Moog Inc (MOG.A) 2005 Q3 法說會逐字稿

Welcome to ZEVEX’s third quarter 2005 financial results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Tuesday November 1, 2005. I would now like to turn the conference over to Nancy Schultz, Director of Corporate Communications and Investor Relations. Please go ahead ma’am.

Thank you. Good afternoon and than you for participating in today’s conference call. Joining me today are President and Chief Executive Officer David McNally, and Chief Financial Officer, Phillip McStotts, to discuss our 2005 third quarter financial results. A short time ago ZEVEX released financial results for the third quarter of 2005. If you have not received the news release, or if you would like to be added to the company’s fax or email list, please contact me at 801-264-1001, ext. 203. A replay of this conference will be available on our website at www.zevex.com, or www.streetevents.com. On the ZEVEX homepage, click on the microphone symbol to hear the replay broadcast. You may also access archived copies of ZEVEX’s news releases on the investor relations portion of our website.

Before we proceed it is my duty to inform you that comments made by management during this conference call may contain forward-looking statements that involve risks and uncertainties regarding the future results of ZEVEX International. Please refer to the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2004, and Form 10-Q for the third quarter of 2005. These filing identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements. Now I’d like to turn the calla over to David McNally, our CEO.

Thank you Nancy. Good afternoon listeners, and welcome to our third quarter 2005 conference call. We are delighted to announce record results for the quarter. As you may have seen by now, third quarter revenue grew 52% to $8.1 million compared to $5.3 million in last year’s third quarter. Revenue from our Therapeutics division grew 59%, and revenue from our Applied Technology division grew 44%.

We reported record net income of $785,000 or $0.22 per share, compared with a net loss in last year’s third quarter of $295,000 or $0.09 per share. Phillip McStotts will go into more detail during his financial review.

For those of you who may not know, we are committed to two businesses, our Therapeutics division and our Applied Technology division. Our Therapeutics division makes and sells enteral nutrition pumps, which are used by patients who cannot feed themselves. We believe that our pumps are superior to all others offered in the market, because they combing accuracy in nutrition delivery, with small size, durability, long battery life, and patented safety features that allow enteral patients to enjoy unprecedented mobility. In addition, we develop, manufacture and market disposable sets and accessories for the pumps.

We are focused globally on the home healthcare market, which due to the aging population and pressure on controlling healthcare costs, is the fastest growing market segment for enteral nutrition delivery devices.

In January we introduced our newest addition to our enteral nutrition pump product line, the EnteraLite Infinity pump. In June we received the silver medical design excellence award from Cannon Communications for the EnteraLite Infinity pump. In August, Numico, our exclusive distributor of a private label version of the EnteraLite Infinity, launched the Flocare Infinity in European markets. Market acceptance of this product has been going well.

In the United States, sales of disposable sets are accelerating, based upon our rapidly growing install base of pumps. In the third quarter we again achieved record domestic ambulatory product revenue, based upon the strong sales of our EnteraLite Infinity and EnteraLite product lines.

Our Applied Technology division develops and manufactures medical device components and systems under private label for many of the world’s leading original equipment manufacturers. Our core competencies in this division include expertise in fluid management and measurement and surgical ultrasound. We make surgical tools, components and systems that improve the safety and effectiveness of cataract surgery, open heart surgery, colon resection, organ transplantation, dialysis, blood component harvesting, and infusion therapies.

Before I provide insight into our performance and prospects, I’d like to turn the call over to our Chief Financial Officer, Phillip McStotts, who will provide detail on our financial results.

Thanks Dave. Revenue for the third quarter of 2005 was $8.1 million compared with $5.3 million for the third quarter of 2004, a 52% increase. Revenue for the first nine months of 2005 was $20.9 million compared with $17.8 million for the same period of 2004, an 18% increase.

Our Therapeutics division generated approximately 58% of total revenue in the third quarter, and 56% during the first nine months of 2005, while our Applied Technology division produced 42% of total revenue for the quarter and 44% for the first nine months of 2005. Therapeutics division revenue increased 59% to $4.7 million during the third quarter of 2005, compared to $3 million in the third quarter of 2004. The increase in revenue from last year’s third quarter is due to an increase of $1,370,000 or 561% in our international Therapeutics revenue, largely due to growth in European demand from Numico, our exclusive distributor for our private label version of our most advanced enteral feeding pump.

Our domestic EnteraLite Infinity and EnteraLite portable feeding pump and disposable set revenue increased $470,000 over the third quarter of 2004. These increases were slightly offset by a decrease of $95,000, or 13%, in sales of our stationary enteral feeding delivery products within our Therapeutics division.

Applied Technology division revenue increased 44% to $3.4 million during the third quarter of 2005 compared to $2.4 million in the third quarter of 2004. Specifically during the third quarter of 2005 enteral revenue increased approximately $920,000 or 106% over the third quarter of 2004, because one of sensor customers substantially increased purchases of our products.

Also surgical hand piece revenue increased approximately $135,000 or 18% over the third quarter of 2004, primarily due to increased demand from our largest surgical hand piece customer. Both our Applied Technology engineering revenue and our medical systems revenue held steady during the quarter compared to the third quarter of 2004.

Therapeutic division revenue increased 20% to $11.2 million during the first nine months of 2005, compared to $9.3 million in the first nine months of 2004. The increase in revenue from last year’s first nine months is due to an increase of $1.4 million, or 100%, in our international Therapeutics revenue during the first nine months of 2005 compared to the first nine months of 2004. This increase was largely due to private label pump sales to Numico, which began in the second quarter of 2005.

Our domestic EnteraLite Infinity and EnteraLite portable feeding pump and disposable set revenue increased $720,000 or 12% over the first nine months of 2004. These increases were partially offset by a decrease of $310,000 or 14% in sales of our stationary enteral feeding delivery products within our Therapeutics division.

Our Applied Technology division revenue increased 15% to $9.7 million during the first nine months of 2005, compared to $8.4 million in the first nine months of 2004. During the first nine months of 2005 enteral revenue increased approximately $1,100,000 or 30% over the first nine months of 2004. One of our sensor customers substantially increased its purchases of our products during the third quarter of 2005. Also surgical hand piece revenue increased approximately $70,000 or 3% over the first nine months of 2004.

Our Applied Technology engineering revenue increased approximately $25,000 or 9% during the first nine months, and our medical systems revenue increased approximately $75,000 or 4% from the first nine months of 2004.

Gross profit as a percentage of revenue was 37.9% for the third quarter of 2005, compared to 34.1% for the third quarter of 2004. Gross profit was 37% for the first nine months of both 2005 and 2004. We primarily attribute the increase in gross profit during the third quarter of 2005 as compared to the prior year to different product mix delivered during each period and the increase in revenue, which spread fixed manufacturing overhead costs over greater revenue.

Selling, general and administrative expenses were $1.9 million, or 24% of revenue for the third quarter of 2005, compared to $1.7 million or 32% of revenue for the third quarter of 2004. During the first nine months of 2005 selling, general and administrative expenses increased to $5.7 million or 27% of revenue compared to $5.4 million or 30% of revenue for the first nine months of 2004.

Increases in selling, general and administrative expenses for these periods are primarily related to increases in personnel and insurance costs. However, as sales growth exceeded the rate of increase in expenses, we were able to achieve operating leverage and SG&A expenses expressed as a percentage of revenue decreased in the three and nine month periods of 2005.

We had no income tax expense in the third quarter of 2005, and an income tax benefit of $34,000 in the third quarter of 2004. We had income tax expense of $3,000 in the first nine months of 2005 compared to an income tax benefit of $30,000 for the first nine months of 2004. The income tax expense in 2005 represents minimum tax payments, due to the various states in which we are required to file. Income tax benefit in 2004 is a result of an income tax refund, partially offset by minimum tax payments due to the various states in which we are required to file. We expect we’ll be able to realize a portion of a deferred tax asset related to net operating loss carry-forwards in 2005, which would result in a partial reversal of the related valuation allowance.

We had federal net operating loss carry-forwards totaling approximately $1,213,000 that begin to expire in 2023. We also had state net operating loss carry-forwards totaling approximately $9,716,000 that begin to expire in 2016.

For the third quarter of 2005 we had net income of $785,000 or 10% of revenue, compared with a net loss of $295,000 or 6% of revenue in the third quarter of 2004. Fully diluted earnings per share for the third quarter of 2005 were $0.22 compared with a net loss per share of $0.09 for the third quarter of 2004.

For the first nine months of 2005 we had net income of $999,000 or 5% of revenue, compared with net income of $107,000 or 1% of revenue, for the first nine months of 2004. Fully diluted earnings per share for the first nine months of 2005 were $0.28 compared to earnings per share of $0.03 for the same period of 2004. The increase in net income during 2005 compared to 2004 is primarily related to the increase in revenue in 2005 and the resulting increase in our gross profit, partially offset by increased selling, general and administrative expenses.

Working capital at September 30, 2005 was $6.6 million compared to $5.9 million at December 31, 2004, and $6.2 million at September 30, 2004. The outstanding balance on our funded debt at September 30, 2005 was $2,590,000 compared to $2,120,000 at December 31, 2004, an increase of $470,000. The change in funded debt during the first nine months of 2005 was associated with an increase in our line of credit balance. The increase in the balance of our line of credit was primarily related to an increase in account receivable balances due to substantially increased sales in the third quarter, partially offset by a decrease in inventories.

Total stockholders equity was $13.7 million, at September 30, 2005, compared to $12.7 million, at December 31, 2004.

Now, I’d like to turn the call back over to Dave.

Thank you, Phil. This quarter’s record results reflect strong sales growth from both of our business divisions. Our Therapeutics division produced sales growth of 59% during the third quarter. Within the Therapeutics division our domestic sales team once again generated record sales of our ambulatory pumps and disposable sets during the quarter. Our ambulatory products include our new Enteralite Infinity and our Enteralite pumps and disposable sets. Sales of domestic stationary pumps and disposable sets declined compared with last year’s third quarter, but the decline was more than offset by ambulatory product sales growth. Overall, our domestic Therapeutic sales team generated sales growth of 14% over sales from last year’s third quarter.

International sales from our Therapeutics division grew by approximately $1.4 million, compared with the third quarter of 2004 as sales to our largest international distributor, Numico, have picked up pace. We expect that sales to Numico will exceed $3.5 million this year, as we projected last year. As we have also previously stated, we expect that our business with Numico will product $7 million in annual revenue during the term of our contract, beginning in 2006.

Sales from the Applied Technology division were also strong this quarter. The Applied Technology division generated 44% sales growth this quarter, based on strong sensor and surgical hand piece sales. I’m pleased to report that sales to our largest applied technology sensor and surgical hand piece customers were very strong this quarter. These customers have indicated that unit volume requirements should continue to be strong through the fourth quarter.

Looking back sequentially to the second quarter of this year, our third quarter revenue grew 20%. Therapeutics Division revenue grew 31% and Applied Technology Division revenue grew 7%, compared with the second quarter of 2005.

During the third quarter, operating expenses continued to decline, as a percent of revenue, compared to the second quarter of this year. Selling, general and administrative expenses declined to 24% of revenue for the third quarter of 2005, compared with 30% of revenue in the second quarter of this year.

Total operating expenses were 28% of revenue for the third quarter, compared with 33% of revenue for the second quarter of 2005. This favorable comparison is primarily due to controlled growth of operating expenses spread over greater revenue.

Over the past five years, we have built a more capable leadership team, beginning at the board level. This quarter’s results reflect the successful execution of our strategies and tactics by our employees, including our leadership team. Most recently, I am pleased to announce that we have added Mr. Shawn Fojtik as our Vice President of sales and marketing. Shawn is providing strategic direction in coordinating our sales and marketing personnel, and we welcome him with enthusiasm to ZEVEX.

Looking forward, we are immediately focused on producing strong results for the fourth quarter. Based upon our Therapeutics forecast, and backlog of Applied Technology customer orders, and barring any unforeseen events, we expect to again post strong growth for both divisions during the fourth quarter.

The leadership team is also engaged in planning for the coming year. Based upon anticipated growth, we are recruiting additional personnel, including production, supervisory and technical positions.

Now operator, I’d like to open the conference call up to questions from our listeners.

[OPERATOR INSTRUCTIONS] David Wright, with Henry Investment Trust.

Good afternoon all. Outstanding; congratulations, you all. I know you’ve been working hard for a number of quarters. You should pat each on the back, and you should reach around and each give yourselves a pat on the back, as well. Very well done.

I have two questions. The first is, just--I’ve confused myself, and I know Dave, you read what I’m reading in the press release here. “Growth in our Domestic ambulatory pump and disposable set sales lead to a 14% increase in revenue from our Therapeutics division during the year’s third quarter.” I don’t understand that.

That is when we look at our area of focus for the Therapeutics division; it’s our ambulatory product lines, which includes our original Enteralite product line and now the next generation product, our most advanced product, the Enteralite Infinity. And so, what we’re doing is breaking out the growth piece of that domestic business. As we reported as well, the stationary part of the business declined.

Right, so basically, that’s kind of same-store sales ambulatory, excluding Numico?

That is correct.

I understand. I hadn’t focused on the word domestic. Thank you. And my other question has to do with backlog, and where it is and how much might be shippable in Q4 and how much thereafter.

Dave, this is Phil. When we report backlog, we pretty much report our backlog relates to our applied tech business. As of the end of September, on September 30, 2005, our backlog was about $7.6 million. Where we estimate right now, is about 40% of that backlog will be shipped by the end of the year.

So, that’s $3 million in--I’m sorry. That’s $3 million in the Applied Technology right there, and you did what, $3.3 million in the third quarter?

Yes.

So, you’ve already got booked roughly what you did in the third quarter for the fourth quarter and that doesn’t include any new business that you might build and ship during the fourth quarter?

That is correct.

That’s unbelievable. Those were my questions, well done. Thank you.

Don Littlewood, with Littlewood Burke and Company.

Well Dave, what can I say? Patience has been rewarded and I have lived long enough to see the results.

Thank you, Don, and thank you for your continued support.

My fears of trading dollars on the Numico arrangement are apparently unfounded. It appears you’re making a profit on that business, which is excellent.

It’s good business.

You mentioned the Applied Technology business for the fourth quarter. You’ve got the backlog. I assume that backlog relates to the orders that you’ve been receiving from them for these particular products?

Yes. Typically those orders are rolling. Some customers have shortened the length of time for which they’ll place orders, in terms of deliveries. Others place orders that may be spread out over as much as six months.

Do you believe these customers are going to continue their order pattern in 2006?

It remains to be seen. There are no circumstances that we can foresee presently that would cause demand to change dramatically, although, we all have experienced that the business can be bumpy. But from where we’re sitting right now, we don’t see any dramatic change.

Are you working on new products for any of these customers?

We’re actually working on new pump products for additional customers of the stature of these customers.

I see. Excellent; you’re doing a great job. It looks like the fourth quarter is going to be a good one and you may be set up for a good 2006. Good job.

We’re very excited. Thank you, Don.

Bill Shriver, with Pine Cone Capital.

Thank you. David, Phil, first of all, congratulations on executing what you’ve been talking about the last three or four quarters. My congratulations.

This is the first quarter with, I’ll say, substantial sales to Numico. I just want to hear what type of feedback you’re getting from the end user in Europe. In other words, is Numico being very successful in placing this equipment? That’s the first part of the question and then, I guess, what plans do you have for additional products that could be sold through that channel?

The answer to the first question is Numico is an excellent business partner. We’ve been able to attend the most recent market launch in Germany, which is one of their largest markets. And the feedback that we were hearing through their sales personnel was very, very positive about the product living up to very high expectations.

So, there’s a high level of excitement with our business partner and we’re working together, not only to insure the supply of products to them, but looking ahead to insure the end users are indeed very satisfied.

And the answer to your second question, there is also an innovation element to our relationship, whereby we are looking continually at ways to enervate for the future. We’re looking out years ahead in products that we can potentially bring to market together. So, that is part of our collaboration as well.

OK, David. Very good. Once again, congratulations and I appreciate the feedback. Continued success.

[OPERATOR INSTRUCTIONS] Bruce Whaley [ph], with Wilson Davis.

Hi guys. A question I have is, is this third quarter--is there any particular quarter that’s higher or lower than any others? Is this something we could expect to have happen in the fourth quarter, then the first quarter and so on? Or, are there some variables there?

Are you asking with respect to the cyclical nature that might exist for our business, Bruce?

Well yes, is it cyclical quarter-to-quarter?

There’s not a predictable cyclical nature to our business. As we saw last year. The second half of the year was not particularly strong. In years past, we have seen some years where the second half was strong, as our Applied Technology customers drove to get more product out into the market place. So, I would say in answer to your question that there is not a predictable cyclical nature.

OK. All right, that’s all. Thank you.

OK management, at this time I will turn the conference back over to you for any closing comments you may have.

Thank you. In closing, I would like to praise our employees and leadership team on the company’s performance this quarter. The results that we have reported are a direct result of the efforts of a team focused on our customers. Our team is enthusiastic about finishing the year with another profitable growth quarter.

We look forward to keeping you apprised of our progress. Thank you for your support and for joining us on this call.

Ladies and gentlemen, that concludes the SEVEX third quarter, 2005 financial results conference call. Once again, thank you for your participation in today’s conference. At this time, you may disconnect.