Pro-Dex Inc (PDEX) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the Pro-Dex fourth quarter earnings conference call. Statements herein concerning the Company's plans, growth and strategies may include forward-looking statements within the context of the federal securities laws. Statements regarding the Company's future events, developments, and future performance, as well as management's expectations, beliefs, plans, estimates or projections related to the future, are forward-looking statements within the meaning of these laws. The Company's actual results may differ materially from those suggested as a result of various factors. Interested parties should refer to the disclosure concerning the operational and business concerns of the Company set forth in the Company's filings with the Securities and Exchange Commission.

Thank you. I will now turn the conference over to Mark Murphy, CEO. Please go ahead.

Thank you, Molly, and thank you, all, for joining us to review Pro-Dex's fourth quarter and year-end results for the fiscal year ended June 30th, 2009. In today's call, Jeff Ritchey, our CFO, will provide us with a synopsis of our operating results. I will then comment on the various aspects of the Company and how those results were produced. Lastly we will open the call up to your questions.

So let's get started with Jeff providing a brief summary on the numbers. Jeff?

Thank you, Mark. I am going to present the financials in a little different format for this review. Instead of discussing each item on the income statement in order, we will review the financial performance on a quarterly comparison basis. First, we will review the fourth quarter ending June 30th, 2009 that we just finished with the third quarter of the fiscal year ending March 31st, 2009, the previous quarter. And then, we will compare with last year's fourth quarter. Finally we will compare the full year's fiscal 2009 and fiscal 2008.

Starting with fiscal year 2009 Q4 versus Q3, you will recall that Q3 had intangible impairment charge and a taxed asset allowance charge taken that must be taken into account for comparability. Consolidated revenue for the fourth quarter of fiscal 2009 increased by $1 million or 22% over the third quarter to $5.6 million due to substantially increased shipments of medical devices and motors and a small recovery off the third quarter low base of motion control products. The sales increases were accompanied by increases in gross margins in all areas, and our consolidated gross margin for the fourth quarter was 35% compared to 24% in the previous quarter. Operating costs in the first quarter were $1.7 million, approximately $1.1 million lower than the $2.8 million in the third quarter, recognizing that we did have that $997,000 noncash intangible charge included in the $2.8 million.

The third quarter also had a $2 million tax allowance charge taken against our deferred tax assets. It was not repeated in this fourth quarter. The resulting operating income was $239,000 in the fourth quarter versus a loss of $1.7 million in the third quarter. And net income followed with the earnings per share of $0.02 in the first quarter versus the $0.31 loss in the third quarter.

Let's shift now to comparing the fourth quarter of 2009 with last year's fourth quarter. Again, you will recall for comparison purposes last year's fourth quarter contained a headquarters relocation moving efficiencies, a cost of about $225,000 in the cost of goods sold line and $274,000 in the operating expense line. So, compared to the fourth quarter fiscal 2008, we saw for the fourth quarter of 2009 increase by over $200,000 or 3%, again reflecting increases in medical and aerospace shipments but a decline quarter to quarter in motion control sales. Our consolidated gross margin for the fourth quarter was 35% or 8 points higher than the 27% in last year's fourth quarter. Our $1.7 million in operating costs for this year's fourth quarter compares favorably with last year's $2.25 million operating expenses. Including the impact of the Irvine facility move charged last year our normalized operating expenses are approximately $270,000 less on an ongoing basis as the cost cutting measures enacted in 2008 are being realized. The resulting operating income in 2009's fourth quarter was over $1 million higher compared to the 2008 fourth quarter.

Earnings per share were again $0.02 for this fourth quarter of 2009 compared to a loss of $0.04 in the fourth quarter of 2008. And finally, comparing the full fiscal year results of 2009 with 2008, consolidated net revenue for the fiscal year 2009 decreased by 16% and medical shipments decreased 21%. Motion control decreased by 25%, but motor sales remain flat. Our consolidated gross margin for the year was 32%, just slightly lower than the 33% in 2008. Operating expenses, including the $997,000 intangible impairment charge for 2009, were $8.2 million as compared to last year's $7.8 million. The resulting operating loss for 2009 full year was $1,492,000 compared to an operating income of $318,000 last year. And net income, dominated by the intangible and tax allowance charges taken in the third quarter, was a loss per share of $0.29 as compared to earnings per share of $0.03 last year.

For the 2009 fourth quarter and full year, we did have cash provided from operations of $868,000 and $1.7 million, respectively compared to a use of $110,000 in last year's fourth quarter and a provision of $2 million for the full year of operating cash.

Looking at the balance sheet, cash on hand grew to $1.1 million at June 30th, 2009 compared to $517,000 at June 30th, 2008. We ended the year with nothing borrowed on our credit line, down from $2 million borrowed at June 30th, 2008. Net debt was $2.2 million at June 30th, 2009 compared to $3.5 million at June 30th, 2008. And then as of June 30th, 2009, our backlog stood at $9.8 million compared to $10.8 million at the same time last year. Both figures being well within our normal operating backlog levels.

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

Thank you, Jeff. Fiscal year 2009 has been a very challenging year to say the least. We exited fiscal 2008 with a three year cumulative average growth rate of 22%. Our plans for fiscal 2009 anticipated continued growth. Early on it became apparent that the economy was getting soft. After one canceled development agreement, one customer postponed product release due to the customer's delayed FDA approval, a precipitous drop in our motion control sales due to weak semiconductor equipment market, and three rounds of cost cutting measures we now find ourselves looking back on 2009 in retrospect.

The bad news is that it was painful. The good news is that our business was severely tested and we fared well. The better news is that we are a stronger company with a better balance sheet today than 12 months ago. And the best news is that we are seeing some signs of relief. We are not celebrating yet by they means but some good news is appearing.

Let me start by describing candidly some of the key challenges we still face. I will then explain some of the improvements that have occurred, and recent events that give rise to optimism. Starting with our challenges. First, motion control sales. Between Q2 and Q3 of fiscal 2009 we saw motion control top line decline of over 75%. This area of our business has been historically the most sensitive to general economic market conditions and this year was no exception as the lights went out in the semiconductor equipment market. While our motion control sales did not represent the majority of our top line, the profitability of these sales is significant to our overall performance. We have done and continue to do everything possible to generate sales growth including the hiring of a national sales manager in January and the signing of several new distribution channel partners since then. While these activities have produced some short-term results, such improvements will remain limited until the market returns.

In Q4, we improved from 25% of our historical levels up to 40% of our historical Q2 levels. So it is better, but we are still way off historical rates. The semiconductor equipment book to build ratio has climbed from 0.48 in January to 1.06 in July, just crossing the 1.0 mark in July. August index will be published in about an hour. This climb back to even means that $106 of new semiconductor equipment orders were taken in July for every $100 of orders shipped, something that we have not seen in over eight months. If this index remains strong and our customers continue consuming remaining inventory, we would hope to see gradual improvements in our motion control sales by the third and fourth quarters.

Another significant challenge we still face is landing new development contracts for our Irvine medical device business. With the economic contraction we saw a severe decline in new product development efforts among our customers and prospects. One large medical device firm reported they cut 190 active product development projects down to 40 as a result of recent events. A natural complement to this decrease in volume of projects is to insource more. Available engineering challenge internally has been utilized to complete the now fewer projects. Before these customers turned to companies like Pro-Dex for outsourcing.

The combined effect of these two trends has been a general lack of even prospective projects. We have been sustained the last year by products that were developed in previous years. And while this is fine for maintaining the status quo, we are committed to growth and that will require new projects. We currently have several projects out for proposal and do see the beginning of conversations again that were previously put on hand. We are also in the process of creating a more proactive marketing campaign to increase our deal and prospect flow, but this does remain a current challenge.

Our third challenge is with all of the cost cutting measures have left us a fairly lean organization. We have made the easy and not so easy cuts to our cost structure. At this point we will not be able to save our way to significant profitability improvements. All three of these challenges described -- motion control sales, medical device contracts and fixed cost structure -- all point to top line as the next solution. This is clearly our greatest opportunity for performance improvement.

Now for the good news. How are we better or stronger as a result of facing fiscal '09 and what are we seeing now that suggests some light at the end of the tunnel. First, our cost structure has improved. We have reduced our full time associate base from 145 people at the end of fiscal '08 to 127 at the end of '09. This translates into an annual cost savings of over $0.5 million. Having engineering and manufacturing resources available to dedicate to existing product enhancements has resulted in increased reliability, yield improvements, and repair cost reductions which all translate into substantial dollars. Specifically, in fiscal year 2009, our Q4 operating spending was 10% less than our Q1 operating spending. While some of this expense will need to be added back as revenues increase, much of it will not. In many cases our cost structure is not simply lower because we have temporarily lived without certain resources but because we have fundamentally altered the previous paradigm.

Our second major accomplishment is the movement toward integrating Carson City operations with Irvine operations and beginning to see the synergies that result. After consolidating the senior leadership team in July of '08 we have seen significantly more integration of the two organizations. Carson City has successfully completed the design of its first new motor that will ship in an Irvine medical hand piece. Since that product is the one on hold for our customer's FDA approval, no motors other than prototypes and validation units have been manufactured by Carson City and shipped to Irvine yet. But that insourced production and associated fixed cost absorption is ready and waiting for release. By the end of fiscal 2010, we expect to have three additional motors being made in Carson City for Irvine products.

We have also seen a dramatic increase in new product proposals for Carson City as a result of consolidating the sales efforts with Irvine. We currently have four proposals outstanding, representing $0.5 million in development fees, and $0.75 million in first year revenue for new motor designs for third party customers. The first awards of these projects is scheduled for late this calendar year.

Thirdly, we have had some wins by placing more focus on operational refinement this year, given the delays in new product releases. This has allowed our engineering, manufacturing, and quality groups to work together to address specific legacy issues, improve our quality management system, and develop some new capabilities. Some of these wins translated into an 8% productivity improvement in our shop, $100,000 savings in tools and supplies through better maintenance and price reductions, and a 50% reduction in customer complaints.

Our last significant improvement this year of the Company is reflected in the health of our balance sheet. We generated over $1.7 million in cash this year, and converted our TI short-term debt to a long-term note. Our receivables have declined from 48 days to 41 days outstanding during a time when most companies are being stretched for payment. And our inventory turns have increased from 3.3 times per year in fiscal '08 to 4.3 times for fiscal '09. All of this has strengthened our financial position, specifically driving our current ratio from 1.7 to 2.7. While we certainly would have preferred to dramatically grow the top and bottom lines this year, we believe that we have made as much of the circumstances as possible.

Some positive signs began to appear in the fourth quarter also. First, as Jeff mentioned, Irvine top line regained some momentum. As customers seem to have completed their inventory reduction objectives, their orders began to more closely match their raw demand. This is true for all three product lines, even though the raw demand for motion control products remains low. At least we don't appear to be facing the double jeopardy of both low raw demand and inventory reductions, as we were previously.

Second, it is apparent by analyzing the third and fourth quarter of fiscal '09 how much leverage exists in our top line, realizing a consolidated revenue increase from $4.6 million to $5.6 million resulted in a substantial improvement of our operating income given our now low but still relatively fixed cost base.

And third, we are on the verge of releasing a new product for one of or r major customers. The first production build of these products began yesterday, and is anticipated to be shipped in the next 30 days.

Pro-Dex has been through a tough year and none of us would like to repeat it. We still face substantial challenges which we are actively engaged in addressing. But the sustainability of our business model was tested and proven. We have improved our cost structure, begun to fully integrate Carson City, refined our operations, and improved our balance sheet. With some cooperation from the semiconductor equipment market, the medical device development market, and our new product release, I look forward to reporting brighter days to you in the future. Thank you for your support and trust during these times.

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

(Operator Instructions). Your first question comes from Joseph Levy with LLG Equities.

Hi Mark.

Hi Joseph, how are you?

Okay, good. Just a question on the current quarter, the quarter ended September 30th, what type of bookings are you experiencing?

I would say we're experiencing a relatively stable backlog. So we are seeing no tremendous gains and no tremendous losses to our backlog. I can't comment on shipments but I would say probably nothing dramatic in shipments either. We're not maintaining backlog because we stopped shipping product or anything like that.

The only reason I ask that is because the last two quarters of fiscal '09, the bookings had dropped off. In the last two complete fiscal years, the second quarter always had substantially higher bookings. Is there something intrinsic in the business that accounts for that?

We are starting to see some patterns -- this is Jeff -- some patterns in our orderings where our major customers are ordering in November and December for the upcoming calendar year. So our bookings have tended to rise in our fiscal second quarter, and so that is what's happened the last two years. One or two more times I will call it a trend.

Okay. Do you find that there's shorter lead times in terms of what your customers are requiring?

We have two types of customers. The large portion of our revenue comes from our biggest customers and they typically give us a six month PO, and they typically give that to us 12 to 16 weeks prior to the first shipment on that PO because of lead times for motors, cables and other long leads. So, when we start approaching lead times for them, we call them up and say it is time to get us your new PO, and they look at their MRP and give us typically at least a four, if not a six month PO. Those we would not see.

I think what we are experiencing a little bit, and this is very recent, is customers who need product again, in terms of their inventory, people have compressed their inventory. So we are actually -- and I'm talking in the last three weeks -- getting questions like could you get that to me in three weeks instead of five. Can you get that to me sooner rather than later. Which just wasn't a question we were hearing three months ago because people were fat on inventories and they were really trying to burn them. We felt like we were seeing three-quarters of their demand or half their demand or whatever that number was. But there just wasn't a lot of urgency to get product now, and in the last several weeks we've probably had five customers indicate that sooner would be better than later.

Okay. With regard to profitability, do you expect profitability throughout the year or it's still a question whether or not you will be profitable in certain quarters?

I can't make a forward-looking statement about our profitability or our guidance for the year. I think that fundamentally we lost $0.04 operationally last quarter. So after all of the noise of the patent write off, I hope you sensed my alarm that that is not okay. We have made $0.02 this quarter. I want to fight for a penny or two, and obviously $0.03, $0.04 and $0.05 is even better. But we really are fighting to make sure that we stay above the line as a fundamental business principle. And then cash generation is right up there with that. I think we have squeezed our balance sheet just about as far as we are going to squeeze it in terms of receivables and inventory and collections, and so really future cash generation is going to also come from profitability.

So, I wish I could say we are in the clear and we'll never have another bad quarter and we'll never see brackets on another EPS line. That's my full intention. But we have got enough variables that we can't declare robustness of earnings at this point.

What you did with the balance sheet is tremendous. If I would have looked at the balance sheet before the income statement, the comparison of last fiscal year with the end of this fiscal year, I would have said this company did pretty well for the year.

Yes. The balance sheet carried fiscal '09 and the P&L is going to have to be the hero, it is going to have to be the cash driver for next year. There's not much else we could ask out of our asset management team.

Now the new product you make reference to, is that a significant product? Or how would you describe it? Can you give more color on that?

I am calibrating my guidance. It is a significant product. It is along the line it's to our second largest customer, and their expectations of it is that it will do well in the marketplace, and my expectation is that within a year or two it may become their most significant product that they buy from us. So, not a game changer, $6 million a year type of product but it is not a couple of hundred thousand dollar a year type of product. It is in the couple of million dollar range.

Okay. That's basically all I have. I think, considering the economic environment and conditions, I think you guys did a great job.

Thank you, Joe. Appreciate it.

(Operator Instructions). There are no further questions at this time.

All right. Thank you, ladies and gentlemen, for listening. We will see you in about 60 days for the November report on September results. Have a great day.

Thank you. This does conclude today's conference call. You may now disconnect.