Pro-Dex Inc (PDEX) 2010 Q1 法說會逐字稿

Good afternoon. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the Pro-Dex first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

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 relating 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.

At this time, I would like to turn the conference over to Mr. Mark Murphy. Sir, you may begin.

Thank you, Thea, and thank you all for joining us for Pro-Dex's first quarter results for the fiscal year ended June 30, 2010. In today's call, Jeff Ritchey, our CFO, will provide us with a synopsis of our operating results, and I will then provide my comments and perspective. Lastly, as Thea mentioned, we will open up the call to your questions.

Let's get started with Jeff providing a brief summary of the numbers. Jeff?

Thank you, Mark. Revenue for the first quarter of fiscal 2010 was essentially even with the first quarter of fiscal 2009 at $5.63 million as compared to $5.655 million in the previous year's first quarter. Revenues were also consistent with the $5.621 million in the preceding quarter that ended June 30, 2009.

While total consolidated sales were stable, the sales mix changed significantly. Medical device sales grew 26% as compared to last year's first quarter, and represented 69% of our total sales in the first quarter of fiscal year 2010, up from 54% of total sales in the first quarter of fiscal year 2009. This growth in medical sales offset the 50% decline in motion control sales from the first quarter of 2009 to the first quarter of fiscal 2010.

On stable sales, gross profit for the quarter nevertheless increased by 7% to $1.874 million compared to $1.754 million in last year's first quarter. Our consolidated gross margin for the first quarter increased to 33%, compared to 31% in the previous year's first quarter.

Operating expenses were $1.6 million for the first quarter of fiscal year 2010, down 14% from the $1.9 million for the first quarter of fiscal 2009. As a percentage of sales, operating expenses were reduced by five percentage points to 29% of sales for the first quarter of 2010, compared to 34% of sales in the first quarter of fiscal 2009.

We had our second consecutive quarter of operating income in the first quarter 2010 at $237,000 or 4% of sales, as compared to an operating loss of $156,000, or negative 3% of sales in the first quarter of fiscal 2009. Quarter one fiscal 2010 operating income was essentially even with the $239,000 in operating income in quarter four last year.

The effective tax rate for the first fiscal quarter of 2010 was 2%. A majority of our taxable income is shielded by the allowance against our deferred tax asset established in fiscal 2009. We have $2.2 million remaining on our deferred tax asset allowance.

Earnings per share were $183,000 or $0.02 per share for this first quarter of fiscal year 2010, a $0.03 improvement from the $118,000 or $0.01 loss in the first quarter 2009.

For the 2010 first quarter, we generated cash from operations of $409,000 compared to the use of $459,000 in last year's first quarter. The continued provision of cash went directly to improvements in our balance sheet as cash on hand grew to $1.4 million at September 30, 2009 compared to $1.1 million at June 30, 2009, and $384,000 at September 30, 2008.

Net debt declined again to $1.8 million at September 30, 2009 compared to $2.2 million at June 30, 2009 and $4.1 million at September 30, 2008.

We continue to have nothing borrowed on our line of credit. And then subsequent to the quarter end, we renewed our credit facility with Wells Fargo for another year, keeping in place our tenant improvement term loans, and allowing us for up to $1.1 million in credit line availability.

Our backlog stood at $8.1 million compared to $8.0 million backlog at the same time last year, both figures being at the lower end of our normal operating backlog levels. We have received a few large orders since year-end and our backlog currently stands at $9.3 million.

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

Thank you, Jeff. Just one clarification before I start -- that our credit line is for up to $1 million, not $1.1 million for the credit line availability; a glitch in the line there.

By comparing Q1 of fiscal 2009 to this year's Q1, we can clearly see the impact of our cost reduction efforts over the last 12 months. We went from losing $0.01 on $5.6 million in revenue to making $0.02 on the same top line. As Jeff described, even though our consolidated top line was comparable with last year's first quarter, the components of it were substantially different.

In Q1 '09, our motion control sales were $840,000 compared to $408,000 in this Q1, off $432,000 or 51%. Having said that, it is worth noting that just two quarters ago, our sales of these products had dropped to approximately $200,000. So while we are still off from our historical shipment levels, we did ship twice the dollars of motion control products in Q1 '10 -- in Q1 fiscal 2010 than we did just two quarters ago.

Motor sales for the first quarter of fiscal year 2010 were also $222,000 lower than our unusually high motor sales in the first quarter of fiscal year 2009. This entire gap of over $600,000 of revenue was compensated for by medical device sales. This was possible primarily due to a single customer, who requested substantially larger shipments due to two issues.

First, to fill a large specific order they received; and second, to rebuild inventory levels that had become depleted. Therefore, these exceptionally higher medical device sales, at least from this particular source, are not fully repeatable.

As motion control sales continue to gradually resume to more historical levels, we will not be as reliant on other products to compensate. But in the meantime, we continue to search for every opportunity to maximize medical device and motor sales.

One such opportunity is our recent launch of a new arthroscopic shaver that has been in development since March of 2008. The design is a different approach from existing products on the market, and at user flexibility and high reliability.

Our customer is quite enthusiastic about its potential in the market. The first 50 units shipped in late September and the second 50 will ship from Pro-Dex today, as they continue to introduce the product into their strategic account.

We currently have purchase orders in our backlog totaling $1.4 million for this product, with scheduled ship dates through July of 2010. So while we are not yet into smooth sailing with a reliable top line, we do have several positive developments in the works. We are very pleased with our second consecutive quarter of profit and cash generation, and are working daily to preserve that.

On the business development side, let's start with medical devices. Things seem to be loosening up as prospects have resumed conversations about developing new products. And visiting two medical device companies just yesterday, we were able to identify and ask to provide proposals on two new product development projects.

Since our last conference call just six weeks ago, we are also pleased to announce that we entered into a supply agreement for a surgical product that we're actively marketing to the neuro and cranial segments of the medical device industry. This product provides not only capital sales, but also has a Pro-Dex provided single patient use disposable that could substantially increase the revenue potential for this product.

This supply agreement, which we hope is the first of several, represents $150,000 of first year revenue.

Motor proposal activity remains strong also. In addition to the proposals we have outstanding since our last conference call, totaling over $750,000 in potential first year revenue, we submit a fast-track proposal for a Business Jet project that represents an additional $300,000 in incremental revenue, if awarded, with shipments that could start as early as December of 2010.

We also continue to make progress on the development of several motors for our own products.

It does appear that now is the time to strike with regard to aggressive sales and marketing efforts. To that end, we have hired a new Director of Marketing to create a more proactive campaign for increasing our deal flow. These activities include a revamping of our website, the broad deployment of our brand message in the medical device world, and the identification of new markets where our value proposition can be easily leveraged.

Overall, I would say that we are now in a good place from which to build. We must keep our eye on the top line and ensure that all spending stays in check; that our costs are reduced; our product reliability is improved; our slow business has shown gradual recovery; our bank financing is in place; our balance sheet continues to improve; we have achieved our second consecutive quarter of profit and cash generation; our customers and prospects are talking about new projects again; we have released a new product, signed a new supply agreement, submitted multiple proposals, and are aggressively pursuing more robust deal flow.

These are all good signs and certainly provide a perspective -- a different perspective than we had even a couple of quarters ago. We must continue to execute and capitalize on the foundation we have built, which is our commitment to you, our shareholders.

With that, I will open up the lines to any questions you may have.

(Operator Instructions). [Scott Hood].

Great quarter. I wanted to talk about the operating expenses. They've been controlled really well and this quarter was continuing that; but on each line there was improvement. I was wondering if there was anything that you could say was one-time, either last year or one-time this quarter that would make them lower or one-time last year that would make them higher?

And I guess you hired another salesperson, so that might add to the expenses a little bit going forward. Maybe you could just talk about what's sort of fixed there and what you need to do, to spend money on.

We hired the new marketing person subsequent to the end of the year and so, she didn't show up in the quarter numbers we just reported.

Actually, our first and some of the second quarter numbers on the SG&A side tend to be a little bit higher than the third and fourth fiscal quarters, because of the annual reporting type and auditing expenses that go in. So, generally, we see a little bit higher in the -- at least in the G&A side in the first and second quarter than we do in the third and the fourth quarter.

But we're seeing -- the decreases are across the board due to the different layoffs and cost containment exercise we did take throughout the beginning of last year and through December or so of last year.

Some of the -- if we search for one-time events, Scott, there was some warranty catch-up in the previous quarter, not in Q1. There was none of that in Q1. So, what you see in Q1 is pretty pure. But Q4, relative to the previous Q1 might show some of that.

But most of what you're seeing in the operating expense line is systemic structural change. And yes, as Jeff mentioned and you called out, the new Director of Marketing is not reflected in any of the historical or Q1 fiscal '10 numbers yet.

Okay. And you're roughly okay on engineers and sales people right now?

Yes, we've put a lot of effort into our business development. We still do not have, and not actively seeking, a Vice President of Engineering at this point, because at this level of cost containment, I want to make sure we do everything possible to preserve our core engineering team. And so we've got a pretty nice backlog of projects to work on, which will inevitably result in future revenues. I'd rather go without a VP of Engineering than the threat and the potential stable of talent we have.

Okay. Is there anything you can say on CapEx? I think you spent around $50,000 this quarter on equipment and leasehold improvements. What do you think that would be going forward?

We're watching that pretty carefully. The expenditures this year, this quarter, were for the most part computer upgrades and replacements of older servers and things that were in place. The machine shop side is still in pretty good shape from the things we've put in when we moved to the building here. We still see some upgrades to the Carson City motor facility, but not to a huge extent that's above our historical run rate of, say, $400,000 to $500,000 per year.

Okay, that's good for now; but good quarter. Thanks.

(Operator Instructions). [Vincent Valton].

Hi, guys. Good quarter. Quick question -- what type of price environment are you seeing out there for your products?

I think it's not unlike anybody else. You know, our customers are asking for lower prices; everybody is in an aggressive cost reduction mode.

Most of our larger contractual product pricing is driven by a supply agreement, so it's not a PO-by-PO type of a negotiation. But we are -- even the new products that we're being asked to develop are -- have aggressive cost targets. Some of the new product development coming from our customers is aimed at getting a reduction in price to reestablish some of their margins.

It's not in the commodity range where everybody is fighting over $0.50, but in the general trends for more aggressive pricing.

Okay. And on the last call, you talked about integrating the Carson City operations with Irvine operations. Is there any update on that?

Those are pretty much fully integrated from a leadership and systems standpoint. We're not pursuing at this point a physical integration of the two facilities. So we're moving now from -- the leadership is integrated.

The next step will be, for example, instead of Irvine placing a purchase order with Carson City for a motor that we would just release a work order, and effectively Carson City and Irvine would be two manufacturing plants with one company, as opposed to buying and selling product to each other, charging each other for machining or anything like that.

But at least at this point, we don't see a physical integration of the two facilities.

Okay. Thanks, guys.

(Operator Instructions). I am showing no questions at this time.

Okay. Well, thank you all again for joining us today and have a great day. We appreciate your support and interest in Pro-Dex.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.