Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2012; filed February 13, 2013. Pro-Dex designs and manufactures surgical and dental devices and motion-control products. Results below are for continuing operations unless noted. The Astromec motor product line, sold in February 2012, is reported as a discontinued operation.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $3.007 million | $4.017 million | $6.468 million | $9.062 million |
| Gross profit / margin | $1.033 million / 34% | $1.247 million / 31% | $2.269 million / 35% | $3.355 million / 37% |
| Operating expenses | $1.413 million | $1.565 million | $2.700 million | $3.316 million |
| Continuing operations income (loss) | $(364,000) | $(329,000) | $(418,000) | $17,000 |
| Net income (loss), including discontinued operations | $(348,000) | $(292,000) | $(365,000) | $154,000 |
| Basic and diluted EPS | $(0.11) | $(0.09) | $(0.11) | $0.05 |
- Quarterly sales fell 25%; six-month sales fell 29%. Management attributed the decline principally to sharply lower orders from a former major medical-device customer.
- Quarterly gross margin improved to 34%, mainly from lower warranty expense and improved manufacturing efficiencies, partly offset by product mix. Six-month margin declined to 35%, reflecting lower manufacturing efficiencies and unfavorable mix, partly offset by lower warranty costs.
- Six-month operating cash flow was a use of $791,000, versus a use of $6,000 in the prior-year period. Cash declined $1.563 million to $2.549 million, including $724,000 of financing outflows and $48,000 of capital expenditures.
- At December 31, 2012, working capital was $6.614 million, compared with $6.618 million at June 30, 2012. Total assets were $11.321 million and total liabilities $2.020 million.
- The company repaid its remaining $685,000 term-loan principal in September 2012 and terminated its bank credit facilities. No bank debt remained at period-end, but the company also had no institutional credit facility.
Material changes and business developments
- The former largest medical-device customer had stopped ordering two principal products after developing its own comparable devices; Pro-Dex continued repair work. Six-month sales to this customer fell to $490,000 from $4.294 million.
- Customer concentration remains significant: one customer represented 48% of six-month sales and 37% of receivables at December 31, 2012. Medical products accounted for 66% of six-month sales.
- Inventory increased $724,000 from June 30, primarily for firm backlog orders and repair and warranty demand, as well as components intended to shorten lead times. Reported backlog was $8.9 million.
- The Astromec sale generated continuing earnout income of $92,000 for the six-month period; $45,000 remained receivable at December 31 and was received in January 2013. The Carson City property remained held for sale at a carrying amount of $733,000.
- Shareholders elected four new directors at the January 2013 annual meeting, triggering change-of-control provisions in senior-management agreements and the stock-option plans. Certain management severance and insurance benefits could apply if qualifying terminations occur within 12 months. The Board did not accelerate employee option vesting; director options were already fully vested.
Outlook, risks, contingencies and unusual items
- Management stated existing cash and operating cash flows should fund operations for the next 12 months. This is not a formal earnings or revenue forecast. If anticipated cash flows are not achieved, new financing may be needed; availability and terms are uncertain.
- Management is pursuing new revenue opportunities and cost reductions in response to the lost customer, but cautioned that timing and success are uncertain and failure could prolong a material adverse business impact.
- Key risks identified include customer concentration, product development and sales execution, rapid technological change, market consolidation, and competition from larger, better-capitalized competitors. Order bookings may vary with product launches and customer inventory builds.
- At December 31, the company maintained a $2.7 million valuation allowance against deferred tax assets and accrued $323,000 of unrecognized tax benefits. Management did not anticipate a significant change in unrecognized tax benefits within 12 months.
- A former Santa Ana site was identified for further screening in a government report concerning possible groundwater contamination. The agency reported no further evaluation had occurred and none was planned for fiscal 2013; future applicability or liability remains uncertain. The company also noted other incidental legal proceedings that it did not consider material.
- Three newly elected directors waived specified stock options and most cash retainers and meeting fees through the 2013 annual meeting. Management estimated these waivers would reduce non-cash compensation expense by about $55,000 and cash compensation expense by about $70,000 over the stated periods.
- Management concluded disclosure controls and procedures were effective as of December 31, 2012; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether sales can recover from the former customer loss and whether dependence on the customer representing 48% of six-month sales can be reduced.
- Whether the $8.9 million backlog converts to revenue on expected timing and margins, and whether inventory levels and operating cash use remain manageable.
- Whether cash and operating cash flows support management’s 12-month liquidity assessment given the absence of a bank credit facility.
- Whether the Carson City property is sold near carrying value, and the amount and duration of future Astromec earnout receipts.
- Whether the board change leads to qualifying management terminations or other costs under change-of-control agreements, and whether any environmental or tax contingencies develop.