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Edited Transcript of DYNT earnings conference call or presentation 15-May-18 12:30pm GMT

Q3 2018 Dynatronics Corp Earnings Call

COTTONWOOD HEIGHTS May 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Dynatronics Corp earnings conference call or presentation Tuesday, May 15, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Wirthlin

Dynatronics Corporation - CFO & Secretary

* Kelvyn H. Cullimore

Dynatronics Corporation - CEO, President & Director

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Conference Call Participants

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* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Greetings, and welcome to the Dynatronics Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Kelvyn Cullimore Jr., Chief Executive Officer. Please go ahead.

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Kelvyn H. Cullimore, Dynatronics Corporation - CEO, President & Director [2]

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Thank you, Hector. We welcome you to the Dynatronics Corporation Investor Conference Call to review the results of our quarter ended March 31, 2018, which is our third reporting quarter of the fiscal year 2018.

I'm Kelvyn Cullimore Jr., Chief Executive Officer. With me today on the line is David Wirthlin, our Chief Financial Officer. This morning, we issued our earnings press release. And we will file later this morning our 10-Q for the quarter ended March 31, 2018.

Before we begin, as a reminder, during the course of this call, management may make forward-looking statements regarding future events or the future financial performance of the company. Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially, from the results projected in such forward-looking statements. We caution you that any such statements should be considered in conjunction with the disclosures, including specific risk factors and financial data contained in the company's most recent filings with the SEC, including its most recent annual report on Form 10-K.

Today, we're going to talk specifically about the operating results from the quarter and 9 months ended March 31, 2018. At the conclusion of our commentary, we will have the operator open the phone lines for questions.

First, I want to bring you current on the most important event since the filing of our second quarter 10-Q on February 14. On February 21, 2018, we announced leadership changes to the Board of Directors and executive management team, including the separation of our board chairmanship and Chief Executive Officer positions. For the last 25 years, I have served as the President and CEO of Dynatronics. And for the last 12 years, I have served as Chairman of the Board of Directors. On February 21, the board appointed Erin Enright as the new Chairman of the Board. And in addition, we hired Brian Baker as the new President of the Therapy Products division, which is combined -- comprised of our legacy Utah and Tennessee operations.

We also announced that the board has begun the search for a new CEO. We made good progress in that search, and we believe that we remain on track to name a new CEO before the end of our fiscal year in June. Subsequent to that, I will continue to serve on the Board of Directors.

Several years ago, we determined that we needed to make significant changes to the direction of Dynatronics. That process led us to partner with Prettybrook Partners in 2015. This relationship has been most fortuitous for Dynatronics and our shareholders. Prettybrook not only provided needed capital, but also helped us to improve management and board talent and to develop a business strategy that is helping us to achieve our growth objectives.

With our recent acquisitions and leadership changes, we are well positioned to continue the transformation we embarked on almost 3 years ago. We've achieved many of our goals, including in the past year, we grew annual sales from about $32 million to a run rate of roughly double that number. We've successfully executed on our growth strategy by acquiring Hausmann and Bird & Cronin, we've bolstered the management team and Board of Directors and we've significantly strengthened our balance sheet and capital structure. And we positioned the company for additional acquisitions and growth.

Given these accomplishments, I believe, I've run my fair share of the race, and it's time to pass the baton to a new leader who can bring new energy and different perspectives that will further enable our continued success. Being one of the founders of the company, along with my father, our legacy is inexplicably linked to the long-term success of Dynatronics. I am committed to that success and the new strategic direction that we as a team have defined.

We're pleased to report that the integrations of Hausmann and Bird & Cronin continue to proceed well. The divisions are contributing positively to our consolidated operating results. These 2 acquisitions have been positive first steps in executing our strategy to grow by acquisition. Consistent with the direction we gave in February, we expect to operate in an annualized rate of approximately $65 million to $70 million in sales. And we believe we will generate positive cash flow from operations.

The strong performance of these 2 businesses has given us a solid basis for initiating changes to our Therapy Products division with the focus on generating profitability and cash flow in that division. While we will provide formal guidance for fiscal year 2019 after we report our fourth quarter 2018, we believe that the current run rate discussed earlier forms a good preliminary basis for modeling the next 12-month period.

The growth we are seeing in Hausmann and Bird & Cronin will likely be offset by slower sales at the Therapy Products division as well as the impact of changes being implemented at that division, such as SKU reduction efforts. This is all being done with an eye toward enhancing growth, profitability and cash flow for the company taken as a whole.

I'd now like to turn the time over to David Wirthlin, our Chief Financial Officer, to provide a financial report on the fiscal quarter-ended March 31, 2018. David?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [3]

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Thank you, Kelvyn. I will provide additional detail and commentary to the press release that was issued this morning. There are a few factors that had a material impact on our operating results for the quarter and 9 months ended March 31, 2018. First, the acquisitions of both Hausmann in April 2017 and Bird & Cronin in October 2017 had a significant impact on the quarter and 9 months ended March 31, 2018.

Hausmann's operating results are included in the first, second and third quarters of fiscal 2018. And Bird & Cronin's operating results are included in the second and third quarters. Neither acquired operation is included in the comparative period of the prior year. Second, in our third quarter ended March 31, 2018, we incurred significant severance and related expenses, primarily as a result of Mr. Cullimore's anticipated departure. The company recorded expenses totaling $980,000, including $840,000 of accrued severance payments and $140,000 of stock-based compensation.

For more detailed schedule of payments, please refer to the company's Form 8-K filed on February 21, 2018.

Third, we incurred legal and accounting fees in the 9-month period in connection with the acquisition of Bird & Cronin. Acquisition costs including -- included in SG&A expenses were approximately $323,000 for the 9 months ended March 31, 2018. This compares to $533,000 in the 9 months ended March 31, 2017, which costs were primarily associated with the Hausmann acquisition.

Fourth, we incurred approximately $325,000 in our second fiscal quarter of 2018 in expenses related to an R&D project that was abandoned.

Net sales for the quarter ended March 31, 2018, increased approximately $8.9 million or 116% to $16.6 million compared to $7.7 million in the same quarter of the prior year. The year-over-year sales growth for the quarter came primarily from the inclusion of Hausmann and Bird & Cronin. These acquired operations together contributed sales of $9.7 million. These increases were partially offset by a decrease of approximately $772,000 in net sales from Dynatronics Therapy Products division. That decline was primarily attributable to lower sales of therapeutic modality products and distributed supplies.

Net sales for the 9 months ended March 31, 2018, increased approximately $22.9 million or 93% to $47.5 million compared to $24.6 million in the same quarter of the prior year.

The year-over-year sales growth for the 9 months came primarily from the acquisitions of Hausmann and Bird & Cronin. These acquired operations together contributed sales of $24.4 million in the 9 months ended March 31, 2018.

These increases were partially offset by a decrease of approximately $1.5 million in net sales from Dynatronics' Therapy Products division, primarily attributable to lower sales of distributed capital and distributed supplies.

Gross profit for the quarter ended -- gross profit for the quarter increased approximately $2.6 million or 96% to $5.3 million, representing 31.8% of sales compared to $2.7 million or 35% of sales for the quarter ended March 31, 2017. The acquisitions of Hausmann and Bird & Cronin are the primary year-over-year difference. These acquired operations together contributed gross profit of $3.1 million. These gross profit increases were partially offset by a decrease of $527,000 in Dynatronics' Therapy Products division. Approximately 55% of the decrease in gross profit at Therapy Products division was attributable to lower sales and the remainder to a reduced gross margin percentage. The year-over-year decrease in overall gross margin percentage to 31.8% from 35% was due primarily to inclusion of Hausmann sales, which had a lower gross margin percentage in the quarter, as well as reduced gross margin in Dynatronics' Therapy Products division. Gross profit for the 9 months increased approximately $6.8 million or 78% to $15.4 million, representing 32.4% of sales compared to $8.6 million or 34.9% of sales for the 9 months ended March 31, 2017.

The year-over-year increase in gross profit attributable to the acquisitions of Hausmann and Bird & Cronin. These acquired operations together contributed gross profit of $7.9 million for the 9-month period. The gross profit increase was partially offset by a decrease of approximately $1.1 million in Dynatronics' Therapy Products division. Approximately 45% of the decrease in gross profit at Therapy Products division was attributable to lower sales, and the remainder to a reduced gross margin percentage.

The overall year-over-year decrease in gross margin percentage to 32.4% from 34.8% was due primarily to inclusion of Hausmann sales at lower gross margin and reduced margins in the Therapy Products division.

Selling, general and administrative expenses for the quarter ended March 31, 2018, increased approximately $3.1 million or 97% to $6.2 million compared to $3.2 million in the same period of the prior year. The primary drivers of the $3.1 million increase were $2.6 million of SG&A expenses from the Hausmann and Bird & Cronin operations, approximately $1 million in severance and related stock-based compensation expenses, partially offset by $477,000 of decreased acquisition-related expenses.

SG&A expenses for the 9 months ended March 31, 2018, increased approximately $6.4 million or 73% to approximately $15.1 million compared to approximately $8.8 million in the same period of the prior year. The primary drivers of the $6.4 million increase was $6.0 million of SG&A expenses from the Hausmann and Bird & Cronin operations, approximately $1 million of severance and related stock-based compensation expenses, partially offset by $369,000 of decreased selling costs in the Therapy Products division and a decrease of approximately $210,000 in acquisition-related expenses.

Research and development expenses for the quarter ended March 31, 2018, were flat at $242,000 compared to $231,000 in the same quarter last year. R&D expenses for the 9 months ended March 31, 2018, increased $229,000, or 28%, to $1.0 million from approximately $819,000 in the quarter ended March 31, 2017. The increase in the 9-month period ended March 31, 2018, was driven by $325,000 in costs incurred due to the abandonment of an R&D project during our second fiscal quarter of 2018.

Net loss for the quarter ended March 31, 2018, was approximately $1,277,000 compared to a net loss of approximately $755,000 for the quarter ended March 31, 2017. The $522,000 increase in net loss for the quarter was primarily attributable to $2.6 million of higher gross profit offset by $3.1 million of higher SG&A expenses. The higher SG&A expenses for the current quarter included approximately $1.0 million in severance and related stock-based compensation expenses, offset by $477,000 in lower acquisition-related expenses.

Net loss for the 9 months ended March 31, 2018, was approximately $1,064,000 compared to a net loss of $1,136,000 for the 9 months ended March 31, 2017. The $72,000 improvement for the 9 months was primarily attributable to $6.8 million higher gross profit offset by $6.4 million in increased SG&A expenses and $229,000 of higher research and development expenses.

Included in the SG&A expenses for the current 9-month period are expenses of approximately $1 million in severance and related stock-based compensation as well as the onetime $325,000 write-off associated with the abandoned R&D project, partially offset by approximately $210,000 in lower acquisition costs.

Net loss attributable to common stockholders was $1,468,000 for the quarter ended March 31, 2018, compared to $849,000 for the same period of the prior year. The $619,000 year-over-year increase in loss due to a $522,000 increase in net loss is previously explained as well as approximately $97,000 of additional preferred stock dividends associated with the preferred stock offerings made in association with the Hausmann transaction in April 2017.

For the 9 months ended March 31, 2018, net loss attributable to the common stockholders increased approximately $988,000 to $2,771,000 compared to $1,783,000 for the 9 months ended March 31, 2017. The increase in net loss attributable to common stockholders is due to approximately $648,000 in additional noncash deemed dividends and accretion of discounts associated with the Series C preferred shares and warrants issued in connection with the Bird & Cronin acquisition in October 2017 and $411,000 of additional preferred stock dividends associated with the issuance of the Series B preferred shares. This was partly offset by approximately $72,000 in net loss in the 9 months ended March 31, 2018, compared to the same period of the prior year.

As of March 31, 2018, we had cash balances of approximately $1.5 million. We have an $11 million asset-based line of credit, pursuant to which we had borrowed $6.5 million as of March 31, 2018. Our line of credit balance is averaging approximately $6 million, leaving available borrowings of approximately $2.6 million based on our borrowing base of approximately $8.6 million.

That summarizes the operating results. Kelvyn will make some final remarks before we open for questions.

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Kelvyn H. Cullimore, Dynatronics Corporation - CEO, President & Director [4]

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Thank you, David. The completion of the Hausmann and Bird & Cronin acquisitions have been a major focus of the past several quarters. And the integration of those operations is proceeding well. We continue to hold discussions with numerous potential target companies and remain optimistic about our goal of one acquisition per calendar year.

The leadership changes we are making will help us achieve greater success as we move forward. Within the Therapy Products division, we're optimistic about Brian Baker's leadership and believe he has the skills, knowledge and experience to drive profitability in that division. He's already implemented a targeted reduction in staff that will reduce operating expense. And he is in the process of implementing a business optimization and stock keeping unit reduction plan targeted to improve margins and reduce costs. It's been my honor to serve as CEO, and I am optimistic that the leadership changes we have made will position the company well for even greater success in the years ahead.

Looking forward, with the inclusion of Hausmann for all of 2018 and Bird & Cronin for 3 quarters, we expect consolidated revenues for our fiscal year 2018 to be in the range of $63.5 million to $64.5 million. We expect our going forward consolidated gross margin to be in the 32% range and SG&A to be in about 31% of sales, including approximately $1.8 million or 2.5% of revenues in noncash charges.

As we explained in our last quarterly call, there is some seasonality to certain of our divisions. Bird & Cronin's revenues have not historically varied significantly through the year. Hausmann's strongest quarter has historically been the quarter ended September 30, while Dynatronics' strongest quarter in the Therapy Products division has traditionally been our second fiscal quarter ended December 31. The weakest quarter for both Dynatronics and Hausmann has typically been the current quarter ended March 31, which we are currently reporting.

Gross margins are expected to be higher in the more productive quarters while still averaging around 32% for the year. Subsequent to quarter-end, our Therapy Products division implemented the reduction in force affecting approximately 10 people for which we will incur onetime accrual severance expenses of approximately $140,000 in the fourth quarter of fiscal 2018. The reduction in force is in addition to attrition and top grading of another approximately 5 people in the division.

During the remainder of fiscal 2018, we are focusing our attention on the leadership changes we have previously announced and then implementing strategic plans to not only support our M&A objectives, but to improve operating margins within all divisions with particular emphasis on the Therapy Products division. Some of those plans, such as SKU reduction, may involve the targeted elimination of certain low margin or unprofitable product lines in the Therapy Products division, all of which will be calculated to achieve better margins and improve profitability. The management team at Dynatronics is committed to serving our customers with safe and effective products, building our business through organic growth and acquisitions and enhancing shareholder value.

We do appreciate the continued interest and support of our shareholders. Hector, we will now take questions from those who have dialed in for this call if you will give them instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [2]

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Gentlemen, can you hear me okay?

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Kelvyn H. Cullimore, Dynatronics Corporation - CEO, President & Director [3]

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Yes, we can hear you fine.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [4]

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So David, can you clarify, the additional SG&A was $1 million severance. And did you say $840,000 cash, $140,000 stock, is that correct?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [5]

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That is correct.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [6]

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Okay. So that fell within SG&A and wasn't broken out separately.

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [7]

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That is correct. It's in SG&A.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [8]

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Okay. Do you expect any follow on into the fourth quarter?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [9]

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Well, as Kelvyn mentioned, there's $140,000 of additional severance expenses from the reduction in force that we did in the fourth quarter.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [10]

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Okay. So one would anticipate $140,000 is the minimum for fourth quarter?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [11]

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Correct.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [12]

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Okay. Kelvyn, can you talk a little bit about the margins? And what's in place now to try to expand the margins? And can you also give us a little further clarity on products? As you mentioned you may be ceasing some products and putting more emphasis on other products to drive the margins.

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Kelvyn H. Cullimore, Dynatronics Corporation - CEO, President & Director [13]

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Yes. As you know, Hausmann has lower gross margin than the other 2 divisions. However, they have also have significantly lower selling and general and administrative expenses. So there's an offset there. And in addition, freight margins in our legacy operation reduced our gross margin as well as an increase in the monthly accrual for some write-down of inventory that was done. We're currently undertaking a review of margins in all of our freight charges to see if we can improve things there. We are focused on improving gross margins, and we are directing our time and attention to driving improvement in this area, specifically at the Therapy Products division. We mentioned the SKU project. We will be doing some product line rationalizations to improve our gross margins in that division, and that project is just being kicked off. Not sure we'll see significant impact in Q4, but it will impact future quarters.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [14]

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Okay. Got it. And can you give us a little further color on other opportunities in the M&A front that you are seeing out there as far as various costs and types of businesses?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [15]

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Yes. Jeff, we are in various stages of discussions with several companies. We are focusing on acquisition opportunities that will further enhance our product offerings, distribution coverage and leverage our current sales network to improve gross profit margins and cash flows. And we've executed on 2 transactions in the past 14 months and do have others in the pipeline.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [16]

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Okay. And you gave some guidance for the year of $63.5 million to $64.5 million. So that would assume fourth quarter comes in about even with third quarter or perhaps about $0.5 million greater. So is that a safe way to put it?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [17]

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I think that's safe.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [18]

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Okay. And you expect margins to be at a similar level. You spoke about 32%, is that what you expect the year to come (inaudible)

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [19]

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Yes, we expect margins to average about 32%.

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Operator [20]

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(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Kelvyn Cullimore Jr. for closing remarks.

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Kelvyn H. Cullimore, Dynatronics Corporation - CEO, President & Director [21]

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We want to thank everyone for their participation today and for your interest in Dynatronics. If you do have further questions, please direct them to our Investor Relations contact, Jim Ogilvie, here at corporate headquarters. Operator, you may now end the call.

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Operator [22]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.