Pro-Dex Inc (PDEX) 2011 Q1 法說會逐字稿

Greetings and welcome to the Pro-Dex first quarter 2011 earnings results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of the securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the Company's plans, products, perspectives, and strategies, both preliminary and projected. Actual results or trends could differ materially from the Company's forecasts. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. For more information, please refer to the risk factors discussed in the Company's Form 10-K for the year ended June 30, 2010 and the Form 8-K filed with the SEC today along with the attached press release. Copies can be obtained from the SEC or by visiting our website at www.pro-dex.com.

It is now my pleasure to introduce your host, Mark Murphy, CEO of Pro-Dex. Thank you. Mr. Murphy, you may now begin.

Thank you, Shay and thank you all for joining us to review Pro-Dex's results for the first quarter ended September 30, 2010. In today's call, Hal Hurwitz, our CFO, will provide us with a synopsis of our operating results and then I will comment on various aspects of the Company and how those results were produced. Then, as Shay mentioned, we will open the call up to your questions.

So let's get started with Hal.

Thank you, Mark.

Consolidated revenue for the 2010 quarter increased by $200,000 to $5.8 million, or 3.0% more the corresponding quarter in 2009. This increase resulted from growth across a broad base of customers for medical and motion control products whose orders have been negatively impacted by the relatively slower economic climate in 2009. The sales increase was also characterized by a shift in the mix of our business toward more profitable products, resulting in an improvement in consolidated gross margin for the quarter to 37%, as compared to 33% in the 2009 quarter.

Operating costs for the 2010 quarter were $1.8 million, approximately $200,000 higher than the $1.6 million in the corresponding quarter of 2009, due primarily to focused marketing costs in advertising, tradeshows and website development.

The resulting quarterly operating income in 2010 was $405,000, compared to $237,000 in the corresponding 2009 quarter, representing a 71% increase. Net income in the 2010 quarter of $342,000, or $0.10 per fully diluted share, was an 87% improvement over the 2009 quarter's net income of $183,000 or $0.06 per fully diluted shares.

In the 2010 quarter, we generated cash from operations of $378,000, as compared to $409,000 in the corresponding quarter of 2009. In making this comparison, however, it should be noted that we grew our inventory balance in the 2010 quarter by $621,000, as compared with only $167,000 in the 2009 quarter. The growth of inventory in 2010 was in response to orders in hand at September 30, 2010, most of which we shipped to customers in October. Therefore, our operational cash generating capability remains strong.

Cash on hand at September 30, 2010 was $2.5 million, as compared to $3.8 million at September 30, 2009. This decrease was due primarily to our payment, during the 2010 quarter, of the remaining $1.5 million balance due on the mortgage collateralized by our Carson City property, which fully retired this debt.

While on the subject of cash generating capability and liquidity, let me comment on our credit facility with Wells Fargo Bank, which consisted of a line of credit and a term loan. As we've previously announced, Wells Fargo did not renew the revolving credit line, which expired November 1, 2010. As there were no outstanding borrowings on this credit line, this expiration had no immediate effect on us. The term loan has a remaining balance of $1.3 million and is the only debt remaining on our balance sheet.

Wells Fargo has issued a waiver for the covenant related to a rolling four-quarter net income level threshold, which we were in non-compliance with at September 30, 2010 due to prior quarters' write-off. We understand Wells Fargo's decision to allow the revolving credit line to expire, given our lack of use of that facility for the last several years, and we appreciate its demonstrated cooperation and support as we actively pursue a new credit relationship. Our liquidity position would allow for repayment of the term loan from existing cash on hand, should that become necessary, before a new credit arrangement is in place.

As of September 30, 2010 our backlog stood at $10.6 million, compared to $8.1 million in backlog at the same time last year. The backlog in the 2010 quarter is more in keeping with our historical operating backlog range of $9.0 million to $12 million and we believe that the improvement from the year ago amount is indicative of continued improvement in the economic environment of our customers.

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

Thank you, Hal. Having put the write-offs of intangible assets behind us in the last fiscal year, I am delighted to be able to focus my comments on the operating engine of the Company and our strategic objectives.

Our medical device products performed well, with sales for the quarter ended September 30, 2010 decreasing 3.0% from the corresponding quarter in 2009, primarily due to the timing of orders received from one of our large customers.

Gross margin on medical device product sales improved by half a point. Motion control sales were the highest they have been in two years, reaching 104% of their previous norm, measured as the average sales volume for the four quarters preceding the substantial decline in January of 2009.

Our motor sales were sluggish this quarter, but we believe, based, in part, on October shipping volumes, that the next two quarters will be more in line with historical performance.

Operating expenses continue to be held in check, with the investments in focused marketing activities, about which I spoke quarter, accounting for the majority of the year-over-year increase of 4.0%.

This combination of increased sales, improved margins and controlled operating expenses produced solid earnings and cash generation, as Hal described. Excluding last quarter's write-downs, this represents our sixth consecutive quarter of profitable operations.

Looking forward, our most compelling initiative is to identify and secure new business. With a backlog at September 30, 2010 of $10.6 million, 30% higher than it was at September 30, 2009, the immediate outlook remains positive. The challenge lies in protecting our top-line more permanently.

Since our legacy business model of custom product development does not typically produce short-term revenues due to the required development cycle, we are augmenting our sales efforts with services that involve a shorter sales cycle, primarily contract manufacturing. We continue to pursue this strategy with confidence that our capabilities have value and that the environment, propelled by increased FDA emphasis on supplier controls, bodes well for Pro-Dex.

Our quality systems and manufacturing processes are best of class, an assertion that has been recently validated in our work over the past few months for one of the largest medical device OEMs in the country. They have been most appreciative of, and impressed with, our capabilities, our agility and our performance as we met the very aggressive timetable established for a recent project. We have gained credibility with this OEM since our last conference call and look forward to exploring additional ways we can support their efforts over the coming months.

We are also in discussions with another large U.S. medical device OEM about supporting their development and manufacturing needs for certain components of a product they plan to release in late calendar year 2011.

In addition to this progress, we have stepped up our marketing efforts. I invite you to visit our new website, which clearly communicates our capabilities. You will find there a wide variety of new marketing materials, including brochures, videos, articles we have authored, case studies and product overviews for each of our offerings.

Finally, as mentioned in our last conference call, we have retained an executive recruiter to identify and hire a senior sales executive with medical device contract manufacturing experience. We continue to work diligently to fill this key position. Please know that your leadership team is fully engaged in ensuring continued strong performance.

We will now open the phone lines to answer any questions you may have.

Thank you. (Operator Instructions) One moment, please, while we poll for questions. Speakers, we appear to have no questions at this time.

Okay. Thank you, Shay, and thank you, everyone, for joining us. We appreciate your participation and wish you a great rest of the day. Goodbye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. 2