PRO-DEX, INC. — FY2012 Form 10-K
Reporting period: Fiscal year ended June 30, 2012; comparison is FY2011. The filing was signed September 11, 2012. Pro-Dex designs and manufactures powered surgical and dental instruments and motion-control products. Unless noted, operating results below are for continuing operations. The company sold its Pro-Dex Astromec fractional-horsepower motor business in February 2012 and reports it as a discontinued operation.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $17.257 million | $24.060 million |
| Gross profit / margin | $5.416 million / 31% | $10.141 million / 42% |
| Operating expenses | $6.781 million | $6.663 million |
| Continuing operations income (loss) | $(960,000) | $2.800 million |
| Net income (loss) | $(876,000) | $2.640 million |
| Net cash from operating activities | $45,000 | $2.898 million |
- Sales fell 28% ($6.8 million), primarily because sales to the largest customer declined by $5.6 million. Medical products represented 76% of FY2012 sales; industrial 16%, dental 6%, and government and other 2%.
- Gross margin contracted 11 percentage points. Management attributed the decline principally to product mix and manufacturing inefficiencies at lower sales volume, as well as reduced volume.
- FY2012 cash decreased $577,000 to $4.112 million. Working capital was $6.618 million, versus $7.819 million in FY2011; cash net of bank debt was $3.338 million, versus $3.558 million.
- At June 30, 2012, the company had $774,000 outstanding on its bank term loan, classified entirely as current. Total liabilities were $3.272 million and shareholders’ equity was $9.550 million.
- Capital expenditures were $341,000; cash used in investing activities was $259,000 and cash used in financing activities was $363,000. FY2012 diluted loss per share was $0.27.
Material changes and unusual items
- The largest customer’s sales fell to $6.710 million, or 39% of total sales, from $12.289 million, or 51%, in FY2011. It had advised that it planned to manufacture comparable products itself and placed no new orders for Products A and B beyond orders due through May 2012. It expected to limit repairs to warranty-covered products.
- Two customers together accounted for approximately 72% of FY2012 sales; the top 20 accounted for 88%. The largest customer’s products and repair sales totaled $6.710 million in FY2012, down from $12.289 million.
- Backlog declined to $5.3 million from $13.4 million. The filing attributes much of the decrease to reduced orders from the largest customer and timing of orders from the second-largest customer, which were placed in July 2012.
- Astromec generated $2.160 million of revenue and a pretax loss of $62,000 before sale-related effects in FY2012. Pro-Dex recorded $302,000 of direct sale costs and a $65,000 earnout payment; the Carson City property, valued at $733,000 on the balance sheet, was held for sale.
- Headcount fell to 74 from 115, principally due to workforce reductions and the Astromec sale. The CEO resigned in April 2012; the company paid $300,000 severance and appointed a new CEO.
Outlook, liquidity, and risks
- Management said it was pursuing a strategic plan to develop additional revenue opportunities while reducing costs not critical to growth. The filing provides no quantified revenue, earnings, or margin guidance and cautions that timing and success are uncertain.
- The company violated profitability-based bank covenants at June 30, 2012. The bank could have accelerated the outstanding loan; it waived those rights through October 1, 2012. On August 30, Pro-Dex notified the bank of its intent to terminate the credit facilities and repay the term loan by September 30, 2012. Management believed cash and operating cash flows would fund the next 12 months and repayment, but warned that weaker-than-anticipated cash flows could require financing that might not be available on acceptable terms. The filing does not confirm that repayment was completed.
- Key risks include further customer insourcing or lost orders, severe customer concentration, competitive and pricing pressure, sales volatility, product acceptance and development, regulatory compliance, supplier dependencies, and retaining key personnel. The company also cited possible consequences from a contested director election, including expense, distraction, and potential change-of-control provisions.
- A former Santa Ana site was identified for further screening in a government report concerning possible groundwater contamination. DTSC reported no further evaluation of the site in FY2011 or FY2012; potential future implications were uncertain. The company also disclosed general litigation and product-liability risks.
- The board said it would evaluate in FY2013 whether excess cash, if any, could be returned to shareholders through repurchases, dividends, or both; this was not a commitment. The company had never paid a cash dividend.
- Management concluded disclosure controls and internal control over financial reporting were effective as of June 30, 2012. The financial statements received an unqualified audit opinion; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the $774,000 bank term loan was repaid as planned, whether the credit facilities were terminated, and whether any replacement financing or covenant terms followed.
- Subsequent sales, repair activity, and customer concentration after the largest customer ended new product orders; in particular, the durability of revenue from the second-largest customer.
- Whether the July 2012 orders cited as delayed were delivered and converted to revenue, and how backlog and margins developed after year-end.
- Actual proceeds and timing from the Carson City property sale, and any additional Astromec earnout payments or liabilities.
- Whether the strategic plan produced replacement revenue and sustainable cost reductions, and whether any shareholder cash-return plan was adopted.