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Executives

Leonard Yurkovic - Vice Chairman and Chief Executive Officer

Analysts

Ryan Lamberson - PSM

Chris Fox - RN Fox Capital

Edward Pallo - Small Capital

Ken Lerer - AMRO

Paragon Technologies Inc. (PTG) Q3 2007 Earnings Call November 13, 2007 11:00 AM ET

Operator

Good morning. My name is Dorsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Paragon Conference Call. All lines have placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. At this time, I would turn the call over to Mr. Yurkovic, Paragon’s CEO. Mr. Yurkovic, you may begin your call.

Leonard Yurkovic

Thank you, Operator. Good morning, and welcome to the teleconference. As usual, today I will be making some forward-looking statements within the context of the relevant Securities Laws.

Actual future results may vary significantly from those projected or implied for numerous reasons, including those cited in the company's reports on Form 10-K and 10-Q. And of course, the company assumes no responsibility to update these comments made during the event of changes or in the business outlook or expectations.

Let me start with comments on the third quarter and nine months -- on the nine months results. I think most people have had the opportunity to catch the news release we put out this morning. I’ll try to assume that some have not enough still then wherever that’s appropriate.

Just a short summary on third quarter, but third quarter results were very special in our view, sales were up about 40% from $5.2 million to $1.3 million. Pretax income was up 55% from $283,000 to $239,000, that’s measuring ’06 to ’07.

The tax provision is where we have some discussion. The tax position is such that we have had an issue associated with the reversal of accruals for the expiration of tax return statutes, essentially that goes back a couple of years and unfortunately the reversal is favorable on the tax provision.

So I think if you are analyzing the numbers, best numbers to analyze are the pretax numbers, which I just reiterated. I think that the reversal associated with cash gain on the sale of major joint venture.

The normal amount if you are doing a mathematic is that the earnings of sales for the period instead of the $0.24 that you are seeing, you take that out and take the number provision that would show about half of that or $0.12. The provision for September 30, ’06 was $0.07 and there was no adjustment to that. The provision of the $0.14 drops to $0.03 because of that provision for tax, I mean, the earnings per share drops to $0.03.

And that in the prior year and year ending September ’06, the $0.12 really was $0.10 as it was a portion of that accrual adjustment for the tax provision. So I think that’s -- all with, I think, that by going forward but the best measurement of performance I think during this period and sorry, if you go when the auditors are working with tax provision. I think issue there was associated with certain amount of conservatism as regard to ordinary income the capital gain tax on the major sale.

I think on the major sale the company and joint venture company. I think that the best point as I say to just the earnings if for those people that work with earnings per share and to work with pretax income and that gives you much better picture of what’s transpiring.

I think that I’ll talk about bookings and other areas associated with the quarter and really reach back to the year because I think you get a flavor of how we operate on the percentage of completion and where revenues effected and backlogs effected.

Over the timeframe of the nine months period on bookings they are up about close 50%, I think actual number is 49%. We booked through nine months $18.2 million versus $12.2 million in the prior year, same timeframe.

I might point out and quick look forward, I fully expect that number to approaches I have indicated before close to 23, 24 million pace and that will be a significant change from the bookings of year ago, which effectively were down in the area of $16 million, $16.8 million in fact.

So I think we have nice rise and forward look on booking, again our operating from a quarter-to-quarter basis is far better if you look at 12 months basis just as a lot of flexibility within the quarters on percentage of completion.

I will talk about the type of orders it will give you again the flavor the business. Overall you know, our first, second and third quarters, specifically in third quarter strong were our Johns Hopkins and the production assembly group.

We have a lot of the General Motors power training work going and unusual about this particular or these type of orders is that motors typically was using our CARTRAC high precision and now using our towlines and putting economic capability on that and we find that that we have very, very encouraging sign, specially when we are now working automotive for about $2.8 million.

Also in this particularly timeframe nine months period, we’ve seen in the production assembly Oshkosh truck and these are the people that make various types of cement trucks everything from the standpoint of unusual trucks. We also have -- I'm typically talking about orders that are well over $100,000, some we’re approaching a $1 million and as I mentioned General Motors $72.8.

In the quarter itself auto fulfillment actually had a tremendous quarter and we have a lot of work with Johnson & Johnson, Vistakon at a contact lens people both in Jacksonville, Florida, as well as, over in England.

Other and I talk about various industries our marketplaces and economic sense to help and build these marketplaces is very strong by the very names that I’ll point out we are doing work for Sony, we are doing work for Maybelline, I mean we booked Maybelline, we booked Sony, I should have said it that way.

We booked in the jewelry business BPI and there's $1.2 million plus another order for a $0.5 million. JBC, which are CD disk, I mentioned, Vistakon, SI/BAKER, which is basically McKesson also came in with two orders for the $1.6 million going to the VA facilities for mail order distribution in Chevrolet and Memphis.

And I think people or most people are might be aware that the SI/BAKER is a McKesson arm and we still provide all the capability to add on to the marketplace.

Now, those are the areas of bookings and of course, the customers -- the company has a very large customer base. But I think that it's also we count that number in the 1000 plus or 1400 customers, so that there are lot of customers that start and stop on their projects.

Now, when I talk about a percent completion, some of this jobs are mentioned now in customers our jobs that are in-house, which we are using percentage of completion to establish revenue.

Our Caterpillar is big on that in fact Caterpillar has two projects going through and I previously mentioned in the past teleconference that Caterpillar is a newer customer and we are always happy to have a new one, because once we have a new one, we've seen and have one for life and that's a good thing of course.

We have running through our operations right now Polaris (inaudible ) Mobiles, we have a BRP-Rotax [siling] fischer, nature bonding which is in the VitaMist tool counting areas FA drugs, [Va Green] and BMG Direct, which is in the music field.

So we have a wide range and I think this particular quarter, looking at some of my notes I see that the effectively the order fulfillment system, which is the once the latter one that I just mentioned actually have 55% of the third quarter sales revenue and versus year 28. So that is fastest growing part of our business and one in which we are putting particular emphasis going forward.

I think that what I have talked about was the book notice in jobs and process, of course no one to look about future coding customers, because that's cause difficulties with customers, but again the coding activity is strong at this point in time, I see no signs of lit up.

And the capacity utilization in the country we watch and that’s running near about 1.7% that's just one of many broad tracking things we do. There is some cyclicality to the business, we've had a slow first quarter, but the orders were strong but revenue suffered from third quarter last year.

So its very hard to know when this orders will occur, I never think in terms of one quarter, I always look at the last 12 months trading 12 months or the current year as to look to see what's happening on it. I think, overall the business itself is quite strong, but I do want to move into another area having talk about the numbers and the earnings and the nine-month period.

Maybe a few comments are appropriate as to where the company has been again we have some new comers I understand some people have called me, like indicating interest in the stock and I noted on the line.

But I think that I'll go back just a little bit and point out these things that there are many major changes that have occurred in the business with the full support and the involvement of Broad of Directors of the company.

You know sometimes this is not known and the effort involved, but the company has gone through quite a bit. But we have to remember that the company had a union organization over 400 people of employee and we are embedded another utilized manufacturing operation.

And we are subject to a wide range of capacity utilization. At a various job, I just mentioned you could see how they were impact on operation that had 176,000 square feet and effectively when that's have utilize -- somebody finding yourselves what P&L that doesn’t look very good.

So the fact that the board carefully working with management or just way through the difficulty dispersing to a space now about 25,000 square feet. And in that 25,000 square feet, we are primarily dealing with engineering personnel highly technical people. We are leasing back that 25,000 and basically utilize the cash to purchase stock and retire stock.

So in effect the result has been, the shift in the in-house manufacturing and we have affectively subcontract that outside typically for any high technology part or parts that are subject to create secret information, we make very carefully how three vendors making it under non-disclosure agreement. So effectively, we can control the environment along that line.

The company also, you know, strategically change direction from a high product based company to a system integrator that's almost apparent from the third quarter numbers I had mentioned earlier and in fact, the company is always been know for it's products.

But we have redirected and say yes, we will be continue to known -- to be known for our product. But effectively moved into systems integration which is where the growing markets are.

We are analyzing those markets very carefully. Those markets are still growing. There is no reason that they won't be growing. The market themselves for across the broadest range are running the 100's of millions of dollars and of course, we want to be sure, we get our share of that activity.

I think that the company itself has utilized some of the funds that it has gotten from the items I had mentioned about the purchase retire approximately $15 -- close to $15 million. It is really $14 million of the company stock. We are still opening from the board of directors.

Now, the company is also, you know and question as to where we are going. We are now actively engaged in accelerating the high technology elements of the company's business where the growth potential is the highest. It is apparent there is some pressure although our SG&A is only up about 5%.

We have managed to basically look on our year-to-year points. I think we have been adding salesman. We have been attending shows. We do a lot of direct mailings. We do a lot of promotions unlike and we are active in mergers and acquisition area and that is looking at the aspect of other synergies associated with companies.

The companies starting to look at us from the standpoint of our re-accretive, our re-synergistic and so it is quite a bit going on. I think this is that, yes, the company itself are given all the change that have occurred in the past couple of years, it is very, very well situated.

I think the difficult decisions have been taken. I really appreciate the time and effort from the Paragon board of directors working through this and I especially appreciate the patience of the shareholders.

With that, I think I'll turn it back over to our operator. Dow, could you come back on the line.

Question-and-Answer Session

Operator

Yes sir. I am right here.

Leonard Yurkovic

Thank you.

Operator

(Operator instruction) We do have a question. Our first question comes from [Ryan Lamberson] from PSM. Mr. Lamberson, you have the floor.

Ryan Lamberson - PSM

Hi, Len. How are you doing?

Leonard Yurkovic

Good.

Ryan Lamberson - PSM

Good. Good sales quarter here. This is definitely a step in the right direction. I wanted to first go through a little bit on the backlog. At the quarter end, there was $7.2 million but that - if I understand that correctly that doesn't include $5.5 million in subsequent orders announced after the end of the quarter. Is that correct?

Leonard Yurkovic

That's correct.

Ryan Lamberson - PSM

Okay. Can you try to quantify what the quotes are that you have out in the market place now?

Leonard Yurkovic

I don't have detailed numbers on but we typically are working with over between $100 million and $125 millions with the quotes.

Ryan Lamberson - PSM

Okay.

Leonard Yurkovic

And that's range and of course, will go up and down and Ryan, some of that is -- what phase those quotes are, if some are in firm phase, some are in the budget phase and but I think that we're constantly monitoring that in fact, that's a weekly thing.

We look at everything that's out there, what we are quoting on because in this business spending too much time on wrong quotes is expensive and to say at least. So I think that, I think the right range but this specific number was tracking that I don't have this morning here, you know, just in the 70, 80, 90 range and I suspect from everything I am seeing in the meetings and like that that hasn't changed.

I think that we should have the same model if not more quotes out there than we had certainly last year at this time and in the recent past.

Ryan Lamberson - PSM

Okay. So when you said $70 million, $80 million, $90 million range that's what's in the kind of the further along…

Leonard Yurkovic

That could be in -- that could be arranged for closing in short-term and long-term, those are…

Ryan Lamberson - PSM

Is that the percentage of high amount, okay, you…

Leonard Yurkovic

That's $100 million worth of business that's quoted out there, over $100 million worth of business that's out there that has customer identification and job numbers associated with.

Ryan Lamberson - PSM

Okay

Leonard Yurkovic

And numbers associated with it, I mean are you are always quoting but sometimes it is budget and have done justify a quote number until they ask for a quote and that's what I am trying to show it to you.

Ryan Lamberson - PSM

Okay. On the last quarter, there was a back and forth with one or the other listeners there and you reference something about 70% to 80% chance, once they, once you quoted and its kind of gone through just back and forth process. There is 70% to 80% chance of closing that sale, is that still accurate?

Leonard Yurkovic

That's accurate. We classify certain amounts of certain jobs very specifically and their timeframe and there is criteria for that 80%. Criteria as you can say SI is the favorite vendor or is a previous customer typically and also means the favorite vendor if not a certain vendor and they are the ones that 80% category would classify some 60%, 40% and at the end, 20%, it means that there are new customer and we’re still working with them to understand their businesses, they understand what we do.

Ryan Lamberson - PSM

Okay. What was the gross margin in the quarter?

Leonard Yurkovic

Well, I don't know. I think that I have to pick that up somewhere but I…

Ryan Lamberson - PSM

You know what the dollar amount of the gross profit was?

Leonard Yurkovic

Yes. Gross profit, I think I can find for you also. Do you get news release on it or you do not get copy.

Ryan Lamberson - PSM

Yes. There is -- it is a truncated income statement.

Leonard Yurkovic

The gross profit for the quarter and the absolute number was $1.739 million.

Ryan Lamberson - PSM

Okay.

Leonard Yurkovic

That's up from a $1.4 one year ago.

Ryan Lamberson - PSM

Okay. So SG&A was about $1.4 million in the quarter.

Leonard Yurkovic

That's right $1.382.

Ryan Lamberson - PSM

Okay. Now.

Leonard Yurkovic

That’s up from $1.299 a year ago.

Ryan Lamberson - PSM

Okay. So what was the Sarbanes Oxley expense in quarter?

Leonard Yurkovic

I don't know that number.

Ryan Lamberson - PSM

Okay. What about…

Leonard Yurkovic

Okay. Well what you can do is call in, I think for detail, you are getting into, Ryan, it would be probably better everything going item by item down to P&L is call in Ron Semanick controller he’ll go through a lot of these numbers and give you that kind of detail.

Ryan Lamberson - PSM

All right. I will get out the menu sheet and maybe shift gears into some of the other things that I have questions on.

Leonard Yurkovic

Yes.

Ryan Lamberson - PSM

Are the sales now, I mean $7.3 million was higher than what I was expecting in the quarter.

And so you had a commence rise in your working capital to support those sales mainly in your AR. Are we kind of add -- is this kind of the level that sales are going to run out for the next two quarters at least?

Leonard Yurkovic

I can never predict specific quarter like $7 million. I can predict look at this year, the first quarter was $4 million we have a $10 million quarter afforded. So on average that’s $13 million or $14 million. So net average is $7 million. I would say that everything I see today Ryan is that maintenance of that average rate higher, is there.

Ryan Lamberson - PSM

Okay. So I mean we could be at $7 million maybe $8 million at the top-end. Something like that on the quarterly basis is that…

Leonard Yurkovic

I don’t even call at top-end. I think there is, I think as we are looking at the '08 plan, now in detail as its typical and I think that the range of $7.5 million, with probably low from the standpoint of what we are planning for next year. And not probably, we expect the revenue to be up in the ranges of at least the 25% growing in this year.

Ryan Lamberson - PSM

So that’s fantastic. But I think that my question…

Leonard Yurkovic

I do -- I am emphasize the quarter you get a quarters because percent completion we can book an order, but unless you cross 5% you can take revenue on the two way of cost. I think you know that.

Ryan Lamberson - PSM

Yes. Well as we continue with some sequential sales growth. There is going to be less of a ramp, I think in the working capital going forward also constructed turn some of that working capital and generate cash from it.

Are there any thoughts to returning some of the $10.5 million of cash its on the balance sheet to the shareholders through special dividend?

Leonard Yurkovic

There is -- we always talk about that, we covered that with a Board of Directors constantly and I think there is talk about it. But I think that we are looking at all aspects associated with it. And we never take that off the table we always discuss.

Ryan Lamberson - PSM

Well and this is kind of an on going conversation that I have been having with you and other people, the company is that the discussion seems to be going on and on and on. I am just wondering, where are we in the discussion, I mean is it that year from now we going to asking the same question and…

Leonard Yurkovic

You could be a year from now, yes.

Ryan Lamberson - PSM

Okay.

Leonard Yurkovic

We will look further opportunities, when we are looking for companies. We will look for companies on the M&A side that are pretty much synergistic we looked at those and we worked very hard on that aspect.

When we look at the cash, we look at what are the aspects of cash that we need to be detailing with. We looked at stock buyback we looked at cash as very variable when you are dealing companies in the M&A world. So as we look at the dividend and say this is a time for dividend but I think that the aspect is that.

The board of directors is very responsible about this I think they are doing a fine job on it. And I think we'll go forward constantly measuring on behalf of the shareholders once it's in affect what’s in their best interest.

Ryan Lamberson - PSM

Well. Its kind of critical as a shareholder that I think the board of directors is doing fine job then. So I am wondering now its been over two years of the strategic review we have incurred $100 of $1000 if not over $1 million of cost associated with the boards review and I am wondering were we are? And I ask that…

Leonard Yurkovic

Well, I tell you where you are, is that -- look where you are, you looking at basically you are in the third quarter or where earnings are basically, our pretax earnings are 150%.

Ryan Lamberson - PSM

I mean, that’s the whole…

Leonard Yurkovic

Of course, the increase income and increase revenue, revenue is up from $5.2 million this time last year to $7.2 million.

Ryan Lamberson - PSM

But when I think more of that…

Leonard Yurkovic

Through that -- I went through that with you Ryan.

Ryan Lamberson - PSM

More of that should have deliver?

Leonard Yurkovic

Of course, it is teleconference so I think you are over taking other people times in questions.

Ryan Lamberson - PSM

I understand -- you know, I just have a few more questions. What was the expense related to the board of directors activities in the quarter?

Leonard Yurkovic

I don’t know that.

Ryan Lamberson - PSM

Well, how many meetings of the board were there?

Leonard Yurkovic

I am not sure that. I'll have to get back to you on it.

Ryan Lamberson - PSM

Well, but I think that you are on the board and how many meetings did you attend?

Leonard Yurkovic

One meeting.

Ryan Lamberson - PSM

Okay. How many committee meetings were there during the quarter?

Leonard Yurkovic

I don’t recall -- I don’t think there were any actually sort of the audit committee is required one, one-audit committee meeting and one of Board of Directors meeting.

Ryan Lamberson - PSM

Okay. So this is a significant reduction from prior quarters activities than?

Leonard Yurkovic

You want to look back or you want to look forward?

Ryan Lamberson - PSM

No. I am trying to look forward, when I am saying I am paying you a compliment in that it seems that the board is -- has more than I towards running efficiently and pursuing their activities in efficient manner?

Leonard Yurkovic

I think so.

Ryan Lamberson - PSM

Okay. Great. Now, I asked you on the last conference call there we just a serious one-time items in the second quarter and you -- such as legal expense to pursue acquisitions and things like that.

And you said that they were going to be in the 10-Q and I have been through the Q several times and I wasn’t actually finding them. I was just wondering if you could maybe help me understand what they were and if they were?

Leonard Yurkovic

Actually – probably, I had one to do on this talk conference, but give a call around some next year, I will give you that number very quickly.

Ryan Lamberson - PSM

Okay. Great. Thanks a lot Len.

Operator

Our next call comes from Chris Fox from [RN Fox Capital]. Mr. Fox you have a floor.

Chris Fox - RN Fox Capital

Thank you. Good morning and thank you for taking my question. I just want to say it looks like a nice quarter from an operational point of view. There is a -- not a whole lot of data in terms of the financials and as your previous caller asked I guess this is stuff that I can get offline or maybe from the 10-Q.

But looking at your past quarterly filings it does seem to me or someone is relatively new to the company but knows the industry quite well that you do seem to have quite a lot of administrative overhead, not necessarily pertaining to the operations of the business.

You know it looks in the past that something like you guys have acknowledge there, you know, wanted to kind of explore and maybe, if you can update us as to where we are in that process?

Leonard Yurkovic

Well. I think this is that I have a gone a record seeing that we are $17 million company and we can be a public company at that size. We're now $24 million company and we really still can't be company at that size.

We maybe looking at $30 million or some number close to that next year and we still shouldn’t a public company at that size. And therefore, part of this trying to spread cost that you have to have because of Sarbane’s Oxley and quarterly reports, and auditors are having -- the auditors in those elements that you incur certain expenses that you have no alternative but to incur in the public environment.

So when we look at various aspects of the company when we look at being acquired or joint ventures there is something that will put muscle on the bone to increase the size of the company. I think that’s where it will go. I think, as far as reducing them is not possible by a law first to reduce a lot of idols we only four, five board members.

Chris Fox - RN Fox Capital

Right.

Leonard Yurkovic

We're basically trying to cut the aspect of that down. I think that we're public company and do have to represent by outside board. We're confidently looking at that trying to hold down meanings, but I mean there's an important thing to be discussed here. And I think, that we miss if it didn't work at that.

The idea herein for us to increase our revenue and get contribution margin that will carry the company at the same time trying to reduce expense every where we accounting, I pointed out the SG&A was up 5% and I might also point out that we have had a direct sales in order of fulfillment because that’s the fastest growing market.

So we are not blind to the expenses. We are blind to the cost and I think the issue for this company is to grow the business and you can cut your way to growth. We certainly -- I have cut people. We are cutting people, now that are inefficient. We are letting people go and we have to and bringing on people that are more oriented to the strategic directions of the company. But we'll have to do that within the framework of what we can get done in this timeframe.

Chris Fox - RN Fox Capital

Sure. Now, I mean that makes sense and that from an operational point of view those are company doing the good job and but you know, with a very low number of shares outstanding in this company you know you point both the Sarbane’s Oxley cost, if you guys were a part of another company perhaps and you can laminate those that would be such an increase in profitability at the company of your size.

Leonard Yurkovic

That’s right, Chris. I think that, you know, going on the industry now is that there's a lot of companies looking at the roll-up companies, platform companies looking at us, I will be frank we're looking at companies that might be associated with that.

My only real comment is that we're going to -- can't space strategically where we are and boy it doesn't disagree. What we have -- we have been active in looking at I mean, we have follow the pattern of looking at companies that are premium and synergistic and if they're not, in those worst cases that doing a lot of the acquisition on top of this after having not for always being to get where we are.

Chris Fox - RN Fox Capital

Absolutely. Yeah…

Leonard Yurkovic

And that’s I will be very, very reluctant to go at too faster pace on acquisitions. And I have to be frankly; I had one that was very close when we pass the expression of interest level like this year.

And when we got into the due diligence area we want to call it I think that we found now there wasn't as accretive we thought and the synergy was there for limited customers. What we are looking for in that areas customers that we can acquire or be acquired by that we'll add something to the capability of the overall company.

Chris Fox - RN Fox Capital

And I am assuming in a business like this under no circumstances would you entertain an acquisition that was going to be dilutive to earnings? Is that correct?

Leonard Yurkovic

Well. I am saying that probably not. Probability of doing that is not there. I don't think it would there. I think that we have to be bringing such as huge customer base -- such an attempt into the marketplace.

I mean those technologies out there. I mean I have talked with probably a dozen if not necessarily at least a half dozen of a potential customer that are software base, because we're going very rapidly in that area.

Chris Fox - RN Fox Capital

Right.

Leonard Yurkovic

But as I look at on the biggest thing they love our cash. They love our balance sheet. Certainly looking at the customer list and I look at the capability of say I think a whole lot more than we have.

In fact we have a bigger one so we're more attractive than say how fast we are to them and therefore, forget that I am not going down.

Chris Fox - RN Fox Capital

Sure. And how about the past that you guys being acquired another words when people look at the profitability you guys would have, if you didn't have this public company cost.

Leonard Yurkovic

That’s right.

Chris Fox - RN Fox Capital

In your balance sheet?

Leonard Yurkovic

There are companies that are interested. There is no question about that.

Chris Fox - RN Fox Capital

So that’s something that it did made sense you would certainly entertain?

Leonard Yurkovic

Absolutely.

Chris Fox - RN Fox Capital

Okay. Well, thank you so much for your time and I appreciate you taking my question.

Leonard Yurkovic

Thank you, Chris.

Chris Fox - RN Fox Capital

Bye-bye.

Leonard Yurkovic

Hello. Yes.

Operator

Question is from Ryan Lamberson. Mr. Lamberson you have the floor.

Ryan Lamberson - PSM

Hey, Len. I just wanted to follow up on the couple of things. It seems to me that you guys are, I mean, you definitely including our conversations from before the last conference call and over the past few months.

You seem to be very focus on doing the right thing and the question that I am asking are not -- are really more pointed towards a timeline trying to understand when we might see you put in place this real strategic plan.

And I guess that when I hear you talking about making -- wanted to avoid Sarbane's Oxley expense or spread the Sarbane's Oxley cost over a larger base. And then, I hear you talking about acquisitions in the next spread.

It seems to me that even if you made a significant transaction utilizing all the cash on the balance sheet and then even took on some debt, the company would still not be to a size where it was leveraging the Sarbane's Ox, the cost have been public.

So to me it seems more in keeping that to be genuinely shareholder friendly or to pursue the most the highest returning fastest solution would be to put the company up for sales so it’s part of a much larger organization where the expenses are spread over, over the -- over much larger base and that you'd deliver far more value to your shareholders pursuing that course of action.

Leonard Yurkovic

Yes. I have no comment on that. I think that those are issues that we take up at the board level meaning that companies to arguing. We are not at all we are just seeing aspect of the sale of the company.

Ryan Lamberson - PSM

Okay. And how are you pursuing -- how were you pursuing a sale of the company. It's not that you're resisting I mean I can…

Leonard Yurkovic

I am not saying we are pursuing. Let say we are looking at aspects associated with the sale of the company, because I can't really go beyond that except the, say, first of all there is a question of what is pursue. We are looking at companies that are synergistic and they are looking at us and we are looking at matches associated with it.

So, the company signed non-disclosure agreements and are getting into the detail of the company and it is permitted typically you would get it.

You know you have private investors that are looking at the company and at private equity funds and all those aspects. You don't need really to go up there and get what we can handle and deal with that at this point.

Ryan Lamberson - PSM

If I take your commentary regarding what 2008 could look like and even apply kind of low-end of what the gross margin could be. You know, we are looking at possibly a $30 million sales number with $7.5 million of gross profit and maybe half of that goes to SG&A on a transaction basis. You could be looking at an adjusted EBITDA of $4 million, $5 million.

Leonard Yurkovic

I don’t think, I even past the revenue number, Ryan.

Ryan Lamberson - PSM

Okay.

Leonard Yurkovic

I suggest that the revenue numbers since we are planning process could be approached to our $20 million, $30 million and we are analyzing that, but I don't think I gave you any numbers associated with the gross profit.

Ryan Lamberson - PSM

No. Those were my inference?

Leonard Yurkovic

Okay. I just want to clarify that apparently what that…

Ryan Lamberson - PSM

Absolutely, I understand that but what my point is that if you were to look at the way any private investor or any other strategic acquire would look at this business, it would be on an adjusted basis stripping out the cost of being an independent company such as your board expense and some of the SG&A items such as your -- the audit expands and the Sarbanes Oxley compliance.

Leonard Yurkovic

What you can do is, you can take close to $1 million associated with that, when you get the EBITDA and that’s why I encourage the use of EBITDA as oppose to these provisions of things get earnings spread out.

But when you take the EBITDA numbers and you can take the second half and analyzing you can take the whole year or you can take various numbers and you can basically take $1 million as our number close that has been the cost of it. Add that to EBITDA and then put your traditional multiples on the net cash and you can get enterprise value frequently I think.

Ryan Lamberson - PSM

It seems to me that rather than trying to find an acquisition you could maybe turned it into something larger and even the combine company then would not be large enough up to leverage the cost of being public.

It seems to me the way they deliver the most value to the shareholders is to actually aggressively pursue that sale and get the deal done?

Leonard Yurkovic

We are looking at it very accurately.

Ryan Lamberson - PSM

Okay. When can we expect some real commentary about this? When is that they can go, I mean, I think you’ve been looking again the strategic committee will…

Leonard Yurkovic

Well. We have something that’s reportable by the alone or like that. We have something that requires public disclosure we will, that be a mistake. You know if people don’t want to disclose until they free step quiet. Therefore any activity that’s going on be sure, I am going to putting that out weekly as still as this is what we are doing that’s we are not.

When we require we will see the news release that says we have extra wire, we have executed the definitive agreement with despite several operations to that in various directions and putting the sale of the company.

Ryan Lamberson - PSM

Okay. All right. Well thank you very much for your time.

Leonard Yurkovic

Okay.

Operator

Thank you. Our next question comes from [Edward Pallo] from the Small Capital.

Edward Pallo - Small Capital

Hi, Len. Hey great quarter. You really did well this quarter very impressed.

Leonard Yurkovic

Thanks, Ed.

Edward Pallo - The Small Capital

You be our estimates and everything. This is probably first time I can say great job. Could you just-- I have heard the other questions, I don't want to get in to that now but you announced an order on October 3rd. It was SINTHESIS order, didn’t stay to us with but you got this new Accupic light directed picking technology.

How was everything go in the SINTHESIS area? Do you have -- how many sales people involved in that? What are your customers saying about it?

Leonard Yurkovic

Well, I think this is just the -- I think I said last time that on the SINTHESIS systems we had already developed that and put it all in the marketplace where there is a 100 sites that one customer couldn’t have three or four sites and that kind of thing but 160 modules.

We're aggressively trying to develop within the framework. Of course, hopefully, we are making money and like at the pace we can, the DC Accelerator, which is also accelerating and looking at the potential force and web-based capability there for sliding the machine that really is lot of products and the way of distribution area.

We are very aggressively pursuing the software area and the SINTHESIS area. I think the product is good. But I think there are some elements that cause that to require more work and a reason I said is that when the markets first develop they typically developed by using customer's money and some of our own.

Another good example of that is the contact lens industry. Well, in the contact lenses industry all the product is the same size and therefore it's much easier to slot. And we go to somebody like office people or we go CDS or Va Green of those we've got 25,000 products and therefore the slotting and technology has to be adjusted to the magnitude.

So as we are getting new customers, we do have to have the software capability that can attract more customers and also our -- ability to cover the market place with the limitations on SG&A as referring to prior conversation of cost.

We have added salesman to try to do that but I think that everything is going. We just reviewed our development programs here very recently with the Board of Directors only a week ago and I think its going very, very well.

I think we are going as faster pace we can. Our people with some very, very good people and very knowledgeable and we have good position in the industry. So what I mentioned at that particular brand Order Fulfillment System is now pass the PAS group of Production & Assembly in orders and activity and that’s very part of this were because of the thing driven by the SINTHESIS software.

That’s a very good package that drives and you know the [eight frame], which is the hardware on these systems is not the big attraction. People make eight frames so do we DISPEN-SI-MATICs and but I think that the difference in here is our ability to manage the customers operations with our software. And that’s what we were working on very aggressively.

Edward Pallo - The Small Capital

Yes. The margins still in that product to up around 60%?

Leonard Yurkovic

The margins on the software in that product can be very high and in that 50% plus. But again when you look at an overall order if we have to put in a system that might include somebody's power cells because it doesn't fit into a machine.

A power cell is a different way or what is called like that the different way of picking again. If they have to be bought to finish the job we will take all the responsibility. We are there for long in this business.

So we will take on the responsibility but where we have pass through resale products then the overall gross profit. That’s why kind of laugh at the measurement on gross profit to gross profit because one can have a lot of resale in it and one can have no resale in it and have 50% margin.

But as far your question add in the software area, we commend a 50% plus margin, if we were more software, of course, that's why that's a growth area and a more profitable area of course.

Edward Pallo - Small Capital

Now this order on October 3rd with this unknown company software driven warehouse, is -- has that been installed already or what's you timeframe for that being…

Leonard Yurkovic

No. We've have signed an order, you know when we signed an order what's happening in there is that. We can't start taking our revenue; we not even start taking revenue until we pass 5% of performance meeting with the engineering effort and typically when the product comes.

So, that's typically will spread out over the very low level order that we are taking now in this period in the fourth quarter will occur as revenue this year, almost all of that, will occur revenue in the first to second quarter.

On average that's a six month period we are percent completions spreads and we are $2.9 million order that we put out recently that's going to be fairly heavy in the first and second quarter with maybe some revenue we'll make us way in December, but I doubt it.

Yes, our warehouse, I mean, I have to accumulate all the cost every month in every operation and then roll it based on the projected gross profit and that becomes your revenue sales revenue for the month that you booked.

Edward Pallo - Small Capital

Yes. That's good Len. That's something we look forward to and with regard to the question that came in earlier, this was exceptional quarter, if I look back, I don't think we -- the company has ever had a quarter this big. If I look back for the last three to four years without the reminder, is this sustainable do you think, let say in the fourth quarter here?

Leonard Yurkovic

I think that the fourth quarter will be a good quarter. I don't see, why it won't be reasonably sustainable that’s right.

Edward Pallo - Small Capital

I mean it could be better than this quarter?

Leonard Yurkovic

Again, percent completion I would say that, I try to call it beyond that except to say won't be a bad quarter, it would be a profitable good quarter probably on part with a quarter where we are finishing now, we’re just finish.

And it could be better sure, it could be worst. I am not sure on that either, if some of the revenue can't get in by December 31, because it cost when accumulate in time well that's going to flow till January.

I never worry about that too much except that, it that show up on year-end numbers and it always like that should be good. But we can’t control, sometime a customer will stop a project while he gets his act together and therefore we can’t accumulate our cost and I can put out revenue on the channel.

Edward Pallo - Small Capital

Sure. Well very good, Len. Nice job.

Leonard Yurkovic

Thanks. Take care.

Operator

Thank you. Our next call comes from [Ken Lerer with AMRO]. Mr. Lerer you have the floor.

Leonard Yurkovic

Hi, Ken.

Ken Lerer - AMRO

Good morning, Len. How are you doing?

Leonard Yurkovic

Good.

Ken Lerer - AMRO

Just, I called in late I am sorry, I am sorry you might have cover this before. But have you seen anybody pulling back as you just mentioned pulling back after you have the order. But do you see anybody pulling back from some sales that you might have thought was eminent because of the economy, do you see any…

Leonard Yurkovic

No. We haven't seen…

Ken Lerer - AMRO

Overall economic weakness that might come up in '08?

Leonard Yurkovic

No. What I think our customers, I only think the names are Caterpillar, GM and CBS and they are really doing long range plans they are little bit oblivious through their sales. And what they are doing is getting their systems productivity systems putting.

So I don’t see any sign of that all, we questioned our sales guys and there is slight slowness regarding the opening of effort, but not on the closing of effort. What I mean by that is we’ve mentioned 60%, 80% kind of customers that are moving right along to conclusion.

Well, I don’t -- from my communication and our own communication with operating people location like, we are not seeing any sign yet of activity being down and I almost when I know them maybe learn on there a bit to state that we expect 25% of sales that were up next year from the current levels of $24 million, which were up $17 last, $16 or $17.

Within that I don’t see any signs today and you know, I guess I have been wrong before but you continually engaged activity that's following and I think that if we control operation the way we have been recently, I think that we are going to have enough peer and I don’t see next year has been a down year for us at all.

Ken Lerer - AMRO

Okay. Great. Thank you very much and congratulations to you and the whole team there, really great quarter for us.

Leonard Yurkovic

Okay.

Operator

At this time, there are no more questions in queue.

Leonard Yurkovic

Okay. Well, let me close by thanking all very much for dialing in conference. And we look forward to the next opportunity to get together and talk about the business. Thank you.

Operator

Thank you. This ends today’s conference call. You may all disconnect.

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Source: Paragon Technologies Incorporated Q3 2007 Earnings Call Transcript
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