Pro-Dex, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016, compared with fiscal 2015. The filing is an annual report, although the request metadata identifies “2015 Q4.” Pro-Dex designs and manufactures powered surgical and dental instruments, motion-control products, injection molds, and engineering services. Financial amounts below are in millions unless noted.
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $20.158 | $13.383 |
| Gross profit / margin | $5.403 / 27% | $3.704 / 28% |
| Operating income (loss) | $0.526 | ($0.902) |
| Income (loss) from continuing operations | $0.822 | ($0.402) |
| Net income (loss) / diluted EPS | $0.822 / $0.20 | ($0.365) / ($0.09) |
| Cash from operating activities | $0.466 | ($0.775) |
| Cash and cash equivalents at year-end | $2.294 | $0.697 |
| Working capital at year-end | $7.141 | $4.714 |
Total assets were $11.147 million and shareholders’ equity was $8.877 million at June 30, 2016. Debt was limited: $72,000 remained on the Fineline seller note ($26,000 current and $46,000 non-current); the Summit receivables facility had no outstanding borrowing at year-end. The company had $1.419 million due from factor, with Pro-Dex retaining customer non-payment risk.
Changes and performance drivers
- Sales increased 51%, primarily as medical-device and services revenue rose 88% to $14.292 million. New customer product launches contributed materially; Fineline also contributed a full year of sales versus five months in FY2015.
- Three medical-device customers represented 57% of sales in FY2016, versus 52% for the three largest listed customers in FY2015. The top 20 customers accounted for 87% of sales.
- The former largest customer’s sales fell to $3.6 million from $6.6 million. It plans to replace a product supplied by Pro-Dex with in-house production, and the company expects sales to that customer to decline further in FY2017.
- Gross margin slipped to 27% from 28%, reflecting lower margins on newer products, expedite costs, and outsourcing to meet delivery needs. Research and development expense increased to $1.852 million from $1.668 million.
- Operating cash flow turned positive, but working-capital movements were mixed: inventory fell by $0.737 million and deferred costs by $0.615 million, while accounts payable, accrued expenses, and deferred rent together declined by $1.288 million.
Outlook, risks, and unusual items
- No specific financial forecast or quantified guidance is provided. Management said existing cash, receivables, and expected operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months, while noting that additional financing could be needed and may not be available on acceptable terms.
- Management’s priorities include retaining existing customers, reducing costs on newer products, and expanding through product launches and related services. Backlog was $11.3 million at June 30, 2016, versus $10.6 million a year earlier; bookings can vary with launches, customer demand, and inventory levels.
- Customer concentration and the planned insourcing by a major customer are significant risks. Other stated risks include order cancellations or delays, competition, product and technology acceptance, warranty costs, supplier constraints, regulatory compliance, and dependence on key personnel.
- Pro-Dex recorded a $0.340 million gain from selling the Ramsey property and related assets; the property sold for approximately $1.653 million. It also recognized a $0.245 million non-cash impairment charge, principally a $0.241 million Fineline goodwill impairment. FY2015 included a $0.455 million realized gain on marketable securities and $0.037 million of discontinued-operations income.
- A former Riverside Manufacturing executive demanded $250,000 in August 2016. Pro-Dex disputed the claims, recorded no liability, and proposed a mutual release; no litigation had commenced as of the filing. The outcome is uncertain.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether new medical-device products and customers can offset further sales declines from the customer moving production in-house, and the precise customer concentration figures.
- Whether newer products’ margins improve as production stabilizes, and whether warranty costs or product-development estimates require further charges.
- Whether operating cash flow remains positive as sales grow and working-capital needs change; also verify the availability and terms of receivables financing.
- The resolution and potential financial exposure of the Riverside-related dispute, which was unaccrued at filing.
- Fineline’s operating performance following its goodwill impairment and the durability of the company’s stated 12-month liquidity assessment.