PDEX - NASDAQ

Hal Hurwitz - Chief Executive Officer

Greetings, and welcome to the Pro-Dex Fiscal 2014 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Hal Hurwitz, CEO of Pro-Dex. Thank you. Please begin.

Thank you, Luria and thank you all for joining us to review the results for the fiscal 2014 fourth quarter and full year ended June 30, 2014. On today’s call, I will provide a synopsis of our operating results as well as some comments. Then as Luria mentioned, we will open up the call for your questions. Before beginning, however, I ask our participants and listeners to 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, prospects and strategies, both preliminary and projected. Actual results or trends could differ materially. We undertake no obligation to revise 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, 2014, to be filed with the SEC today as well as to the Form 8-K filed 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. And now let’s cover the quarter’s results. Net sales for the three months ended June 30, 2014 increased $492,000, or 18%, to $3.2 million from $2.7 million for the three months ended June 30, 2013, due primarily to an increase of $746,000 in medical device product and repair revenues from our largest customer, partially offset by an aggregate decrease in sales of $349,000 to two former customers. The growth in sales to our largest customer arose from the resumption of product delivery orders from this customer in December 2013, following the customer's suspension of such orders from March through November 2013 ostensibly to relieve an inventory buildup of our product. Gross profit for the three months ended June 30, 2014 increased $366,000, or 65%, to $931,000, compared to $565,000 for the year-ago period, primarily as a result of the increased sales volume between periods. Also contributing to the growth in gross profit were decreases of $113,000 in inventory and warranty charges and $137,000 in accruals recorded for anticipated losses from the fixed-price development services portion of certain contracts. The decrease in these charges and accruals also contributed to an increase in gross margin as a percentage of sales, which rose to 29% for the three months ended June 30, 2014 from 21% for the corresponding period in 2013. Operating expenses, which include selling, general and administrative, and research and development expenses, for the quarter ended June 30, 2014 decreased 24% to $958,000 from $1.3 million in the prior year's corresponding quarter, reflecting primarily the effects of our continued cost reduction efforts. Income from continuing operations for the quarter ended June 30, 2014 was $27,000, compared to a loss from continuing operations of $680,000 in the corresponding quarter in 2013. Net income for the quarter ended June 30, 2014 was $23,000, or $0.01 per share, compared to a net loss of $673,000, or $0.20 per share, for the corresponding quarter in 2013. Turning to the full fiscal year results. Sales for the year ended June 30, 2014 decreased $1.4 million, or 12%, to $10.8 million from $12.2 million for the year ended June 30, 2013. Contributing to this reduction were decreases from fiscal 2013 to 2014 of (a) $491,000 in sales to our largest customer, arising from the effects of the suspension of product delivery orders during the first five months of fiscal 2014, (b) $428,000 in repair revenues from our former largest customer, from whom we expect no future revenue, and (c) $204,000 in sales of our motion control product line. Gross profit for the year ended June 30, 2014 decreased $750,000, or 20%, to $3 million from $3.7 million for fiscal 2013, due primarily to the reduced sales volume in fiscal 2014 and to a $141,000 increase from fiscal 2013 to 2014 of accruals to record anticipated losses from the fixed-price development services portion of certain contracts, partially offset by a $480,000 decrease from fiscal 2013 to 2014 in inventory and warranty charges. Gross margin as a percentage of sales declined three percentage points from 30% in fiscal 2013 to 27% in fiscal 2014. Contributing to this decline were the increased accruals related to the product development contracts, and to under-absorption of overhead due to the reduced sales volume in fiscal 2014, partially offset by the lower inventory and warranty charges. Operating expenses, which include selling, general and administrative, and research and development expenses, for the year ended June 30, 2014 decreased 33% to $3.8 million from $5.6 million in fiscal 2013, reflecting primarily the effects of our continued cost reduction efforts. Also contributing to the decrease were non-recurring charges of $190,000 incurred in fiscal 2013 in connection with the contested election of directors at our January 2013 Annual Meeting of Shareholders. Loss from continuing operations for the year ended June 30, 2014 was $651,000, compared to a loss from continuing operations of $1.9 million for fiscal 2013. Net loss for the year ended June 30, 2014 was $488,000, or $0.14 per share, compared to a net loss of $1.8 million, or $0.54 per share, for fiscal 2013. During the year ended June 30, 2014, we used $329,000 of cash in operating activities, compared to the use of $1.3 million of cash in operating activities in fiscal 2013. This improvement results primarily from the corresponding improvement in results of operations in fiscal 2014, relative to 2013, and to the liquidation through sales in fiscal 2014 of a build-up of our inventory that occurred in late fiscal 2013. These factors were partially offset by an increase in accounts receivable from the fiscal year-end 2013 to year-end 2014, which corresponded to the sales increase in the fourth quarter of fiscal 2014, relative to the corresponding period in 2013. With all of this said, now some brief commentary. One year ago I stated that our goal was to restore Pro-Dex to profitability and positive cash flow from operations. Today, it is evident we have not yet achieved that goal, but we believe we are well along the path to achieving it. Fiscal 2014 brought its challenges: We endured a nearly complete suspension of product delivery orders from our largest customer for the first five months of the year, we experienced unanticipated delays in completing two large product development projects involving new designs and technological applications for the markets to be served, and a major contract manufacturing customer encountered delays of its own in completing its product development. As a result, revenue recognition was deferred, fixed manufacturing overhead costs were not fully absorbed and losses on the development projects were incurred. Even with these challenges, the right-sizing of our cost footprint over the past 18 months contributed to improved financial results during each quarter of fiscal 2014, relative to the corresponding quarters of fiscal 2013, and we finished fiscal 2014 with an essentially break-even, albeit profitable, fourth quarter. This focus on cost control, as well as on inventory and other balance sheet expenditure controls, contributed to positive cash flow from operating activities for both the third and fourth quarters of fiscal 2014. For these results, I thank the Pro-Dex employees for their continued hard work and commitment. In addition, I am pleased to report that, in July 2014, our largest customer issued us purchase orders for the manufacture and delivery of $3.5 million of product through December 2015, which will commence upon our fulfillment of the customer's current purchase orders that call for shipments between now and December 2014. In addition, the two product development projects that I have described are nearing completion, which we believe will occur during our second fiscal quarter ending December 31, 2014, and which we believe will be followed in subsequent quarters during fiscal 2015 by the aforementioned contract manufacturing project. Finally, I will comment briefly on the Form 8-K we filed with the Securities and Exchange Commission this past July regarding our potential $225,000 acquisition of a Northern California-based manufacturing company. We have been, and continue to be, open to considering transactions that make financial sense for Pro-Dex. Regarding the potential acquisition described in July's Form 8-K, I can report only that our due diligence procedures are underway, but that no assurance can be given as to the successful completion of the transaction. I am now happy to invite any questions you might have with regard to the quarter and full year results, or on our business operation, and to that end, I will turn the call back over to Luria for Q&A.

(Operator Instructions) Our first question comes from the line of Matthew Mcclane [ph], a private investor.

Hi, thanks for taking my question. Congratulations on finishing the year strong. I am just wondering I have a few questions. First one about, can we consider this quarter to be as somewhat of a run rate to the operations now, is it kind of stabilized revenue [inaudible] similar without the production contract coming through and is the cost base about where you want it to be?

Matt, first, thanks for your comments on this quarter. Because we are very much still a project based entity, and if I mention, we don’t look for manufacturing to start on our two large development projects until later in the calendar year I don’t know that I can say that we can yet call this a run rate for future quarters. But we’re definitely getting there.

All right, thanks. And then just quickly on the purchase order from the largest customer, are you happy with the volume that’s going through in that contract and how does it look compared to prior year?

We are happy with it. Our customer has actually now run short of project -- products, that’s what we have been told, so that’s a good news. And we are very pleased with the PO.

And then just lastly a bit, could you speak any more about how the product development projects are going and what are you looking at for the quarter, is there going to be hopefully some sort of the tooth [ph] on this by the end of the quarter, will revenue then follow in the following quarters, so how should we approach it as investors?

The product development projects are going nicely. We emerged substantially through the development phase. We are into a testing phase now. So we are not completely through the development phase. But it is an accomplishment to say that we are into the test phase now. And the answer to the latter part of your question is yes. We expect that we will be through the development phase of those projects late in this calendar year which would be our second fiscal quarter, so that our expectation is that meaningful manufacturing revenues likely would be on the other side of New Year. There is some chance that some manufacturing revenues would occur in December but I think that is a more realistic and reasonable expectation to say that it would occur in the quarter beginning January 1.

All right. I appreciate that. And then I just have one last question about the 8-K filing and [inaudible] considering a possible manufacturing company acquisition, just wondering how potentially [inaudible] make sense with Pro-Dex, will it provide additional manufacturing capacity, does it align well with new product development contracts, just if you could provide any color, I understand that you are doing due diligence now, it may not be anything you can see through but if you could provide some additional information.

Sure. I will be happy to. The particular transaction that we are looking at as well as some others provides us with near term and shorter sales cycle revenues. As I have commented on and as my predecessors just commented on for many years now, the sale cycle in a medical device space is a very long one. Until we have a two-tiered approach with respect to business development, as we go after the larger tickets, higher margin revenues represented by the medical device projects, those need to be supported by a solid foundation of shorter sale cycle recurring on a regular basis revenues, which I think will make my answer to your first question about run rate an easier one in future quarters. That’s really our objective with this small acquisition.

That’s good to hear. So this isn’t just simply buying [inaudible] assets, you’re actually looking to have reasonable operational revenue coming out of this as well?

That’s correct. I would remind you that this particular acquisition, as an example, is a small one, at $225,000 of purchase price, you can appreciate that it’s a small entity. But it does have a good run rate, a good positive cash flow and a good customer list which is our primary interest.

(Operator Instructions) Thank you. We have no further questions in queue at this time. I would like to hand the floor back to our host for closing remarks.

Thank you, Luria and thank you everyone for joining us today. All of us at Pro-Dex appreciate your interest, your time and your support of the company. And we look forward to speaking with you in November when we report our fiscal year 2015 first quarter financial results. Have a good day.