had a longer response typed up but lost it so F me.

1. Q1 was fine, would have been a blow out quarter if largest customer hadn't froze those $1.6m in orders. Q2 should be great and Q3 should be greater.

2. TTM Rev maybe was too high but they also have a third new product launching in Dec that wasn't in my original math and another in the spring, these should bring $3.5-5m/yr in rev between the two. Also, one of the recently launched projects is going to be way larger than i originally assumed so overall i think things are as good or even better than my original write up.

3. Margins are lower than i expected but they said they are working through some production inefficiencies with the new products they just launched. I think they can get to at least 30-32% once things normalize here.

BCI, any new insights on your position? Lately it looks like there will be one big buy/sell during a day of trading and then not much other activity. Seems like it's just an effect of low volume, but is your outlook still good?

Most of my recent reading on the company still looks very positive, but it just doesn't look like many people have picked up on that.

Two years in a row i'm the only shareholder to attend the annual meeting. First off, basically all of the new ventures they have started up over the last year have not met their internal expectations, Riverside IRR is going to be lower than planned, the two acquisitions haven't met projections, and engineering services the same. They said its been a learning experience for them that as a small company they cannot focus their attention on 6 things at once and expect them all to go smoothly.

Engineering Services

The VP they brought in to run engineering services died suddenly a few months back and that was a real setback for them. They also felt that they expanded too quickly opening that Michigan office and got ahead of themselves so they closed it down and are just focused on operating out of Santa Ana.

Acquisitions

The two acquisitions were purchased to acquire new capabilities and expand into new markets. The Huber acquisition specifically was purchased for their relationships with Tesla and Apple. They didn't expand on this any further but i thought that was interesting.

Riverside:

So the original plan for Riverside was either to acquire the operating business, which had in recent years done around $1m/yr in EBITDA or liquidate the assets of the company and the real estate to earn a 20% IRR on the investment. Nick said that they spent too much time and money trying to get the operating business to work and that ultimately cut into the IRR of the investment. If that would have worked, they would essentially have been acquiring a company for 1.5x EBITDA, so that would have been a home run but it didn't work out. So they went the liquidation route and the PP&E has proved to be worth much more than they were expecting so that has been good. The real estate is under contract for $1.65m and should be wrapped up within 60 days. At the annual meeting Nick said they were 60% done selling the PP&E and expected that to be wrapped up shortly. He said if i really search around online i can find how much the PP&E is selling for but i haven't been able to find it (haven't spent a lot of time either). When all is said and done, Nick said he's expecting a 8-12% return on the whole Riverside investment and closer to 15% on an IRR basis. I like when the backup scenario is a 15% IRR.

Capital Position:

I asked about the conflicted signals between the 10-Q and the shareholder letter as it relates to the need to raise capital. Nick said that the auditor makes them put a lot of that language in the Qs and Ks and then said very confidently that they don't need to raise capital.

Medical Devices/Core Business:

For all the things that haven't gone as well as expected over the last year, they are happy with their performance and prospects for the core business and have been happy with the level of orders they have received so far for the new products. The products that are for specific customers are under contracts that range from 3-7 years and have guaranteed minimum order quantities over the life of the contract but orders can fluctuate wildly from quarter to quarter. I believe their largest contract that launched last spring is a 7yr contract but don't quote me on that.

Future Acquisitions:

Asked about the prospects of future acquisitions and what the landscape looks like, Nick said they are going to take it easy for a while and just focus on what is already on their plate. Don't expect any additional acquisitions in the next year or so.

Other

Spent some time talking to Alisha the new CFO. We hit on a bunch of topics. She said the margin enhancements they are working on will take a few quarters (sourcing components/subassemblies cheaper). Making tweeks to products in the medical devices space is not easy because you need to ensure that any changes won't affect the FDA clearance regulations and what not so it just takes time to sort through these things.

Few other random things:

-sounds like bringing battery manufacturing in house was a margin improvement play.

-there shouldn't be any cannibalization from these new products launching

-They haven't noticed any major changes to the competitive landscape over the last year. They view their customers as their biggest competition (in housing vs. outsourcing).

-i got some info on some of their accounting and what fixed costs flow through SG&A vs. COGS if anyone is interested or if you want to understand what that "Over/Under absorbed manufacturing costs" line represents in their filings

-They are still trying to sublease out some of their excess office space. They were also doing that last year, the space is kind of awkward so i'm not sure how likely it is that it ever happens but its great that they are trying to maximize what they have, most companies probably wouldn't even bother.

Overall, not everything has gone smooth but I think the company is set up really well for the next few years with their current pipeline. They told us we will see the full effect of the increased backlog in their Q2 results which they release in February here. They also have a new product that launched at the end of 2015 and another launching in the spring. Insiders have continued to buy around current levels in recent weeks.

PDEX reports here in about two weeks. I'm hesitant to throw out a revenue expectation because they don't give any sort of guidance and i don't really care about one quarter but i would guess sales will be somewhere around $4.8m for the quarter, give or take .2-.3m. Each of these next 3 quarters should be progressively better. I've bought more shares in the $2.25-$2.35 range.

havent bought but appreciate you sharing your thoughts and keeping us up to date BC

well, tomorrow should be fun

http://seekingalpha.com/pr/16169806-...-month-results

Hah, I love when I click the link and the first thing I see is "Net sales for the three months ended December 31, 2015 increased $2.6 million, or 95%".

I'm glad I took a flyer on this. Thanks for posting about it.

I assume you're still in for the long haul, right BC? Or are you thinking about cashing in some shares tomorrow?

It's early, but trading up 35% after hours right now.

I'll update here whenever I sell but no i don't plan to sell anything tomorrow unless something crazy happens like what happened to LAKE. There is still lots of room for improvement here. This is an above average business with top notch management/BoD, i'm just going to let them keep going. This business deserves 2-3x EV/Rev multiples, thats when i think about selling. When you invest in ****ty businesses or questionable management, you are always wondering when you need to sell but with good businesses and management, it pays to be patient.

Thanks for replying to my last post BCI. I'm glad I took a flyer on this as well, very nice to see an alert that they were up 25% at one point this morning.

I'm very new at this but PDEX really does seem like a good "value" investment. It's not hard to understand what they do, and the management in place is top notch like you said. I've been reading through the early Berkshire Hathaway letters, and PDEX fits all the criteria for a business they'd have been interested in buying.

The most important thing in the 10-Q is this:

Segment Financials:

Core Pro-Dex Segment:

Rev: $4.9m
GP: 1.4m
OI: .792m
D&A: .145m

EBITDA: .937m
EBITDA Rate: 19.1%

A key part of my logic for investing here was that this business was capable of 20% EBITDA margins if they grow back into their cost structure. This quarter proved that that is real. Their new business divisions were slight drags on profitability so overall EBITDA % was only 10% but over time this will work itself out. Medical device outsourcing companies that do 20% EBITDA margins don't trade for .5x EV/Rev, they trade for 2x Rev and 10x EBITDA.

insiders are now buying at $3.15/share. It appears they have raised their buying limit now after the most recent earnings.

https://www.sec.gov/Archives/edgar/d...0592-index.htm

https://www.sec.gov/Archives/edgar/d...3/cabillot.xml

Thanks BC. Bought some more shares today.

What kind of timeline would you recommend for holding equity in PDEX?

Hard to answer cause lots of things could happen but i currently don't plan to sell any for several years. I've highlighted what valuation i think this business deserves so until it gets in that ballpark i'm probably just sitting still.

Company should report earnings here in two weeks. Here is my rough estimate for the quarter. I assume the $8m of backlog they said would ship between Q3 and Q4 to be evenly spread between the quarters. I also just assumed a repeat performance of last quarter from the smaller divisions, so not great there. They should have an extra $100k charge for the commission of selling the Riverside building flowing through the Other segment. The topline number is lower than last quarter because of the $660k of one time engineering revenue that was recognized last quarter, so apples to apples sales are up sequentially.

I think there are upside and downside scenarios to this but i'm going with this as a middle ground. A lot of it just depends where Gross Profit % falls. They said it should be improving gradually here and i think that one time engineering revenue last quarter was basically 0% margin.


Q3 Total
Revenue $5,242
Gross Profit $1,678
SG&A $1,195
OI $483
D&A $166
EBITDA $649
EBITDA Rate 12.4%

The company also filed an 8-K that they had initiated a automated buyback program. Historically the buying limits have been set at the same price that Nick and Ray had been buying at which in this case is $3.15/share. It will be interesting to see if the company bought back any shares between the last earnings release and March 23rd when they entered into the automated plan. My gut says they probably did but we'll see.

good research man. going to the shareholder meeting and asking questions to management is serious due diligence and dedication. hope it works out. given the liquidity I would be worried to hold anything over 3K shares. but interesting research thanks for posting.

BCI - that'd make EPS for the quarter in the $0.11 - $0.12/share range if my math is correct (assuming no major share repurchases)? Trending towards an annual EPS of $0.44 or so.

They have NOLs so yeah with no taxes thats probably in the ballpark. Still lots of room to improve going forward. 1. Another product launches in the spring here and 2. Continued gross margin improvements as called out and 3. Improved financial performance in the other 3 segments (fineline, OMS, ESD).

Liquidity doesn't really bother me unless is gets super extreme. I hold way more than 3k shares and i don't lose any sleep over it. If you are holding a good company run by people you trust, you shouldn't worry too much about liquidity because your holding period is probably going to be really long.

Theres actually a study done called "liquidity as an investment style" that i found really interesting.

http://www.zebracapm.com/files/Liqui...6%20Update.pdf

The graphs on page 25 and 27 sum up research.

thanks for that. Interesting paper

The most amazing part is the lowest liquidity companies also have the lowest standard deviations.

Isn't this a bearish signal? 10b5-1s are for insiders to sell their stock back to the company, not (as I understand) for companies to repurchase shares in the open market.

right? completely counter intuitive. I think its the big clunky institutions, daytraders, index funds, etc who are trying to move around millions of dollars that create lots of volatility and those guys don't play in small illiquid companies.