Mark P. Murphy, the company’s president and chief executive officer, commented, Operationally, we continue to be challenged by our top line. Medical products remain flat over all three quarters of this year, but down from last year due to customers’ inventory fluctuations. Motor sales had a soft quarter as we predicted. Our most systemic challenge is the precipitous decline in our motion control product sales, driven primarily by the very sluggish semiconductor equipment market. Given the historical length of these cycles, we are not counting on a rebound to previous motion control sales levels in the next quarter, although we are cautiously optimistic that spending patterns are at or near a bottom. We are doing everything possible to accelerate revenues in all three product lines and I’m encouraged that our backlog remains strong at $11.6 million as of March 31, 2009, up from $9.6 million a year earlier.
Consolidated gross profit for the quarter ended March 31, 2009 decreased 50% from the same quarter in the previous year to $1.1 million, a 24% gross profit margin, compared to gross profit of $2.2 million or 29% gross profit margin last year. Gross profit margins were lower than the same quarter in the previous year due to lower volumes and an unfavorable sales mix that included fewer high margin industrial and medical products. The negative effects of the unfavorable sales mix were partially offset by reduced warranty expense attributable to product improvements in the last six months, which reduced the rate of expected returns as well as the per unit repair cost.
Operational selling, general and administrative costs (excluding the impairment charge discussed below) declined due to cost saving measures implemented earlier this year. While the cost reductions were effective in shoring up the Company’s medical products profitability, they did not anticipate nor correct for the motion control product shipment declines.
Murphy commented on these two charges, We decided to write-down the value of the patents based on a detailed analysis of several scenarios. We have stopped actively marketing this product and we are looking for a company with a direct dental distribution channel which might be interested in access to the technology through product purchases, licenses, acquisition, joint venture, or other means. Management remains committed to optimizing the value of this technology for its shareholders, and will continue to pursue any opportunity to accomplish that end. The tax asset write-off was precipitated by the impairment charge, since that charge substantially reduced our historical taxable earnings. While we believe that future profitability will eventually allow us to use these tax benefits, we do not have the historical evidence to support that position.
Murphy continued, These two charges are significant and are not taken lightly. At the same time, it is important to keep in mind that they are non-cash, non-operating, and non-recurring charges that do not impact the company’s ability to generate either earnings or cash in the future. Accordingly, it is the $(0.04) per share operating loss that has my greatest attention. The other key metric is that we generated $896,000 in operating cash during the third quarter. This, along with our strong backlog, communicates volumes about the Company’s underlying health and stability.
The substantial loss reported by the Company has resulted in violations of certain covenants related to the line of credit issued by Wells Fargo Bank. While the bank reviews the situation to gain a better understanding, it has issued a letter of forbearance concerning the violations and reduced the amount of available credit from $4 million to $1 million as of May 12, 2009. The Wells covenant violations in turn create a violation of covenants under the Company’s Union Bank mortgage on the Carson City property. Union has issued a waiver of such violations.
Murphy commented, Wells Fargo’s actions are understandable, given the significance of the numbers and its need to fully understand them. Our $4 million line was high relative to our historical needs as we have not used more than $1 million for our operating requirements. We currently have zero drawn against the line, so the bank’s actions are not expected to impact our operations.
Murphy concluded, One final note is that Dick Corrington, our V.P. of Engineering has accelerated his planned retirement to become effective May 29, 2009. I want to publicly acknowledge and thank Dick for his contribution to Pro-Dex. Given our current financial circumstances, we will likely leave this position open at the current time. There is no question that we currently face our share of adversity. With our revenues being challenged in all product lines, an operational loss this quarter, and some very large balance sheet write-offs, this is clearly a trying time for us. Attention and intention is being applied to every issue we face. We are doing everything prudent to save costs and improve our top line. In the meantime, we have a robust backlog, a shrinking cost structure, and strong cash production. We will continue to navigate with fiscal conservatism toward our ultimate success.
Pro-Dex completed the March 31, 2009 quarter with cash and cash equivalents of $504,000 compared to $517,000 as of June 30, 2008. During the quarter, Pro-Dex paid the remaining $271,000 balance due on the term note relating to the acquisition of its Astromec subsidiary, fully retiring the indebtedness. This note was paid approximately one year ahead of its scheduled due date. Net debt was reduced to $3.0 million at the end of the quarter, compared to $3.8 million at the end of Q2.
Pro-Dex, Inc., with operations in Irvine, California, Beaverton, Oregon and Carson City, Nevada, provides a pathway to product solutions rarely envisioned by customers.
