additions to PDSi’s footprint represent low-risk investments in our future infrastructure and expanding capabilities.
Our focus for 2007 is to adhere to our business model, which specifically addresses profitability and scalability goals. We want to capitalize on the void of full capability technology enablers for OEMs and Independent Software Vendors ( ISVs) with computer hardware in their products, by:
- Completing our operational improvement plan and showing measurable progress in terms of quality, delivery and the ability to scale efficiently;
- Evaluating our sales strategy, processes and organization to effectively target OEMs and ISVs who recognize the value PDSi offers and whose needs are complex, with on-going programs of low to medium volume, requiring some level of global service and support;
- Completing the replacement of several non-integrated systems accumulated through the years with one main enterprise resource planning system, a significantly upgraded version of the BaaN system acquired with GNP in 2005, to further improve our scalability and increase the reliability of our systems infrastructure; and
- Completing the acquisition of the operations of Aspan in the Netherlands and the ramp-up of our new facility in Hong Kong, including attainment of their ISO 9000 registration.
We are excited about the future and opportunities to accomplish PDSi’s mission to improve the lives of all stakeholders and achieve our vision of the being the best in the business. Future success will be influenced by careful execution of our strategy, demonstrating that we can grow profitably, and developing a compelling value proposition for our customers within the global EMS market.
Our Annual Shareholder meeting will be on May 8, 2007. We hope you will join us. We would like to thank all of our stakeholders for their investments in PDSi and their continuing support.
Respectfully,
/s/ Michael R. Sayre
Michael R. Sayre
President and Chief Executive Officer |
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