| 2006 Shareholder Letter|
Dear fellow shareholders,
I am excited and optimistic as I assume the role of Pro-Dex’s CEO. During the last four years that I served on your board of directors and the limited time I have now spent inside the Company, I have become increasingly convinced that we own a valuable corporation. Let me share with you how I have reached this conclusion in the context of this year’s performance.
Our motion control business had a banner year in FY2006, with notably high revenues and impressive profitability. While we do not expect such exceptional performance to repeat, it did prove the value of our diversification strategy this year as we struggled in other areas. In addition to a strong financial year, we continue to reduce our reliance on the semi-conductor industry as we grow other segments, including medical, research and factory automation.
Our recent addition, Astromec, produced a small incremental profit during the six months we held them. The transition of ownership went smoothly, but due to more pressing issues, the Company has not yet realized the synergies from this acquisition. We will more actively focus on Astromec in FY2007.
This brings us to our medical device business. In this area, we experienced renewed sales growth, but saw our historically-strong operating profit depleted. To understand what happened this year, some historical perspective is helpful.
In the process of transforming this part of the business from a commodity product supplier to an enabler of speed-to-market over the last four years, significant focus was placed on the “front-end” sales and marketing functions of the business. Our customers changed, our selling strategy changed, and our products changed. Well beyond a surface-level sales pitch, the very essence of our market positioning was completely transformed.
Behind the scenes of this significant shift, the “back-end” engineering and manufacturing functions did everything possible to keep pace with the rapid evolution that was occurring. Through the talent, hard work, and commitment of these groups, we enjoyed initial success in implementing our new value proposition. It is now clear, however, that the investments made in people and processes were insufficient to achieve the required fundamental reinvention of these critical support areas. FY2006 revealed this gap in the form of quality issues that plagued our current year’s earnings.
Specifically, in FY2006, our medical device business experienced the pain of frustrated customers, the cost of substantial warranty returns, the disruption of normal engineering and manufacturing functions in favor of re-engineering and repairs, the delay of new sales and marketing activities while previous commitments were honored, and the uncertainty of a transition in leadership. Through it all, we stood in the integrity of our commitments to our customers, and ultimately delivered what we promised. As a result, we have not lost a single customer this year.
The cumulative effect of this perfect storm created deep introspection about who we are and how we create value. Great teams utilize challenging periods as an opportunity for self-evaluation and improvement. The theme for our annual report this year, “Success Driven by Perseverance,” was carefully chosen. We have emerged from the challenges of FY2006, confident in our medical device business model. We must execute the model more robustly.
Despite the challenges we faced last year, the Company proved to its customers (and itself) that it stands behind its commitments, developed a far deeper engineering understanding of critical subsystems, cultivated a stronger leadership team, grew the backlog, increased sales, made money, and generated cash. The Company’s ability to post these positive indicators this year is very encouraging to me, and is proof that we, as shareholders, own something of real value.
Going forward, we will continue to support the motion control business, address the fractional horsepower motor business, and make the necessary adjustments to the medical device business. These adjustments will include the wise investment in human resources and systems to ensure sustainable and scalable performance. We will achieve reliable speed-to-market, by design … by the design of our products, our organization, our culture, our engineering methods, and our manufacturing structure. Once the platform for growth is re-established, we will then leverage our investment and accelerate our profitability. My commitment is to build the long-term earning power of our Company.
As I look around the business world today, I see many companies that are trying to differentiate themselves in a commodity-based market with severe off-shore competition. The external show-stoppers facing them are significant. Pro-Dex has positioned itself at the high end of the value proposition in all three of our businesses. We truly do solve customers’ problems, and the solving these problems creates substantial value for them, and us. That is what is most exciting for me … that we have accurately identified what our customers really need and highly value. Our job is to deliver that. Reliability and speed will inevitably lead us to continued growth in revenues and profit.
On behalf of your leadership team, we appreciate the confidence you have placed in us as the stewards of your investment. We commit to protect it and grow it responsibly.
Mark P. Murphy
Chief Executive Officer
2005 Shareholder Letter 2004
Shareholder Letter, 2003