Moog Inc (MOG.B) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ZEVEX 2005 investor conference call. At this time all participants are in a listen only mode. Following today's presentation instructions will be given for the question and answer session. If anyone should require operator assistance during the conference, please press the star key followed by the zero. At this time, I would like to turn the conference over to Nancy Schultz, the Director of Investor Relations, please go ahead.

Good afternoon and thank you for participating in today's conference call. Joining me today are President and Chief Executive Officer, David McNally, Chief Financial Officer, Phil McStotts, to discuss our year-end financial results for 2005. A short time ago ZEVEX released financial results for the fourth quarter and year ended December 31, 2005. If you have not received the News Release or if you would like to be added to the fax or email list, please contact me at 801-264-1001, extension 203. A replay of this conference call will be available on our Web site at www.zevex.com or streetevents.com. On the ZEVEX homepage click on the microphone symbol to hear the replay broadcast. You may also access archived copies of ZEVEX news releases on the Investor Relations portion of our Web site.

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 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 filings identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements, so now I'd like to turn the call over to David McNally, our CEO.

Good afternoon, listeners, and welcome to our 2005 year-end conference call. We are delighted to announce record results for the fourth quarter and 2005 fiscal year. For 2005 revenue increased 28% to $30.3 million compared with $23.6 million for the prior year. Net income was a record $1.9 million or $0.52 per share compared with a net loss of $179,000 or $0.05 per share for 2004. Fourth quarter revenue grew 60% to $9.4 million compared with $5.9 million in the fourth quarter of 2004. Net income for the fourth quarter was a record $906,000 or $0.23 per share compared with a net loss of $286,000 or $0.08 per share for the prior year's fourth quarter. Phil 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 combine 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, 2005 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. 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 very well and we continue to receive positive feedback from Numico and their customers.

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

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. We have developed a design award winning kidney transporter for one of our Applied Technology Division customers and we produce custom sensors for the design award-winning product of another customer.

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

Revenue for the fourth quarter of 2005 was $9.4 million compared with $5.9 million for the fourth quarter of 2004, a 60% increase. Revenue for the year ending December 31, 2005 was $30.3 million compared to $23.6 million for the same period of 2004, a 28% increase. Our Therapeutics Division revenue increased 80% to $5,665,000 during the fourth quarter of 2005 compared to $3,142,000 in the fourth quarter of 2004.

The increase in revenue from last year is due to a 330% increase in international sales, largely due to increased sales to Numico, our exclusive distributor for a private label version of our Infinity enteral feeding pump in Europe. Additionally, our EnteraLite Infinity and EnteraLite portable Feeding Pump and disposable set revenue increased 40% over the fourth quarter of 2004 due to sales of the EnteraLite Infinity Pump, which was introduced in the market in early 2005. These increases were partially offset by a decrease of 12% in sales of our stationary enteral feeding delivery products during the fourth quarter of 2005 compared with the same period of 2004.

Our Applied Technology Division revenue increased 36% to $3,690,000 during the fourth quarter of 2005 compared to $2,721,000 in 2004. Specifically during the fourth quarter of 2005, sensor revenue increased 87% over the fourth quarter of 2004. Also, surgical handpiece revenue increased 33% and Applied Technology Engineering revenue increased 64% during the fourth quarter of 2005 compared to the same period of 2004. These increases more than offset a decrease in Medical Systems revenue of 43%.

For the year ended December 31, 2005 our Therapeutics Division revenue increased 35%, $16,899,000 compared to $12,489,000 in 2004. The increase in revenue from last year is due to 165% increase in our international therapeutic revenue largely due to increasing sales to Numico.

Our EnteraLite Infinity and EnteraLite portable Feeding Pump and disposable set revenue increased 19% over 2004. These increases were partially offset by a decrease of 14% in sales of our stationary enteral feeding delivery products within our Therapeutics Division.

Our Applied Technology Division revenue increased 20% to $13,375,000 during 2005 compared to $11,145,000 in 2004. Specifically during 2005, sensor revenue increased 42% and surgical handpiece revenue increased 12% over 2004.

Applied Technology Engineering revenue increased 21% during 2005 compared to 2004. These increases were partially offset by a decrease in medical systems revenue of approximately 8%.

For the fourth quarter of 2005 the Company had net income of $906,000 compared with a net loss of $285,000 in the fourth quarter of 2004. The fully diluted income per share for the fourth quarter of 2005 was $0.23 compared to a net loss per share of $0.08 for the same period in 2004.

For the year ended December 31, 2005 the Company had net income of $1,905,000 compared with a net loss of $179,000 for 2004. The fully diluted income per share for 2005 was $0.52 compared to a net loss per share of $0.05 for the same period of 2004.

Our Therapeutics Division accounted for approximately 61% of total revenue fourth quarter and 56% of revenue during 2005, while our Applied Technology products accounted for 39% of total revenue for the fourth quarter and 44% for the year ending December 31, 2005.

Gross profits as a percentage of revenue was 39% for the fourth quarter of 2005 compared to 32% for the fourth quarter of 2004. Gross profit was 37% for 2005 compared to 36% for 2004. The increase in gross profit for 2005 was due to a more favorable product mix.

Selling, general and administrative expenses during the fourth quarter of 2005 were $2.3 million or 25% of revenue compared to $1.7 million for the fourth quarter of 2004 or 30% of revenue. Selling, general and administrative expenses were $8.1 million in 2005 or 27% of revenue compared to $7.1 million in 2004 or 30% of revenue. These differences are primarily related to increases in recruiting, personnel and insurance costs in 2005. However, SG&A expenses expressed as a percentage of sales decreased during both the quarter and the year.

As stated earlier, the Company had net income of $1,905,000 in 2005 compared to a net loss of $179,000 in 2004. The increase in net income during 2005 was primarily related to revenue growth and the resulting increase in our gross profit, the increase in profit margins related to our product mix, partially offset by increased selling, general and administrative expenses.

We had a tax expense of $4,000 in 2005 compared to an income tax benefit of $31,000 in 2004. Income tax expense in 2005 resulted from the minimum tax payments due to the various states in which we filed. The income tax benefit in 2004 was a result of an income tax refund partially offset by minimum tax payments due to the various states in which we filed.

Working capital at December 31, 2005 was $7.8 million compared to $6 million at December 31, 2004. The Company generated $1.8 million in positive cash flow from operations in 2005. This was the fourth consecutive year of positive cash flow from operations for the Company.

The outstanding balance of our funded debt at December 31, 2005 was $1,966,000 compared to $2,120,000 at December 31, 2004. Stockholders equity was $15.1 million at December 31, 2005, up $2.4 million from $12.7 million at December 31, 2004. Now, I'd like to turn the call back over to David.

This quarter's record results reflect strong sales growth from both of our business divisions. Our Therapeutics Division produced sales growth of 80% during the fourth 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 Pump and its predecessor the EnteraLite and disposable sets for both of these products. Sales of domestic stationary pumps and disposable sets declined compared with last year's fourth quarter, but ambulatory product sales growth more than offset that decline. Overall, our domestic Therapeutics sales team generated sales growth of 27% over U.S. sales from last year's fourth quarter.

International sales from our Therapeutics Division increased 330% compared with the fourth quarter of 2004, as sales to our international distribution partner, Numico, have continued to grow. During the fourth quarter our sales to Numico exceeded expectations based upon the minimum purchase requirements of our strategic agreement. During 2005 Numico directed its launch efforts in Europe. In 2006 Numico is expected to continue to introduce the Flocare Infinity into additional global markets.

Sales from the Applied Technology Division were also strong in the fourth quarter. The Applied Technology Division generated 36% sales growth based upon continued strong sensor and surgical handpiece sales. In particular, we benefited from market share gains by our largest surgical handpiece and sensor customers during the fourth quarter. Our customers for these products have indicated that unit volume requirements should continue to be strong during 2006.

As Phil mentioned, we produced record net income of $1.9 million in 2005, while achieving revenue growth of 28%. Our Therapeutics Division produced revenue growth of 35% due to the successful global launch of our new Infinity Enteral Feeding Pump product line.

Our domestic sales force generated 11% sales growth for the year, while international sales increased 165%. Our Applied Technology Division produced 20% revenue growth based upon strength in the business of some of our largest customers.

For 2005 operating expenses were $9.3 million or 31% of sales compared with $8.6 million or 36% of sales for the prior year. Selling, general and administrative expenses were $8.1 million or 27% of sales compared with $7.1 million or 30% of sales for 2004. A significant portion of the increase in SG&A expenses reflects our investment in expanding our selling and marketing resources. During 2005 we successfully recruited a Vice President of Sales and Marketing and two new Business Development Directors. All three of these are newly created positions.

Research and development expenses for 2005 were $1.2 million or 4% of sales compared with $1.4 million or 6% of sales for the prior year. The decline in R&D expenses followed the launch of the Infinity Enteral Feeding Pump Product line early this year, which prior to this year consumed a tremendous amount of R&D Resources.

We expect the momentum of our 2005 success to carry us into 2006. Based upon early indications from both of our divisions, we believe that we could again produce revenue growth of more than 20% this year. While we execute in order to produce profitable growth in the current year, we will also be focusing considerable resources on new business development. During 2006 we expect to further increase our investment in selling and marketing for the purpose of increasing sales in 2006 and beyond. We do not expect that this investment will increase SG&A expenses expressed as a percentage of sales. This year we will increase our investment in research and development to approximately 5% of sales as we develop new products for both divisions.

Looking forward, we would like to remind our listeners that in 2006 we expect to incur a tax expense, as our net operating loss will be consumed in the first half of the year. Also, we will begin expensing stock options in compliance with FAS123R. We believe that stock options are an important tool for employee motivation and retention.

Our record results for the year and fourth quarter reflect the execution of a plan and initiatives that we put into place well before 2005. I would like to acknowledge the efforts of our dedicated employees for succeeding in growing sales through market expansion and market share gains in competitive medical device environments. Our progress reflects the quality of the products that we design and manufacture and the level of service that we provide our customers. Now, operator, I would like to open the conference call up to questions from our listeners.

[Operator Instructions] Our first question comes from [Don Littlewood] with Littlewood Burke & Company.

Well, David, I've got to congratulate you. You did what you said you were going to do, and it looks like you've got it on a nice roll at this point.

Thank you, Don.

Question on Numico, you stated that it exceeded expectations for shipments to them in the recent quarter. Do you expect that to continue like that?

In terms our forecasting, we forecast based on the minimum commitments. Our operations team is closely linked with Numico and working in step with them to make sure that we meet their needs, but we receive a rolling forecast from Numico and continue to work with them going forward.

Good. You mentioned they were just starting to go beyond Europe. Have you gotten anything from anyplace else yet?

The timing of the launch is something that is internally coordinated within Numico. I can say that primarily we were focused on Europe and the major markets last year, including the markets in Germany and UK. Looking forward, we expect the launch to expand into the Pacific Rim, also Australia, New Zealand and possibly South America.

All right, very good. Option Care, has there been any development of an order rate there?

We have continued to grow our business with Option Care. They have been very keen to the benefit selling strategy that our product offers and the opportunity for them to secure new referrals, so we have actually seen growth in the Option Care business and support within the organization at the very highest levels.

Applied Technology, can you discuss a litter bit about any new customer sponsored projects that are underway?

I can discuss them in general without specifics, Don. I can say that we do have new sensor products in the pipeline as well as surgical tool products in the pipeline for large medical device companies that are large potential distribution partners. We're working with them on customization of our technologies to meet their needs, and expect to be rolling those out not only in 2006 but beyond. Typically the incubation time is anywhere from 12 to 24 months for those programs.

Last quarter you gave us a backlog figure for Applied Technology as 7.6 million. Can you give us a backlog as of the end of December for Applied Technology?

Our backlog is consistent with that level, consistently strong with that. I'd like to point out, Don, that of course in terms of the trends with our customers we're seeing the duration of blanket orders tightened up, being shorter times which would reduce our backlog figure. So backlog is not particularly an accurate projection of future business but I can say that our backlog is as strong as it was at that time.

Good. You added a second shift in production and I guess started it long before early December. But since early December have you expanded your production on the second shift?

We've been able to meet even the increased production of last quarter with that current second shift, and what we have seen is an improvement in their productivity as they have come up and running.

Very good. You're off to a great start. Keep it up. Thanks.

Thank you, Don. Thank you for your support.

[Operator Instructions] And our next question comes from Bill Shriver with Pine Cone Capital.

First of all I want to congratulate you. It looks like you executed very well against what you've been saying over the last couple of years, so I want to congratulate you and your team on that. One thing that I've seen -- you know, as you go forward here and you're actually profitable, you're going to start to be valued compared to a lot of other medical device companies. I wanted to ask you about the increase in the diluted average shares outstanding. It looks like it increased quite a bit over the last three months and maybe you can comment on what you expect going forward.

Bill, this is Phil. That calculation obviously comes in relationship to outstanding options in relationship to the stock price. With the stock price increasing dramatically in the last quarter is the impact in relationship to that dilution, so it's a hard question to answer without saying-- giving a what if the stock price is X versus Y. So if you-- most of the options that are outstanding are somewhere in the $4.00 to $4.50 range in relationship to their strike price. So the calculation on fully diluted shares, you work there against the current stock price in the market.

Okay, okay. Well, I appreciate your shedding some more light on that. That's really my only question. Just congratulations on a great year, and keep it going.

[Vincent Stotten] with Wedbush Inc.

Congratulations on the quarter. I just had a quick question. If options were expensed this quarter, how much would the expense have been roughly?

That number will actually show up in the 10-K, and the 10-K has not been filed yet. These are unaudited numbers basically because we're not an accelerated filer. We're kind of in the second group of companies that get audited, and rightfully so. Our auditors are here right now, but we will be filing our 10-K upon the completion, and that number will actually show up in the 10-K.

Okay. And also, just I didn't quite hear what you said, but what was your revenue forecast for 2006? You said based on early indications--?

Based on early indications, we believe that we could exceed 20% revenue growth again this year.

[Operator Instructions] [Bob Nims] with the Salt Lake Tribune.

First time on one of your conference calls, so forgive me if I don't know the history of this. But I'm just wondering why your results are unaudited?

And like I was just telling Vincent from Wedbush, it's -- we are not an accelerated filer. We wanted to make sure that we got the information out to the public as soon as possible. We feel very good about the data, but our auditors are here currently, and that's the reason they're unaudited at this point in time.

And basically to simplify that, Bob, even further is that we're in a queue to have the auditors audit our Company's financials, and we don't come to the front of the pecking order because of our size and our filing status. And -- but again, as Phil mentioned, we're confident in the results and we wanted to get the information out into the public's hands as quickly as we could as soon as we had a high level of confidence.

When your results have completed audit, would you or will you be re-releasing or putting out a new release or --?

If there are any material changes, the answer to that would be yes. But we will be filing our Annual Report with the SEC on Form 10-K.

At this time we don't anticipate any material changes and that would mean, Bob, that it would simply appear in our public filing documents.

Thank you very much for the education. I appreciate it.

We're delighted to have you on the call, Bob.

[Operator Instructions] [David Chang] with Oakdale Capital.

Good job. I have a question regarding the fact that ZEVEX has about 10% market share in pumps right now versus Tyco and Abbott Labs, but a good two-year head start in R&D on the new products. What initiatives do you guys plan on taking to kind of bring that more to bear or bring some --?

A great question, David. We, while we are a small market share player here in the U.S. today, in terms of sales of ambulatory pumps, companies that sell ambulatory pumps, we sell more than half of the pumps that are sold into home care today in ambulatory pumps. So we are rapidly gaining market share in our target segment of the home health care market. We believe that our market share is in excess of 20% already in the home health care market, and our installed base is rapidly growing. So our strategy to attack the marketplace is a benefit selling strategy; that is the features of our pump allow us to translate those features into benefits -- not just quality of life but clinical outcomes for patients, which allow us to sell effectively all the way through the chain from gastroenterologists to discharge planners through the [dirble] of medical providers that want to secure those referral streams, combined with the strength of home health care providers that see this opportunity as a way for them to gain market share by accessing our product.

[Operator Instructions] Management, I am showing there are no further questions. I'll turn the conference back to you for any closing comments you may have.

Thank you. In closing, I'd like to praise our employees and leadership team on the Company's performance this year. 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 beginning 2006 with another profitable growth quarter. We look forward to keeping you apprised of our progress. We are pleased to announce that we will be presenting next week at the Roth Capital Partners Eighteenth Annual Growth Stock conference on February 21st in Dana Point, California. Please visit the news release on our Web site, zevex.com, to learn more about the conference. Thank you for your support and for joining us on this call.

Thank you. Ladies and gentlemen, that does conclude today's teleconference. Once again, thank you for your participation and at this time you may disconnect.