Pro-Dex, Inc. — Form 10-Q summary
Reporting period: Three and nine months ended March 31, 2017 (fiscal 2017 third quarter; not calendar 2016 Q3). The filing describes a designer and manufacturer of surgical and dental instruments, with injection-molding operations. Amounts below are in millions unless otherwise noted.
Financial performance and liquidity
- Quarter: Sales were $6.62 million, up 28% year over year; gross profit was $2.46 million and gross margin was 37%, versus 25%. Operating income was $1.35 million. Net income was $0.89 million, or $0.22 per diluted share.
- Nine months: Sales were $16.35 million, up 15%; gross profit was $5.20 million and gross margin was 32%, versus 26%. Operating income was $1.91 million. Net income was $4.37 million, or $1.07 per diluted share.
- Cash flow: Nine-month operating cash flow was $1.92 million, compared with cash used of $1.04 million in the prior-year period. Investing activities used $0.18 million and financing activities used $0.33 million. Cash increased $1.41 million to $3.70 million.
- Balance sheet at March 31: Current assets were $11.15 million and current liabilities $2.35 million; working capital was $8.80 million. Total assets were $15.39 million, liabilities $2.43 million, and shareholders’ equity $12.96 million. The company also held $0.34 million in marketable equity securities.
- Debt and liquidity: Notes and capital-lease obligations totaled approximately $0.13 million. The Summit receivables loan was terminated in March and fully repaid. A $0.5 million secured revolving bank facility was entered into after quarter-end and had not been drawn, according to the filing.
Changes versus prior comparable periods
- Quarterly operating income rose from $0.18 million to $1.35 million; year-to-date operating income rose from $0.60 million to $1.91 million. Management attributed margin improvement mainly to manufacturing efficiencies and bringing some previously outsourced parts in-house.
- Medical-device and related-services sales increased $2.0 million for the quarter and $3.2 million year to date. Growth included higher shipments of a surgical handpiece, $0.75 million of CMF screwdriver engineering revenue, and $0.60 million of initial product shipments to a distributor.
- General and administrative expense increased $0.31 million for the quarter and $0.49 million year to date, including higher bonuses and legal costs. Selling expenses declined.
- The company sold its Oregon Micro Systems (OMS) business on January 27, 2017 for $0.636 million. OMS is reported as a discontinued operation; its sale generated a $0.201 million after-tax gain in the reported periods.
- Nine-month earnings included a $2.2 million income-tax benefit, principally reflecting release of a valuation allowance on deferred tax assets. In the quarter, the company recorded $0.65 million of income-tax expense.
Outlook, commentary, and risks
- Management gave no formal earnings or revenue guidance. It said existing cash, receivables, and expected operating cash flows should fund current operations for at least 12 months, while noting that customer cancellations or delayed payments could adversely affect cash flows.
- Backlog was approximately $12.9 million at March 31, of which $4.8 million was scheduled for delivery in fiscal 2017. About $8.6 million was associated with the largest customer. Backlog is not a guarantee of future revenue.
- Customer concentration is significant: the largest customer accounted for 48% of quarterly sales and 48% of nine-month sales, and 66% of gross receivables at March 31. Management also reported declining sales to a former major customer after it began making a product in-house, and expects repair revenue to remain lower.
- Management plans to focus on existing medical-device customers, new product development, and its adaptive torque-limiting technology. It cautioned that success and meaningful returns are not assured. An April investment in Monogram Orthopaedics included a $0.45 million loan and a possible additional $0.35 million advance subject to milestones; management described it as a long-term investment that may take years to generate meaningful revenue, if at all.
- Legal matters include litigation related to the Riverside foreclosure and claims by two former employees seeking $0.10 million and $0.041 million. The company had not accrued amounts for the employee claims; damages in the Riverside dispute were unspecified and not quantifiable in the filing.
- The filing reported $0.441 million of unrecognized tax benefits. Management said it did not anticipate a significant change in that balance within 12 months.
- The company’s ATM offering agreement permits stock sales to raise capital, but no shares had been sold under it as of the filing. It repurchased $0.312 million of shares during the nine months and terminated its repurchase plans in February 2017.
Important facts for investors to verify
- Whether major-customer demand and the reported backlog convert into shipments and cash collections, particularly given the largest customer’s sales and receivables concentration.
- How much of year-to-date net income reflects recurring operations versus the deferred-tax valuation-allowance release and OMS sale gain.
- Progress, funding requirements, and potential returns from Monogram and other product-development initiatives.
- Developments and potential exposure in the Riverside litigation and former-employee claims.
- Terms and availability of the secured bank facility, and whether the ATM is used or causes share dilution.