PDEX - NASDAQ

Greetings, and welcome to the Pro-Dex Fiscal 2013 First Quarter 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 securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends and the company's plans, products, perspectives and strategies, both preliminary and projected. Actual results or trends could differ materially. We undertake no obligation to revise or publicly revise the results of any revision to the forward-looking statements in light of new information or further events. For more information, please refer to the risk factors discussed in our company's Form 10-K for the year ended June 30, 2012, our Form 10-Q that we expect to file within the next 2 weeks, and the Form 8-K we are filing with the SEC today along with the attached press release issued today, all of which can be obtained from the SEC or by visiting our website at www.pro-dex.com. I would now like to turn the conference over to Michael Berthelot. Please go ahead, sir.

Thank you, Stacy, and thank you all for joining us to review the results for the first quarter of fiscal year 2013. On today's call, Hal Hurwitz, our CFO, will provide us with the synopsis of our operating results, after which I will share my comments. Then, as Stacy mentioned, we will open up the call to your questions.

Thank you, Mike. My discussion of our results for the fiscal 2013 first quarter will relate to our continuing operations, meaning that the results of our former Astromec motor product line, which was sold in February 2012, will be excluded. Sales for the quarter ended September 30, 2012, decreased 31% to $3.5 million, from $5 million for the corresponding quarter in 2011. As we have disclosed previously, the decreases in sales were primarily the result of the continuation of a reduction in purchases of our medical device products by our former largest customer. Excluding sales to the former customer from the comparison of 2012 to 2011, the company's surgical product sales increased $548,000 in 2012. In addition, motion control system sales increased $138,000 in the 2012 quarter when compared to the corresponding period in 2011. Gross profit for the quarter ended September 30, 2012, was $1.2 million or 36% of sales compared to gross profit of $2.1 million or 42% of sales for the year ago period. This decrease resulted primarily from the year-over-year decrease in sales and the related effects on manufacturing at lower sales volumes. Operating expenses, which includes selling, general and administrative, and research and development expenses for the quarter ended September 30, 2012, decreased 26% to $1.3 million from $1.8 million in the prior year's corresponding quarter. The decrease reflects the broad-based effect of the company's cost-reduction efforts, evidenced by reductions of $100,000 or 27% in selling expenses; $208,000 or 25% in general and administrative expenses; and $155,000 or 28% in research and development expenses. All of these departmental reductions reflected, among other items, a focus on the elimination of noncritical activities and the previously announced reductions in force and company-wide 5% decrease in base compensation. Pre-tax loss from continuing operations was $58,000 for the quarter compared to pre-tax income from continuing operations of $347,000 in the corresponding 2011 period. Net loss for the quarter ended June -- September 30, 2012, was $17,000 or $0.01 per diluted share compared to net income of $446,000 or $0.14 per diluted share in the corresponding 2011 quarter. During the quarter ended September 30, 2012, we used $172,000 of cash in operating activities and repaid the entire outstanding balance on the term loan from Union Bank, amounting to $685,000. Cash on hand at September 30, 2012, was $3.1 million compared to $4.1 million at June 30, 2011. With that, I will turn the call back over to Mike for his review and outlook comments.

Thank you, Hal. As we said in this afternoon's release, we believe that the first quarter of fiscal 2013 marks the beginning of the beginning of Pro-Dex's resurgence as a focused developer and manufacturer of powered surgical instruments. We had a strong quarter reporting, as Hal mentioned moments ago, a very small net loss, a smaller than anticipated loss from continuing operations and EBITDA of $141,000, of which $100,000 was from continuing operations. We were able to achieve these results not only as a result of our attention reducing costs, especially SG&A cost, which we cut by 26% from last year's first quarter and 17% from the preceding quarter, but also by improving the efficiency of our manufacturing operations as evidenced by the increase in our gross margin to 36%, the highest in 4 consecutive quarters even while quarterly sales were the lowest over the same period. We will continue our efforts to exert discipline in our cost structure, and we'll limit our SG&A investments to those areas where we believe the value added of such expenditures will be realized quickly and directly. Our increased sales efforts have shown immediate positive results in the 25% increase in powered surgical instrument sales, excluding the sales last year to our former largest customer, and a 32% increase in motion control product sales, which blend together to yield 26% aggregate sales growth when compared to last year's first quarter without the sales to our former largest customer. Our focused efforts to establish ourselves as the go-to company for powered surgical instruments is showing benefit in both the long and near term. While our book-to-bill ratio for the first quarter was 1.14, our bookings for the first 3 weeks of October amounted to over $3.5 million, for total bookings for the first 4 months almost of this fiscal year of $7.5 million. While not all of those bookings will be shipped in fiscal 2013, we believe that this level of bookings so early in the fiscal year shows the validity of our strategy and its promise for the future. The goal, of course, is to reach breakeven and then to maximize our profitability. Based upon our currently budgeted cost structure, we estimate our pre-tax breakeven point at somewhere between $13 million and $14 million in revenues, depending upon the aggregate gross margin we realized. We also estimate our breakeven EBITDA level at $12 million. In addition to this strong level of bookings, we have a solid pipeline of projects that present opportunities for the future. We have several proposals out to major medical device OEMs and more than a dozen product development modification projects in process. As you may have noticed, we have updated our logo and changed our tagline to powered surgical solutions, as we continue to focus on a project-centric strategy. We have also commissioned an engineering and market study project with the objective of filling out our dental product line and reintroducing a complete line of dental handpieces, a product line that we have allowed to stagnate and decline over many years but in which we were once considered a leader. On the manufacturing cost front, we continue to seek ways to reduce cost and become more efficient. We now closely track our electricity usage down 4% in terms of kilowatt hours and 12% in overall costs from a year ago. We have tighter controls on overtime. While up $5,000 when compared to last year's first quarter, when we had 15 more people in manufacturing and thus needed fewer marginal resources, first quarter overtime was down 71% from the preceding quarter. Our associates have identified a number of cost-saving, efficiency-enhancing modifications as to how we do things. One example is the recent change in the coolant we use on our production machines. In the past, we used oil as the coolant lubricant. Upon the suggestion of one of our associates, we have changed to a synthetic coolant which costs the same but has allowed our machines to run for a longer period of time at lower heat levels, effectively reducing the time required to produce some critical components by up to 32%, reducing lead times, cost and our carbon footprint. Our engineering and operations staffs are working together on a number of these designed-for-manufacture products. Similarly, our engineering and QA staffs are working to improve the quality of our products, accelerate the test and validation process and better refine our products so as to meet the needs of our ultimate customers, the surgeons in the OR. We have begun a broad program of attending labs and observing procedures in the OR to see how our products can be improved. We have a number of modification projects underway, which will allow our basic surgical handpiece product to be used in a number of specialty procedures, increasing its value to our customers and broadening our product line without stretching our investment resources. Bringing a new device or even a modification of an existing device to market is a time-consuming effort, not only because of regulatory requirements but because the physical testing and validation of efficacy of such a product requires hundreds of hours of actual physical operation or autoclave testing. Our engineering, QA and motion control departments are working together to develop automated test equipment that will be operational 24/7 and which we would expect could shorten the product development cycle significantly. The faster we can get newer modified product through the validation process and accepted by our customer, the sooner we will be able to commence volume manufacturing of the device, our ultimate objective. Because of the increasing demand for these front-end engineering services, we are actually in the process of increasing our engineering resources by adding the first new engineer to our staff in a year. Our associates, management team and our board are fully involved in our transformation. We are excited about what the future holds for our company as we continue to pursue the creation of cutting-edge solutions for our customers and opportunities for our associates, which, together, will build long-term sustainable value for our shareholders. We thank you for your confidence and support, and pledge to you our absolute commitment to making our company the best it can be. I will now turn the call back to Stacy for questions.

[Operator Instructions] Our first question comes from Mark Murphy, Private Investor.

Two quick questions. One is the press release refers to 3 new customer product development projects that have begun. Can you put any color without names or anything or products on size or length of time, or when those might start seeing the revenue line?

Yes, I -- as you know, I can't put names on them...

Yes, I know that.

Certainly, Mark. But...

Any color that you can put on those 3 new projects just in terms of size or timing.

Though -- if I try to put it in terms of size, it's going to get a little too into forward-looking estimates of revenue. But let me say this, what those projects are, is they are derivations of our basic driver. And so what we're doing is we're looking at expanding it into multiple applications. Let's say, maxi-cranial facial [ph] , spinal, general orthopedics. And so we have actual projects in place that are doing defined modifications for each of those procedures for specific customers.

Our next question comes from Christian Liang [ph] with Red Oak Partners.

I was just curious what the backlog was at the end of the quarter?

Let's see. The backlog at the end of the quarter, well, it's up 1.14.

Was it 5.3 at the end of the year?

Okay, you've got me flat-footed here.

Yes, me as well. I can get that for you.

We'll have to get that for you. It would have been up a bit from the end of the year.

Okay. Was there any revenue contribution in the current quarter from the previous large customer or was that a 0?

There were no new product sales to the new customer. However, repairs continue to be a revenue source.

So -- and I think it was about $0.5 million in the last quarter, and that maybe continue ongoing or a slow decline?

Well, it wasn't $0.5 million in the last quarter.

No?

I think it was in excess of $300,000 for the year, if I recall.

Oh, okay. So a relatively a small number?

A relatively small number is a fair description.

And then last question. Just was there any update on the return of capital? Is that still part of the plan between now and the end of the year to come to a decision?

Well, we are looking at that, and we are eagerly anticipating what happens 12 days from today because that will seriously impact the timing of anything we might do. If we're going to make any kind of application of shareholder cash to shareholders, we want to make sure shareholders get to keep the better part of that cash.

[Operator Instructions] Gentlemen, there are no further questions at this time.

Okay, great, thank you. Thank you, Stacy. So with that, I'd like to thank everybody for joining us today. Stacy, thank you for moderating. We appreciate everyone's interest and your time and support of the company and look forward to speaking with you in January when we report our final -- or our second quarter financial results. Thank you.