Pro-Dex Inc (PDEX) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Pro-Dex third-quarter earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

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 performances, as well as the 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.

I would now like to turn the conference over to Mark Murphy. Please go ahead.

Thank you, Camille, and thank you all for joining us for Pro-Dex's third-quarter results for the fiscal year ended June 30, 2010. On today's call Jeff Ritchey, our CFO, will first provide us with a synopsis of our operating results, and then I will provide my comments and perspective. Lastly 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 third-quarter fiscal 2010 was 34% higher than the third-quarter fiscal 2009 at $6.2 million this year as compared to $4.6 million the previous year. Revenues in this quarter continued their upward trend, as they were higher than the $5.7 million in the preceding quarter that ended December 31, 2009, and the $5.6 million in the quarters that ended September 30 and June 30, 2009, which in turn was up from the low point of last year's third quarter.

Medical device sales again accounted for the majority of our sales growth, as this portion of our business grew 21% over last year's third quarter. Medical devices represented 58% of our total sales in the third fiscal-quarter 2010, compared to 63% of the total sales in the third quarter of last fiscal year.

Industrial and aerospace sales increased over 150% each from last year's depressed levels.

Gross profit for the quarter increased 106% to $2.3 million compared to $1.1 million in last year's third quarter. Our consolidated gross margin for the first quarter increased 13 points to 37%, compared to 24% in the previous year's third quarter. Margin increased as a result of the higher sales and a more favorable mix, as the revenue gains were driven by higher-margin medical and motion control products.

Operating expenses were $1.883 million for the third quarter fiscal-year 2010, down 32% from the $2.779 million for the third quarter of fiscal 2009. An increase in our marketing expenses drove an increase in our selling expense. As a percentage of sales, operating expenses were reduced by 30 points to 31% of sales for the third quarter of 2010.

We had our fourth consecutive quarter of operating income this quarter at $409,000 or 7% of sales, as compared to an operating loss of $1.668 million or 36% of sales in the third quarter of fiscal 2009.

Earnings per share were $174,000 or $0.02 per share for the third-quarter fiscal 2010, a $0.33 improvement from the $3.011 million or $0.31 per share loss in the third quarter of 2009.

There were three major nonrecurring events that affected this quarter's operating results. First, there was $250,000 in revenue recognized for a development contract that had not transitioned to a manufacturing contract.

Second, we have an income tax expense of approximately $225,000. So we adjusted estimates regarding the income tax refund and deferred income tax allowance taken in the second quarter, as well as incurred an alternative minimum tax based on our higher profitability.

Third, we recognized a $113,000 expense related to severance.

In the prior year's third quarter, finances reflected an impairment charge of $997,000 in operating expenses and the negative impact of a $1.960 million reserve of our deferred tax assets in our income tax expenses.

For the 2010 third quarter we generated cash from operations of $1.691 million, of which $549,000 was the collection of the federal tax refund, compared to the generation of $896,000 in last year's third quarter. Year-to-date we have generated $2.661 million in operating cash, an improvement of over $1.8 million from the $840,000 in cash generated through the first nine months of last fiscal year.

The continued provision of cash went to continued strengthening of our balance sheet, as cash on hand grew to $3.4 million at March 31, 2010, compared to $504,000 at March 31, 2009. Net debt became net cash of $340,000, as our cash levels exceeded our debt levels at quarter end, compared to net debt of $3 million at March 31, 2009. We continue to have nothing borrowed on our line of credit and have the full $1 million in credit availability if needed.

Our backlog on March 31, 2010, stood at $13.2 million compared to $11.6 million backlog at the same time last year. Our backlog currently stands at approximately $12.6 million.

The quarter-end and current backlog levels exceeded the high end of our historical range of between $8 million and $12 million, another result of our largest customer providing us with their calendar year orders ahead of their past ordering patterns.

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. A critical metric for us is the comparison that Jeff provided of Q3 a year ago versus Q3 this year, excluding all of the nonrecurring items. In that metric we improved from an operating loss of $0.04 to an operating profit of $0.04.

But more important than the total improvement is the gradual and consistent trend with which these incremental improvements have occurred. Over the last four quarters, revenues grew from $5.6 million to $5.9 million, not counting the $250,000 of nonrecurring revenue this quarter.

Earnings per share excluding nonrecurring items have been at $0.02 operationally in each of the prior three quarters, growing to $0.04 this quarter. Strict asset management has translated those revenues and earnings into consistent cash production, adding a total of over $2.9 million for the trailing 12 months' operating cash before the $549,000 tax refund.

This type of steady performance is an important indication of the progress we've made.

Looking at the near-term future, as Jeff mentioned, our current backlog is at record levels. This all results in a completely different outlook than we found ourselves in a year ago. The next opportunity for us is to focus on shoring up our top line for the end of this calendar year.

We announced in December of '09 that 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. They've updated their guidance and have extended the time of their purchase commitment through the end of this calendar year for one product and through the end of next fiscal year for the other.

While we believe there are significant challenges to their success with the new products, we must behave as if they will succeed. Accordingly we continue to do everything possible to accelerate revenue opportunities from new and existing customers.

You will notice, as Jeff mentioned, that our sales and marketing expenses have risen this quarter. We've increased our tradeshow attendance; developed new printed material for each of our product lines; enhanced both our advertising and public relations presence with trade publications; and are in the process of developing a new website. We are exploring opportunities with potential strategic partners and identifying ways to leverage our ISO 1345 medical device certified manufacturing facility.

I have personally met with most of our major customers, and I'm optimistic about our ability to land new work.

We are on track to begin shipment of our new power 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 associated disposables could prove to be a valuable revenue stream.

This product is based on a Pro-Dex platform and will be targeted at multiple customers, as opposed to an exclusive OEM relationship. We are currently in various stages of conversations with several other potential customers.

Motor sales were up 18% in Q3 over Q2 as our largest customer moved forward a significant delivery. We have begun the testing phase of a Carson City made motor for one of our medical devices and expect to see such motor used in our own products during fiscal 2011.

Our motion control product sales have stabilized at $600,000 the last two quarters. You will remember that it had dropped precipitously from over $800,000 in Q2 '09 to $200,000 the very next quarter. But while we are not back yet to the highs seen before the year-ago drop, we have significantly recovered from the floor of this very profitable product line. We have also increased our sales and marketing efforts in this product line with promising initial feedback.

Over the last 12 months, Pro-Dex has shipped $23.1 million; earned $0.12 per share; created $2 million of EBITDA; and generated $3.5 million in operating cash. These numbers represent significant improvements over our year-ago performance.

With the posting of our fourth consecutive quarter of solid operational profitability and cash generation, Pro-Dex has now proven what it is capable of. Our goal now is to preserve that performance and build on it.

The strength of our existing backlog will assist us in doing so in the near term. And the investment we are making today in sales and marketing, strategic partnerships, and manufacturing leverage should serve us well in the long term.

We will now open up the phone lines to any questions that you may have. Camille?

(Operator Instructions) Vincent Staunton, Wedbush.

Congratulations on the good quarter. Regarding the one-time items, on just an operating income basis, excluding all the items, what would you have reported?

Operating income basis?

Yes.

So if we have the -- what we reported was $409,000. If we take the entire $250,000 off of that and add back $113,000, we are at $262,000.

That would exclude the tax impact.

That's before the tax impact. So that's on the operating --

So it would be $262,000?

On the income from operations line, yes.

Okay, and in terms of the backlog, what was it at the beginning of the quarter?

I think we're about $11.6 million there, but I would have to double-check and verify that.

Okay. All right, that's it. Thanks, guys.

(Operator Instructions) This does conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Camille. Thank you, everyone, for your attendance and interest in Pro-Dex. We look forward to speaking to you next quarter. Have a good day. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.