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| PDEX > SEC Filings for PDEX > Form 10-Q on 12-Feb-2009 | All Recent SEC Filings |
12-Feb-2009
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 six month periods ended December 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-Q, 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-K or 10-KSB.
Pro-Dex, Inc. ("Company," "Pro-Dex", "we," "our,", "us"), with operations in Irvine, California, Beaverton, Oregon and Carson City, Nevada, provides a pathway to product solutions rarely envisioned by customers. A unique blend of creativity and systemic discipline enables us to develop and manufacture innovative designs that powerfully complete a customer's strategic product offering. Pro-Dex leverages extraordinary human collaboration and superior technical capability to power and control products used in medical, aerospace, military, research and industrial applications requiring high precision in harsh environments. With expertise in multi-axis motion control, fractional horsepower motors and rotary drive systems, we identify and create unexpected value for our customers.
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 names of Micro Motors, Oregon Micro Systems, and Astromec are used for marketing purposes as brand names.
Pro-Dex's principal headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is 949-769-3200. Our Internet address is www.pro-dex.com . Our annual reports on Form 10-K or 10-KSB quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission ("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. 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.
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 December 31, 2008, $677,000 was expensed for company-funded research and development; an increase of $42,000 from the $635,000 expensed in the three months ended December 31, 2007. The increase was attributable to increased labor costs for medical and small motor product development, improvement and validation.
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 research and development fees provided $61,000 in revenue during the quarter ended December 31, 2008, compared to $209,000 for the three months ended December 31, 2007. Revenue related to these fees can vary greatly due to the timing of contract milestones that prompt the revenue recognition. The results of customer-funded development work are intended to provide long-term exclusive manufacturing agreements and may provide the customer with the retention of the intellectual property developed. The identity of our customers is generally protected by a non-disclosure agreement.
The Company's revenue is derived from five main customer types. The proportion of total sales to each customer type and sales by location are noted in the tables below (unaudited):
Three months Ended December 31, Six months Ended December 31,
Sales by customer type ($'000) 2008 2007 2008 2007
Dental $ 577 11% $ 786 13% $ 1,308 12% $ 1,749 14%
Medical 2,684 51% 3,519 57% 5,357 49% 6,725 56%
Industrial 865 17% 919 15% 1,811 17% 1,631 13%
Aerospace 659 13% 422 7% 1,422 13% 985 8%
Government, repairs and other 452 9% 477 8% 995 9% 1,024 8%
Total Sales $ 5,237 100% $ 6,123 100% $ 10,893 100% $ 12,114 100%
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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. 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. The Carson City 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 December 31, 2008, we had a backlog, including orders for delivery beyond 60 days, of $12.1 million compared with a backlog of $11.7 million at December 31, 2007 and $10.4 million at June 30, 2008. We expect to ship most of our backlog in fiscal year 2009 and the remainder in fiscal year 2010. The increased backlog compared to December 2007 and June 2008 is due the booking of a $1.3 million order for a new product expected to be released in calendar year 2009. 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.
RESULTS OF OPERATIONS
For the Three-Month periods ended December 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 December 31,
2008 2007
Net sales: $ 5,237 100% $ 6,123 100%
Cost of sales 3,305 63% 3,769 62%
Gross Profit 1,932 37% 2,354 38%
Selling, general and administrative expenses 1,162 22% 1,218 20%
Research and development costs 677 13% 635 10%
Income from Operations 93 2% 501 8%
Net interest and other income (expense) (52) -1% 22 0%
Provision (benefit) for income taxes (40) -1% 218 4%
Net income $ 81 2% $ 305 5%
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Net Sales. Consolidated sales decreased from $6,123,000 to $5,237,000 ($886,000 or 14%) for the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007. The decrease was primarily due to the delivery of a single product to a major medical customer during the second quarter of last fiscal year. These sales were not repeated in the second quarter of fiscal 2009 as this customer plans to replace this product with newly developed product that Pro-Dex is forecasting to begin shipping in the second half of this fiscal year. In addition, we have been exiting the sale of low-profit, non-differentiated products. Lastly, the second quarter of fiscal year 2008 included customer-funded development fees that were not repeated this year.
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 December 31, 2008 decreased $422,000 or 18% over
the same quarter in the previous year due to the lower sales rate Gross profit
as a percentage of sales was 1% lower at 37% for the quarter ended December 31,
2008 compared to 38% for the quarter ended December 31, 2007. Net gross profit
margins were comparable to the same quarter in the previous year, as an
increased facility and overhead costs were offset by lower warranty expenses.
The reduced warranty expense is attributed to both lower projected per unit
costs to repair warranty-covered products and a reduced expected return rate.
Gross profit and gross profit as a percentage of sales were as follows:
Three Months Ended December 31,
2008 2007 Decrease
Gross Profit $ 1,932,000 $ 2,354,000 -18%
Gross Profit Percentage of Sales 37% 38%
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Selling, General and Administrative Costs (S, G&A). Consolidated S, G & A expenses decreased to $1,162,000 for the quarter ended December 31, 2008 from $1,218,000 for the quarter ended December 31, 2007. The decrease in selling expense is mainly due to lower labor costs ($54,000) offset by higher travel costs ($20,000). The decrease in G & A costs was due to lower labor costs ($69,000), offset by Sarbanes Oxley consulting expense ($33,000). As a percentage of sales, S, G&A expenses increased to 22% of sales from 20% of sales for the quarter ended December 31, 2008 and 2007 respectively. S, G&A costs were as follows:
Three Months Ended December 31, Increase
2008 2007 (Decrease)
Selling $ 329,000 $ 352,000 -7%
General and administrative $ 833,000 $ 866,000 -4%
Total S, G&A $ 1,162,000 $ 1,218,000 -5%
S, G&A Percentage of Sales 22% 20%
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Research and Development (R&D) Costs. Company-funded research and development expenses increased $42,000 to $677,000 for the quarter ended December 31, 2008 from $635,000 for the quarter ended December 31, 2007, an increase of 7%. The increase was due to approximately $45,000 in increased labor costs for medical and small motor product development, improvement and validation. Company-funded research and development costs were as follows:
Three Months Ended December 31,
2008 2007 Increase
Research and Development costs $ 677,000 $ 635,000 7%
R & D Percentage of Sales 13% 10%
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Operating Profit and Operating Profit Percentage of Sales. Our resulting consolidated operating profit for the quarter ended December 31, 2008 decreased to $93,000 compared to $501,000 for the same quarter in the previous year. Operating profit as a percentage of sales decreased to 2% for the quarter ended December 31, 2008 compared to 8% for the quarter ended December 31, 2007. Operating profit and margin were as follows:
Three Months Ended December 31,
2008 2007 (Decrease)
Operating Profit $ 93,000 $ 501,000 81%
Operating Profit Percentage of Sales 2% 8%
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Royalties and Other Income. We received $8,000 in royalty income in the three months ended December 31, 2008, compared to $14,000 in the same period during the prior year
Net Interest Expense. Net interest expense for the quarter ended December 31, 2008 was $60,000 compared to $40,000 in the quarter ended December 31, 2007 due to the higher debt levels.
Income Tax (Benefit) Provision. Our estimated effective combined federal and state tax rate on income from operations for the quarter ended December 31, 2008 resulted in a benefit of 98% of earnings before tax for the quarter ended December 31, 2008 compared to a 42% provision of earnings before tax for the quarter ended December 31, 2007. The difference in the 2008 rate is due to the benefits from the prior year combined with the use of state tax credits and a $70,000 retroactive reinstatement of the federal research and development credits.
Net Income. Our net income for the three months ended December 31, 2008 was $81,000 or $0.01 per share on a basic and diluted basis, as compared to net income of $305,000 or $0.03 per share on a basic and diluted basis for the three months ended December 31, 2007.
For the Six-Month periods ended December 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) Six Months Ended December 31,
2008 2007
Net sales: $ 10,893 100% $ 12,114 100%
Cost of sales 7,206 66% 7,608 63%
Gross Profit 3,687 34% 4,506 37%
Selling, general and administrative expenses 2,354 22% 2,276 19%
Research and development costs 1,396 13% 1,209 10%
(Loss) Income from Operations (63) -1% 1,021 8%
Net interest and other expense (112) -1% (14) 0%
Provision (benefit) for income taxes (138) -1% 376 3%
Net Income $ (37) 0% $ 631 5%
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Net Sales. Consolidated net sales decreased to $10,893,000 from $12,114,000 ($1,221,000 or 10%) for the six months ended December 31, 2008, compared to the six months ended December 31, 2007. The decrease was primarily due to the delivery of a single product to a major medical customer during the first half of last fiscal year. These sales were not repeated in the second quarter of fiscal 2009 as this customer plans to replace this product with newly developed product that Pro-Dex is forecasting to begin shipping in the second half of this fiscal year. In addition, we have been exiting the sale of low-profit, non-differentiated products.
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 six months ended December 31, 2008 decreased $819,000 or 18% over the same period in the previous year due to lower sales volume. Gross profit as a percentage of sales was 3% lower at 34% for the six months ended December 31, 2008 compared to 37% for the period ended December 31, 2007. As compared to the prior year's comparable six month period, gross profit margins were increased by 2% for the reduced warranty costs, but this gain was offset by 3% from a less favorable sales mix that included a lower amount of high margin motion control sales and development fees, and 2% for increased overhead cost. Gross profit and gross profit as a percentage of sales were as follows:
Six Months Ended December 31,
2008 2007 Decrease
Gross Profit $ 3,687,000 $ 4,506,000 -18%
Gross Profit Percentage of Sales 34% 37%
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Selling, General and Administrative Costs (S, G&A). Consolidated S, G & A
expenses for the six months ended December 31, 2008 increased $78,000 to
$2,354,000 from $2,276,000 for the six months ended December 31, 2007. Expense
increases in the first six months of 2008 compared to the first six months of
2007 include consulting related to Sarbanes-Oxley compliance activities
($94,000), and increased costs associated with the Irvine facility ($66,000).
These increases were offset by a reduction in associate labor costs ($82,000).
As a percentage of sales, S, G&A expenses increased to 22% of sales from 19% of
sales. S, G & A costs were as follows:
Six Months Ended December 31,
2008 2007 Increase
Selling $ 673,000 $ 675,000 0%
General and administrative $ 1,681,000 $ 1,601,000 5%
Total S, G&A $ 2,354,000 $ 2,276,000 3%
S, G&A Percentage of Sales 22% 19%
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Research and Development (R&D) Costs. Company-funded research and development expenses increased $187,000 to $1,396,000 for the six months ended December 31, 2008 from $1,209,000 for the six months ended December 31, 2007, an increase of 15%. The increase was primarily due to increased headcount at the Irvine and Carson City locations, offset by reduced labor cost at the Beaverton facility. An increase in rent expense and depreciation related to the Irvine facility rent and tenant improvements accounted for the remaining increase. Company-funded research and development costs were as follows:
Six Months Ended December 31,
2008 2007 Increase
Research and Development costs $ 1,396,000 $ 1,209,000 15%
R & D Percentage of Sales 13% 10%
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Operating Profit (loss) and Operating Profit (loss) Percentage of Sales. Our consolidated operating loss for the six months ended December 31, 2008 was $63,000 compared to an operating profit of $1,021,000 for the same period in the previous year. The decrease in operating profit was due to the lower sales and gross margin. Consequently, as a percentage of sales there was an operating loss of (1%) for the six months ended December 31, 2008 compared to an 8% profit for the six months ended December 31, 2007. Operating profit and margin were as follows:
Six Months Ended December 31,
2008 2007 Decrease
Operating Profit (loss) $ (63,000) $ 1,021,000 -106%
Operating Profit Percentage of Sales -1% 8%
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Royalties and Other Income. We received $9,000 in royalty payments in the six months ended December 31, 2008, compared to $20,000 in royalty payments in the six months ended December 31, 2007.
Net Interest Income/Expense. Net interest expense for the six months ending December 31, 2008 was $121,000 compared to net interest expense of $82,000 in the six months ended December 31, 2007, due to higher debt balances.
Income Tax (Benefit) Provision. Our estimated effective combined federal and state tax rate on income from operations for the six months ended December 31, 2008 resulted in a benefit of earnings before tax of 78% compared to a provision of 37% of earnings before tax for the six months ended December 31, 2007. The difference in the 2008 rate is due to the use of state tax credits coupled with a $70,000 retroactive reinstatement of the federal research and development credits.
Net Income/Loss. Our net income/loss for the six months ended December 31, 2008 was a loss of $38,000 or $0.00 per share, as compared to a net income of $631,000 or $0.06 per share on a basic and diluted basis for the six months ended December 31, 2007.
Liquidity and Capital Resources
The following table presents selected financial information as of the end of the
second quarter of fiscal 2008 and 2007, respectively, as well as of the year
ended June 30, 2008:
As of December 31, As of
2008 2007 June 30, 2008
Cash and cash equivalents $ 406,000 $ 220,000 $ 517,000
Working Capital¹ $ 6,275,000 $ 6,471,000 $ 4,586,000
Credit Line outstanding balance $ 400,000 $ 0 $ 2,000,000
Tangible book value/common share² $ 0.94 $ 0.95 $ 0.93
Number of days of sales outstanding (DSO) in
accounts receivable at end of quarter³ 47 45 48
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1 Working Capital = Ending Current Assets less Ending Current Liabilities.
2 Tangible book value/common share = (Total shareholders' equity - Net intangible asset (patents) - Goodwill) / (basic outstanding shares).
3 DSO = Ending Net Accounts Receivable balance / (Previous Quarter Sales / 91).
Our working capital at December 31, 2008 decreased to $6.3 million compared to $6.5 million at December 31, 2007 and was $1.7 million higher than the $4.6 million at June 30, 2008. Cash flow used in operations was $56,000 in the six months ended December 31, 2008 compared to cash flow provided by operations of $1,266,000 for the six months ended December 31, 2007. Fiscal year 2009 cash was consumed largely through a pay down in accounts payable ($1,832,000) offset by a decrease in inventory ($1,063,000) and reduction in accounts receivable ($362,000).
We have a credit facility with Wells Fargo with a total borrowing capacity of $6,562,500. The credit facility has three components,
º a revolving Credit Line Note of up to $4,000,000,
º a Loan Commitment Note (the "TI Note") of up to $2,000,000, and
º a Term Note for $562,500 remaining from the purchase of our Astromec subsidiary.
The facility was amended in the quarter ended December 31, 2008 to convert $2,000,000 from the revolving Credit Line Note to a five year note (TI Note), amend the covenants, alter the interest rates charged for outstanding balances on the Credit Line Note and add an unused line fee.
The revolving credit line borrowing availability is a maximum of $4,000,000. Its terms require monthly interest payments at either (i) the prime rate of interest (3.25% at December 31, 2008) plus 1.50%, or (ii) three month LIBOR (2.0% at December 31, 2008) plus 2.50%, at our discretion, based on outstanding borrowings. The credit facility expires on November 1, 2009. We are charged an unused credit line fee of 0.25% per annum payable quarterly on the average balance of the revolving credit line that is not used. There was a $400,000 . . .
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