Pro-Dex Inc (PDEX) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to today's Pro-Dex call to discuss the Company's fiscal 2009 second quarter financial results and a review of current corporate developments. Your speakers today are Mark Murphy, Chief Executive Officer, and Jeff Ritchey, Chief Financial Officer. Today's call will be limited to one hour.

Before I turn the call over to Mr. Murphy and Mr. Ritchey, I would like to read a statement concerning forward-looking statements. Listeners are cautioned that statements made in this presentation that are not historic in nature, or that state our management's intentions, hopes, beliefs, expectations, or predictions of the future, may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended.

Forward-looking statements involve risks, uncertainties, and assumptions. It is important to note that any such performance and any actual results, financial condition, or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the presentation, as well as those discussed elsewhere in reports filed with the Securities and Exchange Commission.

Other unforeseen factors not identified in this presentation could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or changes in the future operating results, financial condition, or business over time.

With that said, I'd like to turn the call over to Mr. Murphy. Please go ahead.

Thank you all for joining us during Pro-Dex's second quarter results for the fiscal year ended June 30, 2009. After Jeff Ritchey, our CFO, provides us with a brief summary of our Q2 financial results, I will comment on the general state of the business, how we have been affected by recent events, and what our prospects are like. We will then open the phone lines for questions. So let's start with the numbers.

Revenues for the second quarter of fiscal 2009 decreased by 14% to $5.2 million from the $6.1 million in the previous year's second quarter. For the first six months of fiscal 2009, revenue decreased by 10% to $10.9 million from the $12.1 million in the previous year's first six months.

The sales reductions, compared to last year, were due primarily to lower shipments of a single product to one medical customer that was not repeated this year, as we are developing its replacement for shipment later this year. In addition, as previously discussed, we are exiting the sales of low profit, non-differentiated products, and lastly, the second quarter of fiscal 2008 included customer-funded development fees that were not repeated in this quarter.

Gross profit for the quarter decreased by 18% to $1.9 million, compared to $2.4 million in last year's second quarter. For the six months, gross margin decreased 18% to $3.7 million, compared to $4.5 million in last year's first half.

The gross margin declines were driven by the reduced sales. However, the gross margin percentage of sales for the second quarter was 37%, down only slightly from the 38% in the second quarter of last year, but represents our third consecutive quarter of sequential gross margin improvement.

The positive trend in the gross margin is attributable to improvements in both repair cost return rates of warranty-eligible products, the stabilization of the Irvine facility and the absences of onetime costs seen in the Q4 2008 move, and the realization of the effects of cost-cutting measures implemented this year.

For the six-month period ended December 31, 2008, and 2007, the gross margin percentage of sales were 34% and 37%, respectively. The decrease is attributed to a less favorable sales mix and fixed-cost absorption issues.

Operating expenses were at $1.8 million for the second quarter of fiscal 2009, down from $1.9 million in the second quarter of fiscal 2008. For the six-month periods ending December 31, 2008, and 2007, operating expenses were $3.75 million in fiscal 2009, up from $3.5 million in fiscal 2008.

The six-month cost increases were related to higher research and development and labor costs, primarily in the first quarter. During the year, we made adjustments to our labor base that began to take effect by the second quarter of fiscal 2009, resulting in lower costs for that period. However, increased compliance costs offset the labor savings somewhat.

We had an operating profit in the second quarter of fiscal 2009 of $93,000, or 2% of sales, as compared to operating income of $501,000 or 8% of sales, in the second quarter of fiscal 2008. However, for the first -- for the six-month period, the profit from the second quarter did not completely offset the loss from the first quarter, and for the first half of fiscal year 2009, we had an operating loss of $63,000, or minus 1% of sales, as compared to an operating income of $1.021 million, or 8% of sales in the first half of fiscal 2008.

We realized an effective tax benefit for the second fiscal quarter and first six months of 2009 of 98% and 79%, respectively. In addition to our normal tax credits, we benefited this quarter from a onetime retroactive tax credit due to the reinstatement of research and development tax credits for expenses incurred after December 31, 2007.

Our net income for the second fiscal quarter of 2009 was $81,000, an income of $0.01 per share, compared to net income of $305,000, or $0.03 per share for the second fiscal quarter of 2008. Our net loss for the first six months of 2009 was $37,000, which rounds to break even on a per-share basis, compared to net income of $631,000, or $0.06 per share for the first six months of 2008.

We provided cash from operations of $403,000 for the second fiscal quarter of 2009, compared to $274,000 in the second fiscal quarter of 2008. And for the year to date, used cash from operations of $56,000, compared to a provision of $1.266 million in the first half of fiscal year 2008.

At December 31, 2008, we had $406,000 in cash on hand, compared to $517,000 June 30, 2008, and $305,000 at December 31, 2007. We ended the quarter with $400,000 borrowed on our $4 million credit line of availability, down from the $2 million borrowed at June 30, 2008.

Net debt was $3.8 million at December 31, 2008, compared to $3.5 million at June 31st 2000 -- June 30, 2008, and $1.9 million at December 31, 2007.

Subsequent to the quarter end, we retired the remaining balance of the term note associated with the acquisition of the Astromec assets. This debt was retired one year ahead of schedule, and made possible through the continued cash generation of the business and the high level of available borrowing capacity on our credit lines for future use, if necessary.

We continued to invest in the stock buyback program and repurchased 69,160 shares in the second quarter, which brings us to just over 134,000 shares for the year and approximately 210,000 shares for the program to date. We are authorized to repurchase up to 500,000 shares and will continue to do so at the stock price levels seen in the past few months.

As of December 31, 2008, our backlog was at record high level of $12.1 million, compared to $11.7 million of backlog at the same time last year. These will remain stable and is currently at about $11.5 million.

With that, I'll turn the call back over to Mark for his review and outlook comments.

As all of you know, I started my comments on our last quarterly conference call with the words we lost money and used cash, indicating then that I did not want to ever have to report that again.

I am pleased to say that, even with a substantial decrease in revenue, we delivered a small profit and generated over $400,000 in operating cash this quarter. While I am not doing backflips over our marginal financial performance, I think that the numbers do communicate our commitment to running a disciplined operation, especially during these most interesting times.

In a single quarter, we drove our receivables and inventories down by over $1.1 million and returned our cost structure to year-ago levels. These actions were significant, proactive, and necessary.

I also mentioned in our last call that we still expected our total shipments this year to be higher than our total shipments last year. This is no longer the case. I will explain in a minute what we see here, but this is the possibility we are planning for.

Profit and cash are king in this business climate, and I believe we have our priorities straight.

So what's up with the topline? Our Motion Control revenues have been stable so far, tracking with last year's performance. But we see some softness in Q3, returning to normal levels in Q4. Customers seem to be burning down inventory and preserving their cash. No cancellations or long-term effects, just cautious adjustment.

The same situation is true with our Motor revenue. While commercial aircraft are still being built, the Boeing strike did create a temporary glut of parts in the system that will take Q3 to burn down.

Our Medical Device revenues are in an opposite cycle. They have been lower in Q1 and Q2 than last year, but are expected to increase in Q3 and Q4. The lower comparative sales this year for medical devices have come from two sources -- last year's large orders and this year's discontinued product line.

Our last year's comparisons do contain shipments against the large stocking order from one of our major customers. This single product to a single customer accounted for over $0.5 million in sales during Q2 of fiscal '08, and nearly $1 million in sales during the first half of last fiscal year.

These numbers compare to virtually zero sales of that same product this year, meaning that this single event explains half of the entire difference in our topline.

As we will discuss later, these are not just lost revenues, as the product involved is being replaced by a product we are just finishing. So these revenues will return, but the timing does not match last year.

We also made the decision this year to exit certain markets with products that were unprofitable. The effect has been positive for our financial performance, but negative when the topline is measured alone.

It's easy for us, in situations like this, to become myopic about short-term comparisons. While we are down year over year, we must keep in mind the big picture. Presuming our revenues finish the year at expected levels, we will have still grown our consolidated revenues over the last four years by over 60%, a consolidated average growth rate of over 12%.

So it now appears that the growth we expected and continue to expect in Q3 from our Medical Device products will be offset by the temporarily softer sales of our Motion Control and Motor products.

Regardless of revenue, we remained committed to profit and cash generation. As revenues for our Motion Control and Motor products firm up in Q4, we expect to see better results in our topline there.

Regarding the three major projects that we have been working on, here is the update. One of them has been placed on hold by the customer. This was the longest term of the three contracts and had no product revenues expected from it in fiscal year 2009, only development revenues.

The second project is nearly complete, as we are in the final testing and documentation phases of the development. The customer is pleased with our work and the final product, but has informed us that their FDA approval process could take as long as an additional year to complete. So this product will not produce any appreciable revenue for a while.

The third product -- project is also in the final testing and documentation phase and we have received our first purchase order for this product. The purchase order is for $1.6 million, creating the record level of backlog for us. Shipment of that product should begin before the end of the fiscal year. The customer is also delighted with our work, and has a very high level of confidence that this product will succeed in the market.

Let's shift now to new projects. In all three of our product lines, we are seeing a cautiousness regarding new product introductions. I don't suspect that this is news to any of you, but I think it's worth noting that while project -- new project and new product opportunities are abundant, there is a general hesitancy on the part of our customers to pull the trigger.

We remain creative in the way we structured new contracts to allow our customers access to our capabilities. One such innovation on our part is a slight hybrid between our pure business model and a traditional product manufacturer. Using several components of Pro-Dex's base technology, we are creating a basic platform for a new device.

We are in conversations with several potential customers to take this base platform, modify it very slightly for their requirements, and sell them a private-label solution at an inexpensive NRE, due to it being spread over several users. These conversations range from initial contact to a nearly-finalized agreement. While no single one of these customers could justify the effort, two or three of them make for a very interesting model for us.

Our business development activities remain robust, not only in Medical Devices but also in Motors and Motion Control. We recently hired Mr. Scott Frederick, a Motion Control strategic account manager out of Parker-Hannifin, to head up our worldwide Motion Control business development effort.

Having started only in early January, Mr. Frederick is making an immediate contribution to our business development effort. We currently have nine proposals and supply agreements in active negotiation, which represent approximately $850,000 in development service fees and an estimated $6 million in first-year product revenues.

Let me shift now to a couple of administrative updates. Regarding Intraflow, the parties we are speaking with, as distribution channel partners, are still evaluating the product. I would expect that our conversations with these parties will take place over the next 60 to 90 days. We will keep you posted as we receive feedback.

Regarding the Orange County Water District lawsuit, there has been a couple of positive developments. First, we have received written confirmation of an insurance policy that is in place. The policy covers nearly all of our attorney's fees and up to $500,000 for a potential settlement.

Secondly, the science and facts in this case seem to clearly indicate that Pro-Dex's site could not have contributed to any contamination of the primary well that is the main subject of the case and that has been documented as contaminated. Nobody can ever know what the outcome of a case like this will be until it is ultimately resolved. But I remain encouraged by the additional information that has come to light since our last call.

To wrap up my comments this afternoon, I would like to tell you a story as a metaphor for Pro-Dex. Once upon a time, there was a gardener who came upon a tree. The tree was alive, but it endured severe damage, evidenced by its fragile condition. The gardener invested heavily in the tree, watering it, fertilizing it, and constantly tilling the soil around it.

To his delight, the tree began to grow, both in size and in strength. Due to environmental conditions, however, the gardener was forced to trim the tree. He did so with great care, keeping only the strongest and healthiest limbs. When he was done trimming the tree, it was approximately the same size as it was originally -- same height, same diameter.

For those who only read about this series of events, it appeared to be an act of futility. The gardener had invested so much time and effort into the tree, only to find that it was right back to where it had started. Effectively, nothing accomplished.

But to those been seen the original tree and the new tree, it was clear that they were not the same. The new tree was richer, stronger, and healthier. It had far deeper roots, was more self-sustaining, and had an infinitely greater capacity to produce fruit.

Your Pro-Dex leadership team feels like the gardener in this story. While we all would've liked to see Pro-Dex grow rapidly and freely, the events of this year and this environment have required that we trim it. Even in trimming it, we have attempted to make it healthier.

We spend every day looking for ways to make more money, to increase revenues, to make our products more reliable, to simplify our processes, to improve our yields. And every day, we get a little stronger, healthier, and more capable of producing fruit.

As I speak with business associates in various industries throughout the country, I am hearing the same messages that all of you are -- companies whose revenues are off by 30% or more, hemorrhaging losses, called credit lines, cash starvation, obliterating cutbacks, etc.. I feel blessed to be a shareholder and a leader of Pro-Dex, where my biggest complaint is that we are not growing as fast as we used to.

I believe this enough to have personally invested an additional $53,000 in Pro-Dex stock last November during the last open trading window for insiders.

We have a strong team, a compelling business model, a profitable and cash generating engine, a secure credit line, and much more to be thankful for. It is our intention to keep it that way, and when we begin to see strength again throughout all those sectors in our economy, we will be here, strong and healthy, reaping the rewards of our investment.

In the meantime, we are not waiting around for brighter days. We are heavily engaged in making things happen. Part of our trimming involved tough decisions to exit product lines that had a limited future potential for us. This allowed us to focus all of our spending and resources on those items that will build our future. As we fight to create strong growth, we will keep solidly focused on the fundamentals that allow us to stay in the game for the long term.

I now invite you to ask any questions that you may have.

Joseph Levy, LLG Equities.

First, just a comment. Congratulations on really managing the business very well during very tough times. I see the -- it's indicated that your bookings were over $9 million for the last quarter, which is very strong. Do you expect continued strength, or that's going to abate a little?

I'd say we had relatively normal bookings, a little soft in Motion Control, but relatively normal. And then, we got the $1.6 million order for the new product that was kind of the kicker for this month. It jumped the backlog to a new level.

So, we don't expect bookings to continue to be 9.4 per quarter, indefinitely, and we don't see a lag in bookings. We expect them to kind of return to normal levels, keeping the backlog in the, hopefully, $9 million to $13 million range.

Just another question, I see that your inventory levels have come down. Is that related to the discontinued products?

A little bit, but generally, our revenues are down, and I'd say that a one-third of the revenue drop is commensurate with that and the remaining two-thirds is an intense -- scrubbing and commitment to, say, asset management becomes as critical as profitability management in times like this. So we are buying to tight windows and making sure that we are running the ship as tightly as we need to continue to generate cash.

And just as a final question, what type -- I see, with the gross margins improving during a period when revenues -- revenues are down, it's unusual and very encouraging. What is your goal in terms of getting to what your gross profit percentage would be once you get -- you ramp up to where you want to be?

Consistently, we have targeted low to mid 40% gross margins consolidated. That is, in our opinion, achievable not at these sales levels, but once we are returning to more normal sales levels, sales levels with the other items under control, we believe that's a reasonable target.

Okay, I just want to, again, say, in very, very difficult times, I think you guys did a great job.

Thank you, Joseph. We appreciate that.

(Operator Instructions). Michael Potter, Monarch Capital.

Also, great job managing the cash at the Company, and certainly bringing down the inventory and receivables. Just a couple questions. What was the warranty expense for Q2 versus Q1? And Q2 -- Q2 of '08?

You're going to make me look in the Q because I don't have that memorized. We actually had a pickup in -- warranty this month, our expense was -- we had a pickup this quarter of $42,000. Last year's same quarter, we had $238,000 in expense, and the quarter ending in September, I believe it was about $201,000.

That's great. So we seem to have our arms around the situation now?

The tide looks like it's turned.

I think what happens is you pick the warranty failure rates that you're going to use, and every time you ship, you book that into your liability and your balance sheet, and then, as those products come into their sixth, eighth, twelfth months and you start to actually see what they're going to yield in warranty, you pick them up. If they crossed the 12-month margin and didn't fail at the rate you projected them to, then you get that back.

And so, I think because we've chased that warranty line for so long, we've been pretty committed to saying, let's make sure there's no more adjustments up. (multiple speakers) We haven't -- I don't think we've padded it, but we've tried to make sure that we're on the higher side of that so we don't have any more negative surprises. And this quarter was one of those quarters where some products crossed the line that beat the number that we had accrued for them.

That's great. And the headcount reduction? How many employees did we end the quarter at?

Just under 130. So we have been -- we're about 128, 129 company-wide.

And how does that compare to the end of the first quarter?

We were at about 138, high 130s. (multiple speakers)

Probably entered the year at (multiple speakers) 145.

145 or so.

[We bid] by about 14 people down from 145.

And a couple people left. We haven't replaced them, even this month.

Maybe even 18 people down.

Was there any severance expense in Q2?

Yes.

How much?

We had separation agreements -- the total is less than $30,000.

So about 30K. And that was in G&A?

For the most part in G&A.

With the spreads (multiple speakers)

Jeff, can you break out the depreciation and amortization expense and other non-cash expenses for the quarter? I just want to back into an EBITDA number.

The depreciation for the six months, the D&A --

I got that in the P&L. I'm just looking for the quarter.

The quarter was -- I'm guessing 195. It is 195, confirmed. (multiple speakers) for the quarter.

Where there any options or stock expenses in the quarter?

We always have stock expenses based on vesting of options, and that's about 45,000.

Okay. That's about it.

Everything else is pretty straight off the balance sheet. CapEx was real low, less than $40,000 in CapEx. So -- it's pretty straightforward there.

Mark, you mentioned, I guess -- the platform that you're building, where you can go out and, I guess, sell to multiple customers. Is this platform going to include motors from Astromec?

No, because it's an existing platform that's got an existing everything to it, and we're just modifying -- and it was developed prior to an Astromec motor -- but that's a good question, in terms of how difficult would it be to put an Astromec motor in there. So, at this point, the concept is based on a platform that existed prior to us owning Astromec, and therefore, a motor that is purchased. Take that under advisement, but the answer to your question, at this moment, is no.

Thanks, guys.

There are no further questions at this time. Mr. Murphy, do you have any closing remarks you'd like to make?

Just to say thank you, everyone, for joining us and we look forward to brighter days. Have a great day.

Ladies and gentlemen, this does conclude today's conference call. We would like to thank you for your participation. You are now free to disconnect.