Pro-Dex Inc (PDEX) 2010 Q2 法說會逐字稿

Good afternoon. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Pro-Dex second-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.

Now I will turn today's call over to Mark Murphy. Sir, you may begin.

Thank you, Casey, and thank you all for joining us for Pro-Dex's second-quarter results for the fiscal year ended June 30, 2010.

On today's call, Jeff Ritchey, our CFO, will provide us with a synopsis of our operating results. I will then provide my comments and perspective. Lastly, as Casey mentioned, we will open up the call to your questions. So let's get started with Jeff providing a summary of the numbers. Jeff?

Thank you, Mark. Revenue for the second quarter fiscal 2010 was 9% higher than the second quarter of fiscal 2009 at $5.7 million this year as compared to $5.2 million in the previous year. Revenues for the second quarter were also slightly higher than the $5.6 million in the preceding quarter that ended September 30, 2009.

Medical device sales again accounted for the majority of our sales growth as this portion of our business grew 23% over last year's second quarter. These sales represented 58% of our total sales in the second quarter of fiscal 2010, up from 51% of total sales in the second quarter of fiscal year 2009.

The sales of the new orthopedic surgery devices to one of our main customers that began in September 2009 continued strong and our other main customer continued to request earlier shipments of its previously booked orders.

Industrial motion control sales continued to recover from the bottom seen in the third quarter 2009 but still remain down 23% from the second quarter of 2009, which was the recent market peak before the calendar 2009 turn down.

Gross profit for the quarter increased 3% to $2.0 million compared to $1.9 million in last year's second quarter. Our consolidated gross margin for the first quarter decreased 2 points to 35% compared to 37% in the previous year's second quarter. The margin decline is the result of having a less favorable sales mix.

There are two nonrecurring events that affected this year's -- this quarter's operating results. First, there was $140,000 patent infringement charge reflected -- impairment charge reflected in our operating expenses. The impairment charge represented the remaining balance sheet value that we carried for the patent assets purchased in 2005 as strategic options to sell, license, or otherwise exploit this technology, have not materialized and do not appear imminent.

Second, we had an income tax gain of approximately $489,000 as we reversed a portion of the current income tax asset allowance taken in the third quarter of last year. In November 2009, the tax law changed extending the net operating loss carrybacks and enabled us to use the benefits and file for a refund for the 2004 and 2005 tax years. We should receive this refund in the second half of fiscal 2010.

Operating expenses including the $140,000 in non-cash patent impairment charges were $1.868 million for the second quarter fiscal year 2010, up 1% from the $1.839 million for the second quarter of fiscal 2009. Without the nonrecurring charges, the expenses would have continued their downward trend as compared to last year.

As a percentage of sales, operating expenses were reduced by 2 points to 33% of sales for the second quarter 2010 including the impairment charge and reduced by 5 points to 30% without the impairment charge as compared to 35% of sales in the second quarter of fiscal 2009.

We had our third consecutive quarter of operating income this quarter at $132,000 or 2% of sales as compared to operating income of $93,000 or 2% of sales in the second quarter of fiscal 2009. Earnings per share were $580,000 or $0.06 per share for the second quarter of fiscal 2010, a $0.05 improvement from the $81,000 or $0.01 per share in the second quarter of 2009. Operationally, we made a $0.02 per share as the net of the nonrecurring gain and loss represented approximately $0.04.

For the 2010 second quarter, we generated cash from operations of $562,000 compared to the generation of $403,000 in last year's second quarter. Year to date, we have generated $971,000 in operating cash, over $1 million turnaround from the $56,000 in cash required through the first six months of last fiscal year.

The continued provision of cash went directly to improvements in our balance sheet. This cash on hand grew to $1.8 million at December 31, 2009, compared to $1.1 million at June 30, 2009, and $406,000 at December 31, 2008. Net debt declined again to $1.3 million at December 31, 2009, compared to $2.2 million at June 30, 2009, and $3.9 million at December 31, 2008. We continued to have nothing borrowed on our line of credit and have the full $1 million in credit availability if needed.

Our backlog on December 31, 2009 stood at $1.8 million compared to $12.1 million backlog at the same time last year. Our backlog currently stands at approximately $11.1 million. All of these levels are at the high end of our historical range of between $8 million and $12 million.

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

Thank you, Jeff. As usual, my comments will concentrate on the fundamental operating engine of the Company. The fact that we received a nice tax benefit and wrote off the rest of our patent assets is important to note but does not drive any of our decisions relative to the strength of Pro-Dex.

Revenues for the three quarters, for the last three quarters have been consistent at $5.6 million, $5.6 million, and $5.7 million. Earnings per share excluding the one-time events has been equally consistent at $0.02 operationally in each of the last three quarters. And our asset management has allowed the revenues and earnings to translate in a consistent cash production of $200,000 excluding a tax refund, $409,000, and $562,000 over the last three quarters. This type of steady performance is an important indication of the progress we have made.

Looking at the near-term future, as Jeff mentioned, our current backlog is at the upper end of our historical levels. This all results in a completely different outlook than we found ourselves with a year ago.

The next opportunity for us is to focus on shoring up our topline for the end of this calendar year. As we announced in December of '09, one of our major customers has informed us that they are working on their own version of two products that we currently manufacture for them. While they continue to purchase those products from us today at normal historical levels, we can not and are not relying on those revenues to continue indefinitely. Accordingly, we are doing everything possible to accelerate the identification and consummation of new and expanded customer relationships.

In speaking this morning with our customer for whom we began shipping a new arthroscopic shaver in Q1 of this fiscal year, they remain quite pleased with the performance of the unit and with their customers' response to it. They continue to role that product out to their customer base.

We also expect to begin shipment of a new powered screwdriver for use in the cranial and maxillofacial surgery field starting in fiscal Q4. While the initial revenues from the drivers themselves will be modest, approximately $150,000 per year, the disposable battery could prove to be a valuable revenue stream.

Shifting to our other two divisions, motor sales were up 19% in Q2 over Q1 and we have a stable backlog of orders for motors. Our motion control products sales continued to recover, dropping from over $800,000 in Q2 of '09 to $200,000 the very next quarter, $800,000 to $200,000. Our motion control sales recovered to $400,000 in Q1 of 2010 and continued to improve to $600,000 last quarter. So while we are not back yet to year-ago levels, we have significantly recovered from the floor.

Corporate marketing activities are robust and we will continue to make investments in all areas to gain greater exposure of our capabilities to customers and prospects.

Lastly, we announced today that Patrick Johnson, the Company's Executive Vice President and Chief Business Development Officer, is leaving the Company. Pro-Dex will be heading up a project called worldBed --

You said Pro-Dex.

Thank you. Patrick will be heading up a project called WorldBed, a major humanitarian relief effort in Haiti. I want to thank him for his 10 years of contribution at Pro-Dex and wish him all the best in his future endeavors.

A single data point does not make a trend and two quarters in a row is certainly better but not convincing. With three consecutive quarters of solid revenues, earnings, and cash generations now under our belts, we know what Pro-Dex can do. We must continue to build on that, protect it and expand it. Topline is the name of the game right now and we are focused on exactly that.

With that, I will open up the phone lines for any questions that you may have at this time.

(Operator Instructions) Vincent Staunton, Wedbush.

My question is in December when you announced that that one customer was switching to producing their own product, what is the phase out of that? Is it through the end of the year or --?

Just to be clear, Vince, what we announced was that they had told us that it's their intention to make their own product. They also as far as we know are not through the final testing or verification. That was not a manufacturing announcement, it was an engineering announcement. There remains a lot of variables in the question. What they were able to share with us is that they did not see their orders for the first product reducing at any time before August of 2010 and that they didn't see the second product coming online any earlier than December of 2010. And those estimates or those -- not before then were confirmed as recently as yesterday, that that doesn't seem like it's going to happen any sooner than that.

So how it happens later than that or how it phases, we don't know. They are still -- let's assume that they are successful, they would continue to buy repairs from us which represents about 1/7 of what they buy from us. They would probably continue according to their strategy to buy products from us to support existing accounts and would probably be putting their new products if it is successful more into new accounts.

So it appears that there will be some type of legacy stream but all we have announced is this is what they have said and this is the earliest that they said it might happen and beyond that, we don't have much visibility.

Okay, thank you very much.

(Operator Instructions) As of right now, we have no further questions.

Okay. Thank you, Casey, and thank you all very much for attending our call. Have a great day. Goodbye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.