Pro-Dex, Inc. — Form 10-Q Summary
Business context and period: This unaudited report covers the three months ended September 30, 2018—the first quarter of fiscal 2019 (fiscal year ending June 30, 2019). Pro-Dex designs and manufactures powered surgical instruments, principally for orthopedic and craniofacial applications, and also sells industrial air motors. The company sold substantially all Fineline Molds assets in May 2018.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Quarter ended Sep. 30, 2018 | Quarter ended Sep. 30, 2017 |
|---|---|---|
| Net sales | $6.916 | $5.162 |
| Gross profit / margin | $2.727 / 39% | $1.860 / 36% |
| Operating income | $1.728 | $0.874 |
| Net income | $1.349 | $0.628 |
| Diluted earnings per share | $0.31 | $0.15 |
| Operating cash flow | $0.636 | $1.061 |
- Sales increased 34%; medical-device sales rose 36% to $6.340 million and represented 92% of revenue. Industrial and scientific sales increased 80% to $288,000.
- Gross margin improved three percentage points, principally reflecting higher manufacturing volume and better fixed-cost absorption. Operating expenses were broadly stable at about $1.0 million.
- Cash and cash equivalents were $8.315 million at September 30, up from $5.188 million at June 30, 2018. Working capital was $18.689 million. Current assets were $21.594 million and current liabilities $2.905 million.
- Quarter-end notes and capital lease obligations totaled approximately $5.033 million, compared with $41,000 at June 30. The company drew a $5.0 million term loan; it had not drawn on the separate $2.0 million revolving facility. Total shareholders’ equity was $17.727 million.
- Investing cash outflow was $1.293 million, including $824,000 of investment purchases and $477,000 of equipment purchases. Financing cash inflow was $3.784 million, including the term-loan proceeds, offset partly by $1.115 million of share repurchases and employee payroll-tax payments.
Changes, outlook, and risks
- Growth in medical-device revenue was driven mainly by increased sales of an orthopedic surgical handpiece to the largest customer. That customer generated 62% of quarterly sales; the top three customers generated 83%. Two customers accounted for 84% of gross receivables.
- Backlog was approximately $17.1 million, all scheduled for delivery in fiscal 2019. Management expects sales to an existing significant customer to increase late in fiscal 2019 as a thoracic surgical driver enters its product offering. Backlog and expected timing are not assurances of future revenue.
- Management believes cash, receivables, and operating cash flows are sufficient for at least the next 12 months, but notes that variable orders, long-lead-time material needs, and capital-equipment requirements could create a need for additional debt or equity financing.
- Cost of sales included a $63,000 accrual for replacing all identified batteries affected by a previously announced legacy-battery product recall. Inventory and warranty charges rose year over year; the warranty reserve was $95,000 at quarter-end.
- A $1.15 million participation in a loan bearing 22% annual interest was classified as short-term. Principal payments were deferred until December 31, 2018, and Pro-Dex expected repayment in its second fiscal quarter. The filing describes repayment expectations but not a guarantee.
- The $280,000 Fineline sale note bears 4% interest; management had previously offset the sale gain against an impairment because of collectability concerns and collateral value.
- Management reported no material change to the risk factors in its latest Form 10-K. It cited competition, customer and order variability, product-development execution, and possible need for capital. Adoption of the new lease standard is expected to materially increase reported assets and liabilities. Revenue-standard adoption had no reported quarter impact. Generic legal proceedings are disclosed, with no specific material proceeding identified in the provided filing text.
Important facts for investors to verify
- Whether the $17.1 million backlog converts to shipments and revenue on the expected fiscal-2019 schedule, and whether the anticipated thoracic-driver launch produces the projected customer growth.
- Revenue and receivables concentration, especially exposure to the largest customer, and the effect of any changes in its orders or payment timing.
- Collections and repayment timing for the $1.15 million loan participation and the impaired Fineline note.
- Term-loan amortization, covenant compliance, and any use of the undrawn revolving facility or additional financing.
- Final costs and scope of the battery recall, and whether warranty or inventory charges change.
- Investment portfolio valuation and related-party governance: the Air T, Inc. investment was $1.113 million at quarter-end, and two Pro-Dex directors also serve on Air T’s board.