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| PDEX > SEC Filings for PDEX > Form 10QSB on 15-May-2008 | All Recent SEC Filings |
15-May-2008
Quarterly Report
COMPANY OVERVIEW
The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of our results of operations and financial condition for each of the three and nine month periods ended March 31, 2008 and 2007, respectively. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Report. This Report contains certain forward-looking statements and information. The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may appear. Our actual future results could differ materially from those discussed herein. Our critical accounting policies relate to inventory valuation for slow moving items, impairment of goodwill, warranty reserves, and recoverability of deferred income taxes.
Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-QSB, including discussions of our product development plans, business strategies and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation within our target marketplace and among our competitors, and competition from larger, better capitalized competitors. Many other economic, competitive, governmental and technological factors could impact our ability to achieve our goals. Interested persons are urged to review the risks described herein, as well as in our other public disclosures and filings with the Securities and Exchange Commission. We refer you to the risk factors and cautionary language contained in our reports filed with the Securities and Exchange Commission from time to time, including, but not limited to, those risks and uncertainties which may be listed in our Annual Report on Form 10-KSB.
Pro-Dex, Inc. ("Company," "Pro-Dex", "we," "our,", "us"), with operations in Irvine, California, Beaverton, Oregon and Carson City, Nevada, specializes in bringing speed to market in the development and manufacture of technology-based solutions that incorporate embedded motion control, miniature rotary drive systems and fractional horsepower DC motors, serving the medical, dental, semi-conductor, scientific research and aerospace markets. Pro-Dex's products are found in hospitals, dental offices, medical engineering labs, commercial and military aircraft, scientific research facilities and high tech manufacturing operations around the world. The company names of Micro Motors, Oregon Micro Systems, and Astromec are used for marketing purposes as brand names.
Pro-Dex's principal headquarters changed April 28, 2008 and we are now located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number also changed to 949-769-3200. Our Internet address is www.pro-dex.com . Our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, amendments to those reports and other SEC filings, are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of Ethics and other corporate governance documents may be found on our website at the Internet address set forth above. Our filings with the SEC may also be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov .
Description of Business
The majority of our revenue is derived from designing, developing and manufacturing rotary drive systems for the medical device and dental industries, motion control software and hardware for industrial and scientific applications and fractional horsepower DC motors for aerospace, medical and military applications. A large part of the revenue of the Company has been driven by developing and selling numerous types of private label rotary drive systems for use in dental, cranial, spinal, arthroscopic and orthopedic surgery. The Company distributes its own line of pneumatic and electric dental hand pieces sold under the Micro Motors name utilizing a network of independent sales representatives across North America. Other revenue sources include designing and manufacturing miniature pneumatic motors, fractional horsepower DC motors and motion control systems for industrial applications in the automotive, aerospace, and apparel industries.
All years relating to financial data herein shall refer to fiscal years ending June 30, unless indicated otherwise.
Company-funded research and development supports the development of generic rotary drive, motion control, and electric motor technology platforms. Company-funded research and development projects are generally expected to convert to customer-funded projects within six to eighteen months. Company funded project costs not associated with signed contracts or purchase orders are expensed as incurred. In the three months ended March 31, 2008, $729,000 was expensed as research and development an increase of $65,000 from the $664,000 expensed in the three months ended March 31, 2007.
We seek customer-funded projects to customize these platforms to specific customer requirements. For customer-funded development projects, costs are capitalized and recognized as a cost of sales when specific deliverables within the development contracts are earned, matching the costs to the revenue.
Customer-funded Three Months Ended March 31, Nine Months Ended March 31, development ($'000) 2008 2007 2008 2007 Revenue $ 64 $ - $ 364 $ (23) Cost of Sales 18 15 88 101 Gross margin $ 46 72% $ (15) - - $ 276 76% $ (124) - - |
Customer-funded research and development fees increased in the quarter ended March 31, 2008 due to the initial work being completed on recently signed projectsr. The results of customer-funded development work are intended to provide long-term exclusive manufacturing agreements and may provide the customer with the retention of the intellectual property developed. The identity of our customers is generally protected by a non-disclosure agreement.
The Company's revenue is derived from five main customer types. The proportion of total sales to each customer type and sales by location are noted in the tables below (unaudited):
Three months Ended March 31, Nine months Ended March 31,
Sales by customer type ($'000) 2008 2007 2008 2007
Dental $ 840 11% $ 1,466 25% $ 2,589 13% $ 3,653 23%
Medical 4,668 61% 2,488 42% 11,400 58% 6,340 40%
Industrial 835 11% 758 13% 2,466 13% 2,518 16%
Aerospace 739 10% 633 11% 1,718 9% 1,794 11%
Government, repairs and other 532 7% 571 10% 1,555 8% 1,475 9%
Total Sales $ 7,614 100% $ 5,916 100% $ 19,728 100% $ 15,780 100%
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Three months Ended March 31, Nine months Ended March 31,
Sales by location ($'000) 2008 2007 2008 2007
Santa Ana $ 5,812 76% $ 4,034 68% $ 14,550 74% $ 10,060 64%
Beaverton 775 10% 1,007 17% 2,612 13% 3,068 19%
Carson City 1,027 13% 875 15% 2,566 13% 2,652 17%
Total Sales $ 7,614 100% $ 5,916 100% $ 19,728 100% $ 15,780 100%
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Medical product sales represent the manufacture of products that utilize proprietary designs developed by us under exclusive design and supply agreements. Our dental products are primarily sold to original equipment manufacturers and dental product distributors. An independent dealer network markets our own branded line of dental products; including the IntraflowTMdental anesthesia product we acquired the rights to in October 2005. We also design and manufacture embedded multi-axis motion controllers used to regulate the motion of servo and stepper motors, predominantly for the factory automation, scientific research, and medical analysis equipment industries. The controllers support the platforms for PCI, VME, ISA, and cPCI busses as well as stand-alone requirements. In addition, we make and sell pneumatic motors for industrial applications that are marketed directly to end-users and through industrial supply distributors. We added significant sales with the purchase of the assets of Astromec, Inc. and the establishment Pro-Dex Astromec, Inc. in January 2006. Pro-Dex Astromec's products include high reliability fractional horsepower DC motors designed for harsh environments, primarily for the aerospace and medical markets.
We hold the following three independently verified certifications: ISO 9001:2000, ISO 13485 revised 1998, and Medical Device Directive 93\42\EEC Annex II company.
At the present time, we are generally able to fill orders within sixty (60) days. At March 31, 2008, we had a backlog, including orders for delivery beyond 60 days, of $9.6 million compared with a backlog of $9.3 million at March 31, 2007 and $10.1 million at June 30, 2007. We expect to ship most of our backlog in fiscal year 2008 and the remainder in fiscal year 2009. The increased backlog compared to March 2007 and the decrease from June 2007 is due to normal fluctuations in the timing of receipt and shipment of orders. We do not typically experience seasonal fluctuations in our new order bookings, but may experience variability in our new order bookings due to the timing of major new product launches. Similarly, we do not typically experience seasonal fluctuations in our shipments and revenues.
Change in Critical Accounting Estimates and Judgments
Due to the change in product mix with a greater amount of sales of custom medical devices with a reduced number of final part numbers, we changed the method for establishing the reserve for slow moving and obsolete items as of the quarter ended March 31, 2008. This change is expected to better align the inventory reserve with the marketability of the inventory components.
The prior method calculated the reserve by comparing the quantity of an item on hand with its 12-month sales history. If inventory on hand for a specific part exceeded an estimated 24 months of usage, between 20% and 100% of its value may have been included in the inventory reserve. The actual percentage reserved depended on the total quantity on hand, its sales history and expected near-term sales prospects. The method was changed in two ways. First, the inventory's estimated 12-month usage is the greater of the prior 12-months sales history or the firm orders for future shipments. The second change is to reserve 100% of an item's value of the inventory on hand that exceeds an estimated 12 months of usage. The calculation method change had an effect of increasing the inventory reserve at March 31, 2008 by $301,000 to $1,119,000.
Three Months Nine Months
Ended March 31, 2008
Net Income before provision of income taxes - before method change $ 295,000 $ 925,000
Less: Impact of reserve method change $ (301,000) $ (301,000)
Add : Tax effect $ 105,000 $ 105,000
Net Income before provision of income taxes - after method change $ 99,000 $ 729,000
EPS - before method change $ 0.03 $ 0.10
Less: Impact of reserve method change $ (0.03) $ (0.03)
Add : Tax effect $ 0.01 $ 0.01
EPS - after method change $ 0.01 $ 0.08
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Results of Operations
For the Three-Month periods ended March 31, 2008 and 2007
The following table sets forth the periods indicated and the percentage of net revenues represented by each item in our Consolidated Statements of Operations.
(In Thousands) Three Months Ended March 31,
2008 2007
Net sales: $ 7,614 100% $ 5,916 100%
Cost of sales 5,388 71% 3,760 64%
Gross Profit 2,226 29% 2,156 36%
Selling, general and administrative expenses 1,289 17% 1,141 19%
Research and development costs 729 10% 664 11%
Income from Operations 208 3% 351 6%
Net interest and other expense (77) -1% (65) -1%
Earnings before provision for income taxes 131 2% 286 5%
Provision for income taxes 32 0% 70 1%
Net income $ 99 1% $ 216 4%
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Net Sales. Consolidated sales increased from $5,916,000 to $7,614,000 ($1,698,000 or 29%) for the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007. The increase was due to continued growth in medical product sales, shipped primarily from the Santa Ana facility, offsetting declines in revenues for the other product lines.
Although selective price increases and decreases were implemented in response to market conditions, the majority of the sales changes for each product line are due primarily to changes in sales volume, not the effect of price changes.
Gross Profit and Gross Profit Percentage of Sales. Our consolidated gross profit for the quarter ended March 31, 2008 increased $70,000 or 3% over the same quarter in the previous year due to the higher level of sales. Gross profit as a percentage of sales decreased to 29% for the quarter ended March 31, 2008 compared to 36% for the quarter ended March 31, 2007. Gross profit margins were reduced approximately 4 margin points by the inventory reserve method change, another 1 margin point for the sales mix shift away from software related industrial sales to medical sales, and 2 margin points for higher warranty cost as a percentage of sales due to the higher shipments of warranty related products. Gross profit and gross profit as a percentage of sales were as follows:
Three Months Ended March 31,
2008 2007 Increase
Gross Profit $ 2,226,000 $ 2,156,000 3%
Gross Profit Percentage of Sales 29% 36%
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Selling, General and Administrative Costs (S, G&A). Consolidated S, G & A expenses increased to $1,289,000 for the quarter ended March 31, 2008 from $1,141,000 for the quarter ended March 31, 2007. The increase in selling expense is mainly due to higher labor and labor related costs ($66,000) offset primarily by lower advertising costs ($24,000). The increase in G & A costs was due to higher labor costs ($99,000) and costs associated with preparations for the upcoming facility move ($13,000). As a percentage of sales, S, G&A expenses decreased to 17% of sales from 19% of sales for the quarters ended March 31, 2008 and 2007 respectively. S, G&A costs were as follows:
Three Months Ended March 31,
2008 2007 Increase
Selling $ 397,000 $ 361,000 10%
General and administrative $ 892,000 $ 780,000 14%
Total S, G&A $ 1,289,000 $ 1,141,000 13%
S, G&A Percentage of Sales 17% 19%
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Research and Development (R&D) Costs. Company-funded research and development expenses increased $65,000 to $729,000 for the quarter ended March 31, 2008 from $664,000 for the quarter ended March 31, 2007, an increase of 10%. The increase was due to approximately $109,000 in higher labor costs offset by a $52,000 reduction in independent research project costs as more projects were funded by customers as opposed to engineers working on company-funded projects. As a percentage of sales, company-funded research & development expenses decreased to 10% of sales from 11% of sales for the quarters ended March 31, 2008 and 2007 respectively. Company-funded research and development costs were as follows:
Three Months Ended March 31,
2008 2007 Increase
Research and Development costs $ 729,000 $ 664,000 10%
R & D Percentage of Sales 10% 11%
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Operating Profit and Operating Profit Percentage of Sales. Our consolidated operating profit for the quarter ended March 31, 2008 decreased to $208,000 compared to $351,000 for the same quarter in the previous year. The decrease in operating profit was due to the effect of the inventory reserve increase. Consequently, operating profit as a percentage of sales decreased to 3% for the quarter ended March 31, 2008 compared to 6% for the quarter ended March 31, 2007. Operating profit and margin were as follows:
Three Months Ended March 31, Increase
2008 2007 (Decrease)
Operating Profit $ 208,000 $ 351,000 -41%
Operating Profit Percentage of Sales 3% 6%
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Royalties and Other Income. We received $5,000 in royalty income in the three months ended March 31, 2008, compared to $5,000 in the same period during the prior year. During the quarter ended March 31, 2008, we reversed $44,000 of the $48,000 in other income recorded in the three months ended December 31, 2007 due to the discovery of an error in the calculation associated with early and discounted payment of debt related to the Intravantage deferred payables.
Net Interest Expense. Net interest expense for the quarter ended March 31, 2008 was $37,000 compared to $66,000 in the quarter ended March 31, 2007, due to the lower debt levels and lower market interest rates through the quarter ended March 31, 2008.
Income Tax (Benefit) Provision. Our estimated effective combined federal and state tax rate on income from operations for the quarter ended March 31, 2008 resulted in a 24% provision of earnings before tax compared to a 24% provision of earnings before tax for the quarter ended March 31, 2007. The 2008 rate is reduced by a recalculation of the FIN 48 estimated tax and interest liability and the 2007 rate is reduced due to the use of estimated R&D state tax credits.
Net Income. Our net income for the three months ended March 31, 2008 was $99,000 or $0.01 per share on a basic and diluted basis, as compared to a net income of $216,000 or $0.02 per share on a basic and diluted basis for the three months ended March 31, 2007.
For the Nine-Month periods ended March 31, 2008 and 2007
The following table sets forth the periods indicated and the percentage of net revenues represented by each item in our Consolidated Statements of Operations.
(In Thousands) Nine Months Ended March 31,
2008 2007
Net sales: $ 19,728 100% $ 15,780 100%
Cost of sales 12,996 66% 10,274 65%
Gross Profit 6,732 34% 5,506 35%
Selling, general and administrative expenses 3,564 18% 3,145 20%
Research and development costs 1,939 10% 1,890 12%
Income (Loss) from Operations 1,229 6% 471 3%
Net interest and other expense (91) 0% (142) -1%
Earnings before provision for income taxes 1,138 6% 329 2%
Provision for income taxes 409 2% 10 0%
Net income $ 729 4% $ 319 2%
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Net Sales. Consolidated net sales increased to $19,728,000 from $15,780,000 ($3,948,000 or 25%) for the nine months ended March 31, 2008, compared to the nine months ended March 31, 2007. Increases in medical shipments by $5,060,000 more than offset the combined decreases in dental, industrial and aerospace shipments.
Gross Profit and Gross Profit Percentage of Sales. Our consolidated gross profit for the nine months ended March 31, 2008 increased $1,226,000 or 22% over the same period in the previous year due to the higher sales levels of medical products. Gross profit as a percentage of sales decreased to 34% for the nine months ended March 31, 2008 compared to 35% for the nine months ended March 31, 2007. Gross profit margins were reduced 1.5 margin points by the change in inventory reserve calculation method. This reduction was slightly offset by efficiency gains due to the higher sales levels. Warranty costs represented approximately 5% of sales in each period. Gross profit and gross profit as a percentage of sales were as follows:
Nine Months Ended March 31,
2008 2007 Increase
Gross Profit $ 6,732,000 $ 5,506,000 22%
Gross Profit Percentage of Sales 34% 35%
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Selling, General and Administrative Costs (S, G&A). Consolidated S, G & A expenses increased 13% to $3,564,000 for the nine months ended March 31, 2008 from $3,145,000 for the nine months ended March 31, 2007. The increase in selling expense is mainly due to higher labor and labor related costs ($204,000) offset primarily by lower advertising costs ($72,000) and bad debt expense ($90,000). The increase in G & A costs was due to higher labor and labor related costs ($305,000) and higher consulting expenses associated with the ongoing income tax audit, the adoption of FIN 48, and for implementation of the Sarbanes-Oxley financial controls documentation ($108,000). These increases were offset by decreases in FAS 123 (R) costs, insurance and public relations. As a percentage of sales, S, G&A expenses decreased to 18% of sales from 20% of sales. S, G & A costs were as follows:
Nine Months Ended March 31,
2008 2007 Increase
Selling $ 1,072,000 $ 1,039,000 3%
General and administrative $ 2,492,000 $ 2,106,000 18%
Total S, G&A $ 3,564,000 $ 3,145,000 13%
S, G&A Percentage of Sales 18% 20%
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Research and Development (R&D) Costs. Company-funded research and development expenses increased $49,000 to $1,939,000 for the nine months ended March 31, 2008 from $1,890,000 for the nine months ended March 31, 2007, an increase of 3%. The increase was due to approximately $117,000 in higher labor costs reduced by $43,000 reduction in independent research project costs as more projects were funded by customers as opposed to engineers working on company-funded projects In addition, there was a $21,000 cost decrease in outside consulting expense during the quarter ended March 31, 2008 compared to the same period of the prior year. Company-funded research and development costs were as follows:
Nine Months Ended March 31,
2008 2007 Increase
Research and Development costs $ 1,939,000 $ 1,890,000 3%
R & D Percentage of Sales 10% 12%
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Operating Profit and Operating Profit Percentage of Sales. Our operating profit for the nine months ended March 31, 2008 increased to $1,229,000 compared to $471,000 for the same period in the previous year. The increase in operating profit was due to the higher sales coupled with the controlled growth in S, G&A and research and development expenses. Consequently, operating profit as a percentage of sales increased to 6% for the nine months ended March 31, 2008 compared to 3% for the nine months ended March 31, 2007. Operating profit and margin were as follows:
Nine Months Ended March 31,
2008 2007 Increase
Operating Profit $ 1,229,000 $ 471,000 161%
Operating Profit Percentage of Sales 6% 3%
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Royalties and Other Income. We received $25,000 in royalty payments in the nine months ended March 31, 2008, compared to $30,000 in royalty payments in the nine months ended March 31, 2007. We recognized an additional $4,000 in income in the nine months ended March 31, 2008 for gains associated with early and . . .
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