WEB NEWS Research
On February 11, 2011 we initiated a short-term trading position in PDEX @ $2.54
PDEX has reported 4 straight quarter of above average EPS growth Trades below its book value per share of $2.57
Unfortunately, three issues may hold shares at bay and cause us to close this trade.
Legal problems (from filings)
On June 23, 2008, the Orange County Water District (“OCWD”) filed a complaint in the Superior Court of the State of California in the County of Orange concerning remediation of alleged ground water contamination in the Orange County Groundwater South Basin; Orange County Water District v. Sabic Innovative Plastics U.S. LLC, et al., Case No. 00078246. The South Basin underlies parts of Santa Ana, California and adjacent cities. The complaint identifies 17 named defendants, including Pro-Dex, and also designates 400 unnamed Doe defendants.
Overall, the OCWD complaint remains vague, the OCWD is in an early stage of its remedial activities in the South Basin, the lawsuit is in the middle stage of discovery, one of our insurers has committed to pay most defense costs and has reserved rights under one three-year set of policies and is continuing to consider extending coverage to us under other past policies, Pro-Dex and OCWD are engaged in settlement negotiations, and any recovery the OCWD may gain through trial of the lawsuit is likely to be allocated among several defendants. Therefore, our liabilities, as well as our costs of defending, monitoring and concluding our involvement in this case are uncertain, and those costs cannot now be estimated.
Potential loss of customer: (from filings)
It is possible that revenue otherwise attributable to this Customer could begin to decline during the second half of calendar year 2011. However, the Customer is not obligated either to abide by the timetables it has communicated to us or to update us as to the status of its product development efforts. Accordingly, we are unable to know or predict the status of the Customer’s initiatives on an ongoing basis. The Customer could accelerate, delay or terminate its transition to its own products at any time and without notice to us, which could have a material impact on our revenues. The identity of the Customer is protected by a confidentiality agreement. We have implemented the initial steps of a strategic plan, the objective of which is to identify and capture additional revenue opportunities. There can be no assurance, however, as to either the timing or success of achieving this objective, and it would be our intent to reduce operating costs, if and as necessary, to minimize the impact of a revenue reduction, should it occur. In the event that the Customer’s future purchases are reduced beyond the realization of such opportunities or cost reductions, the Company is likely to experience a material and adverse impact on its business.
Revenue growth has been stagnant for the past 3 years.
If not for the legal and customer loss issues, we would have coded PDEX as a GeoSpecial. We will give this trade a chance to pan out, but it will not be a favorite selection.
Investor Alert
The Company announced that one of its largest customers (the "Customer") is in the process of developing, and plans to eventually manufacture its own surgical hand pieces which are functionally comparable to the two products currently provided by the Company. Aggregate sales of these two products to this Customer during the 12-month period ending November 30, 2009 were $7.5 million, representing 35% of the Company's revenues during the same period. Pro-Dex has been the exclusive manufacturer of these products since they were developed. The Customer's 5-year commitment to exclusivity with the Company will conclude on January 6, 2010.
The Customer has not provided firm transition dates or volumes due to the inherent uncertainty in the design, testing, and qualification process. The Customer advised that it expects to maintain its current level of purchases at least through August of 2010 for one product (which represents 45% of its total purchases from the Company during the 12-month period ended November 30, 2009), and at least through December of 2010 for the second product (which represents 43% of its total purchases from the Company during the 12-month period ended November 30, 2009).
On December 4, 2009, the Customer placed a $1.5 million purchase order with the Company for delivery of the second product at historical monthly quantities through September, 2010. The Customer also stated that it expects to continue to buy some volume of these products from the Company beyond those dates as its initial success is not assured, certain markets may not adopt the Customer's design, and regulatory registration in certain markets is a lengthy process. Further, the Customer indicated that it will continue to rely on the Company for the repair of Company manufactured units in the field. Such repairs represented 12% (approximately $914,000) of its total purchases for the 12-month period ended November 30, 2009.
The design and production of these products is quite technologically challenging, as such devices are exposed to extremely harsh surgical and sterilization conditions. A different large customer of the Company pursued a similar course of action several years ago and ultimately canceled its in-sourcing project, continuing its purchases from Pro-Dex. The Customer currently pursuing this course has indicated a high commitment to proceeding cautiously. Accordingly, the actual occurrence of, and certainly the specific timing of any transition is very difficult to estimate.
The Company intends to find additional business and reduce its operating costs as necessary to minimize the impact of a potential revenue reduction. In the event that the Customer's future purchases are reduced beyond the additional business won and the cost savings realized, the Company is likely to experience a material and adverse impact on its business.
GeoTeam Requests Input
We will begin tracking PDEX, a manufacturer of power control products. We don't see anything that compelling as of yet, but the company has returned to profitably and has a new product line it is cultivating. We would need to see greater profitably along with top line growth to really peak our curiosity. To this point back log is up.
Request GeoReaders input.
