Pro-Dex, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and nine months ended March 31, 2021 (fiscal 2021 third quarter), not 2020 Q3. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Pro-Dex designs and manufactures surgical drivers and shavers, primarily for orthopedic, thoracic, and cranio-maxillofacial markets, and also sells industrial rotary air motors. Medical devices accounted for 91% of quarterly sales and 83% of nine-month sales. The company acquired a 25,000-square-foot Tustin, California property to expand capacity; build-out was ongoing, with operations anticipated in the first quarter of the next fiscal year.
Financial performance
| Metric | Three months ended Mar. 31, 2021 | Year-over-year | Nine months ended Mar. 31, 2021 | Year-over-year |
|---|---|---|---|---|
| Net sales | $11.74 million | +$3.23 million; +38% | $28.59 million | +$4.88 million; +21% |
| Gross profit / margin | $4.39 million / 37% | Margin down about 1 percentage point | $10.46 million / 37% | Margin broadly unchanged |
| Operating income | $1.87 million | +$0.16 million; +9% | $3.94 million | Down $0.93 million; -19% |
| Net income | $2.00 million | +$0.78 million; +65% | $3.60 million | About flat |
| Diluted EPS | $0.50 | Up from $0.30 | $0.90 | Up from $0.88 |
Quarterly net income included a $783,000 gain on sales of investments. Nine-month net income included $795,000 of investment-sale gains. Operating expenses rose 67% for the quarter and 63% year to date, led by higher research and development and general and administrative costs. Quarterly revenue growth was driven especially by thoracic products and higher CMF sales; nine-month medical-device sales increased 31%.
For the nine months, operating cash flow was negative $2.80 million, compared with positive $2.30 million a year earlier. The principal working-capital pressure was a $6.8 million increase in receivables, associated in part with the largest customer moving from net-30 to net-90 payment terms. Investing cash outflow was $4.38 million, including the property purchase; financing cash inflow was $4.63 million.
Financial position, liquidity, and debt
At March 31, 2021, cash was $3.87 million, short-term investments $1.12 million, and working capital $20.09 million. Total assets were $42.32 million and shareholders’ equity was $20.41 million. Notes and finance-lease obligations totaled approximately $12.81 million, in addition to operating-lease liabilities. The company reported no draw on its $2.0 million revolving facility.
The company financed the $6.5 million property purchase partly with a $5.21 million property loan. It also had MBT term loans outstanding of $6.72 million (Term Loan A) and $1.00 million (Term Loan B). Management said available cash, receivables, and expected operating cash flows should meet requirements for at least 12 months, while noting that additional capital could be needed for working capital or equipment.
Material changes, outlook, and risks
- Quarterly gross margin was affected by higher inventory and warranty charges and manufacturing under-absorption; COVID-related absences reduced production hours. Nine-month inventory and warranty charges increased about $423,000 year over year.
- Research and development spending increased 112% year to date. Management expects R&D and G&A costs to remain elevated near term as it develops products and expands capacity; success and revenue timing are not assured.
- Backlog was approximately $11.6 million at March 31, of which $7.9 million was scheduled for delivery in fiscal Q4. Backlog excludes some revenue expected under existing contracts and may vary with orders and customer inventory plans.
- The largest customer’s supply agreement was extended through calendar 2025. Customer concentration remains high: the two largest customers represented 84% of quarterly sales and 85% of nine-month sales.
- Management said COVID-19 had not materially adversely affected results to date, but acknowledged accepted shipment delays and possible demand declines if the pandemic or deferrals of elective procedures worsen.
- Additional MBT borrowing makes compliance with quarterly fixed-charge and debt-service coverage covenants more difficult. A covenant breach could trigger default and remedies involving refinancing, additional capital, reduced activity, or asset sales.
- The company repurchased 161,291 shares for $4.04 million during the nine months. No shares had been sold under the ATM offering agreement as of the report date.
- Legal matters are described as incidental to the business; the filing does not provide a clear quantified exposure. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether collections improve under the largest customer’s net-90 terms and operating cash flow turns positive.
- Customer order levels, concentration, and delivery timing against the $11.6 million backlog.
- Compliance with MBT financial covenants and the schedule and cost of debt repayment.
- Completion, spending, and operational ramp-up of the Tustin facility, along with expected returns from product-development programs.
- Future gross-margin effects from warranty, inventory, and manufacturing-absorption costs, and the performance of the company’s marketable-equity portfolio.