Dynatronics Corporation
Q3 2018 Earnings Call Transcript

Published: 13 Nov 2018

[Operator:]

Greetings, and welcome to the Dynatronics First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Chris von Jako, CEO. Thank you. You may begin.

[Christopher von Jako:]

Good morning, everyone and welcome to Dynatronics Corporation Investor call. I'm Chris von Jako, Chief Executive Officer and with me on the line is David Wirthlin, our Chief Financial Officer. We issued a press release earlier this morning announcing the financial results of our first fiscal quarter ended September 30th, 2019 and later this morning, we will file our 10-Q for the quarter. Today, we will talk about our first quarter operating results and at the conclusion of our commentary, we will have the operator open the phone lines for questions. Before we begin let me remind you that during the course of this call, we will make forward-looking statements regarding our current expectations, plans, projections and financial performance relating to our business. These forward-looking statements reflect our view as of today only and they involve risks and uncertainties that could cause our actual results to differ materially from those discussed today. Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements today are included in our most recent 10-K filed with the SEC. I caution you not to place undue reliance on forward-looking statements we make this morning. We undertake no obligation to update or revise forward-looking statements. Dynatronics delivered a solid quarter that reflects the continued execution of our acquisition strategy and the planned operational improvement initiatives designed to reduce cost and improve profitability. We are beginning to see the benefits from our initiatives as we were profitable this quarter while covering the cost of incremental leadership personnel investments that we made over the past several quarters. During the quarter, I've had the opportunity to spend a significant amount of time meeting with our sales professionals and some of our largest customers. I also spent time speaking with our investors and the investment community. In both cases, I have learned about significant opportunities to improve both our operations and communications. These interactions during my first full quarter as CEO of the company have left me more energized and optimistic about our future potential. We make and distribute high quality and well-known branded products which meet the needs of our clinician customer base and the patients they serve. We have also developed some great relationships with our customer base, but had a clear opportunity to grow with these existing customers and to expand it with new customers. With the investment community, we are sharing our story and are continuing to build relationships that will serve us well. I have the opportunity to present to investors at the Ladenburg Healthcare Conference, New York City as well as conduct several one-on-one sessions with investors and we have several more Investor Conferences on the calendar in the coming months. I look forward to continuing to share our key messages with the investment community. Also this quarter, I launched a strategic planning process with the team. This process is aimed at developing a five-year strategic plan, allowing the team to revisit and better characterize where we are today, but more importantly to embark on planning how we will achieve our goals over the next five years. We expect to complete this process by the end of March 2019. Finally, based on my observations this quarter, we have a unique opportunity to create a medical device industry leader in a physical therapy rehabilitation space for several specific reasons. We are leading manufacturer in a highly fragmented market. We have a number of favorable tailwinds that are driving the market which increases the demand of the products we sell. We continue to differentiate ourselves through our strong brand recognition and customer service. We have successfully demonstrated our ability to execute on acquisitions and integration and have a robust pipeline for future acquisitions. We are making the right operational changes to drive efficiency across our manufacturing sites. We also have the support of our highly engaged Board of Directors and Investors that provide guidance as we execute on our strategy. And in conclusion, we have a talented and dedicated employee base which I would like to thank for their continued commitment in driving our efforts forward. I will now turn the call over to David Wirthlin, our CFO to provide a financial report.

[David Wirthlin:]

Thanks, Chris. I will now provide a financial report on the quarter ended September 30th 2018. Note that we issued a press release this morning, highlighting the financial results for the quarter. There is one significant factor that had a material impact on our operating results for the quarter ended September 30th 2018. Dynatronics closed the acquisition of Bird & Cronin in our second quarter of fiscal year 2018. Therefore, Bird & Cronin operating results are included in the first quarter of 2019, but are not included in the first quarter of 2018. Net sales for the quarter ended September 30th 2018 increased $4.3 million or 33% to $17.1 million compared to $12.8 million in the same quarter for the prior year. The sales growth came primarily from the addition of Bird & Cronin which contributed sales of $5.9 million. This increase was partially offset by a decrease of $1.6 million, primarily due to a decline in sales of physical therapy and rehabilitation equipment and supplies. Gross profit for the quarter ended September 30th 2018 increased approximately $1.2 million or 28% to $5.5 million, representing 32.5% of sales compared to $4.3 million or 33.9% of sales in the same quarter of the prior year. The acquisition of Bird & Cronin was the cause of the increase in contributing gross profit of $2.1 million. The decrease in gross margin percentage to 32.5% from 33.9%, which is due primarily to lower gross margin on sales of our physical therapy and rehabilitation equipment which had a lower gross margin percentage in the quarter. Selling, general and administrative expenses for the quarter ended September 30 2018 increased approximately $1.4 million or 35% to $5.5 million compared to $4.1 million in the same quarter of the prior year. The primary driver of the increase was $1.7 million of SG&A expenses from the Bird & Cronin operation. Offset by a decrease of approximately $241,000 in research and development expenses due to the company’s decision to focus its engineering resources on operational improvements. Note that we have discontinued reporting research and development as a separate expense category. Net income for the quarter ended September 30th 2018 was approximately $316,000 compared to a net income of $199,000 in the same quarter of the prior year, for an improvement of $117,000. Depreciation, amortization, and other non-cash expenses were $355,000 in the quarter, offset by a non-cash gain of $375,000 related to a valuation adjustment of acquisition related contingent consideration. Net income attributable to common stockholders was $129,000 for the quarter ended September 30th 2018 compared to an income of $12,000 for the same quarter of the prior year. Preferred stock dividends paid in common stock were $187,000 in both comparative quarters. Therefore, the $170,000 increase in that income was attributable to common stockholders is the same as the increase in net income. As of September 30th 2018, we had cash balances of approximately $437,000. We have an $11 million asset-based line of credit pursuant to which we had borrowed $5 million as of September 30th 2018. Our line of credit balance is currently averaging approximately $6.5 million, leaving available borrowings of approximately $2 million based on our current borrowing base. That summarizes the operating results. Chris will make some final remarks before we open for questions.

[Christopher von Jako:]

Thank you, David. Consistent with our previous guidance fiscal 2019 will include a full-year of both Hausmann and Bird & Cronin operations. We continue to expect consolidated sales in fiscal 2019 of approximately $65 million to $67 million. As David mentioned, Bird & Cronin will contribute four quarters of sales rather than three quarters included in the last fiscal year. The growth implied by consolidating a full-year of Bird & Cronin sales will largely offset by the lower sales in the Therapy Products Division as we discussed in our September earnings call. For the second quarter of fiscal 2019, which ends December 31st, 2018, we expect consolidating sales to decrease sequentially $500,000 to $1 million. This is consistent with the guidance we gave last quarter. As you may recall, in the prior fiscal year, we undertook a comprehensive review and rationalization of our Therapy Products to increase efficiency, margins and profitability. These steps are expected to decrease the division's sales by approximately $5 million on an annualized basis. Consistent with our previous guidance, we expect our consolidated operations to generate positive cash flow from operations in fiscal 2019. Again, we expect gross margin to be in the 32% range and the sum of SG&A and R&D to be about 31% of sales including approximately $1.7 million or 2.4% of sales in non-cash charges. The number of common shares outstanding as of September 30th 2018 was approximately $8.2 million. We expect the outstanding shares to increase approximately 65,000 shares per quarter throughout the year. Again, this guidance is based on current operations and does not include the impact of any potential acquisitions. In summary, we will continue to focus on leveraging the investments we've made and continue to implement our strategic growth plan to grow by acquisition, to grow organically and to improve operating margins and profits. Finally, I would like to thank our shareholders for their continued support and commitment, our employees who produced another successful quarter and especially our customers, who use our products to improve people's lives. That concludes my remarks. I will now turn it over to the operator for questions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead with your question.

[Destiny Buch:]

Good morning. This is actually Destiny on for Jeff. How are you guys doing?

[Christopher von Jako:]

Good morning. How are you doing?

[Destiny Buch:]

Very well, thank you. Congratulations on a great quarter. I just had a couple of questions. I was hoping you can maybe dive in a little deeper into a couple of things for me. I know you mentioned you're developing relationships with your current customer base as well as expanding into a larger customer base. Are you doing this with new products that you're working on or is it more of just diving deeper into the market?

[Christopher von Jako:]

So I would say, it's two-fold. It is delving deeper into the market as we're trying to really work on our distribution channel, but we are also -- as we mentioned in the previous calls, introducing several new products across the businesses. These products -- these new products are small, but they add-up over time. So I think in the last quarter, we talked about new parallel bars that we had launched up and over that tables and a new physical therapy specialty table that we launched.

[Destiny Buch:]

Okay. Got it. Thank you. And then you also mentioned that you had a number of favorable tailwinds. Could you explain that a little further for me?

[Christopher von Jako:]

So specifically, the tailwinds, it's just looking at the physical therapy market. This is typically when we -- when we speak to investors as well. So just the aging population is, I think, a big tailwind as well as if you look at the physical therapists and the growth that is going to be in physical therapy -- physical therapists over the next eight years, there's almost about a 25% increase in physical therapists. But I think, also, more importantly, physical therapist assistance and aids are growing at about 80%, so there are a number of specific tailwinds, right in the physical therapy area.

[Destiny Buch:]

Okay.

[Christopher von Jako:]

Is that helpful?

[Destiny Buch:]

Yes, very helpful. Thank you.

[Christopher von Jako:]

Okay. Sure.

[Destiny Buch:]

And then I just wanted to clarify one thing. You said that you're no longer going to report research and development that because you're refocusing engineering efforts. So we will now see that as the SG&A line? Just want to clarify that, it will be included in the SG&A line?

[Christopher von Jako:]

Yes. I'll let Dave take that.

[David Wirthlin:]

Yes. We're going to include research and development in our SG&A line. We continue to innovate within our various divisions especially in the Therapy Products division, we shifted more towards an outsourced R&D model and we've passed our engineers with operational improvements. So we're just going to combine the R&D line in with SG&A.

[Destiny Buch:]

Okay. Got it. Thank you. And then I think that does it for me. I appreciate you guys taking the questions this morning. Congratulations again.

[Christopher von Jako:]

Thank you, Destiny, Appreciate it.

[Operator:]

[Operator Instructions] Gentlemen, we're showing no additional questions in queue at this time. Do you have any additional or closing comments?

[Christopher von Jako:]

Well, I just want to thank everybody for their questions and their interest in Dynatronics. If you have any more further questions, you can direct them to our Investor Relations contact, Jim Ogilvie. Donna, you may end the call.

[Operator:]

Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.