Business context and reporting period
Pro-Dex designs and manufactures powered surgical instruments, principally for orthopedic, cranio-maxillofacial (CMF), and thoracic markets; it also sells industrial air motors. The 10-Q covers the three months ended September 30, 2020—Pro-Dex’s fiscal first quarter of fiscal 2021, although the request labels the period “2020 Q1.” Figures below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $8.590 million | $7.240 million |
| Gross profit / margin | $3.475 million / 40% | $2.780 million / 38% |
| Operating income / margin | $1.549 million / 18% | $1.491 million / 20% |
| Net income | $1.265 million | $1.104 million |
| Diluted earnings per share | $0.32 | $0.27 |
| Operating cash flow | $(0.888) million | $0.908 million |
Revenue rose 19% as reported by management; medical-device sales increased 26%, mainly from $1.5 million of thoracic-driver deliveries. Gross margin improved about two percentage points, primarily due to product mix. Research and development expense increased 125% to $1.091 million, while operating income grew only modestly and operating margin declined.
At September 30, cash and cash equivalents were $5.202 million, short-term investments $2.400 million, working capital $18.087 million, and total assets $30.797 million. Current liabilities were $4.451 million. Notes and capital lease obligations totaled $3.774 million, including $660,000 current; lease liabilities are presented separately. Total liabilities were $10.746 million. Marketable equity securities totaled $4.709 million and carried net unrealized losses of $1.671 million; quarterly other comprehensive loss from investments was $107,000.
Material changes and operating developments
- Revenue increased $1.350 million year over year. Thoracic sales were $1.526 million, versus none in the prior-year quarter; orthopedic sales fell 15%, while CMF sales rose 49%.
- Two customers represented 85% of quarterly revenue, compared with 81% a year earlier. The largest customer alone contributed 60%; the two largest also represented 92% of gross receivables at quarter-end.
- Operating cash flow turned negative despite higher earnings. Increased receivables of $986,000, lower payables and accruals of $767,000, and $747,000 of net income-tax payments were key cash uses. The largest customer changed payment terms from net 30 to net 90.
- Cash fell $1.219 million during the quarter. Investing activities provided $25,000; financing activities used $356,000, including $259,000 of employee payroll taxes associated with performance-award shares.
- Backlog was approximately $14.8 million at September 30, of which $14.7 million was scheduled for delivery during the rest of fiscal 2021. Backlog consists of acknowledged firm orders and does not represent all expected contract revenue.
Outlook, risks, and unusual items
Management said existing cash and receivables should meet requirements for at least 12 months, and may also use its $2.0 million revolving facility, which it planned to renew. The filing gives no formal financial guidance. Management expects research and development spending to increase in the near term and cautions that revenue growth may be uneven and planned initiatives may not succeed.
The company is pursuing new products, including an ENT shaver, CMF driver, and VITAL ventilator. The ventilator and planned clean-room installation depend on closing the purchase of a Tustin facility; escrow was expected to close around November 6, 2020. The largest customer amended its supply agreement to extend surgical-handpiece supply through calendar 2025.
Management reported no material adverse COVID-19 effect on results or operations to date, but noted accepted requests to delay some shipments and warned that deferred elective procedures could reduce demand. Other risks include dependence on a small number of customers, variable order timing, supplier and operating disruption, product-development execution, and potential funding needs. The company was working with its bank on financing for the real-estate purchase and refinancing existing notes, without assurance of success. It disclosed routine legal proceedings but no specific material claim; management reported no material changes to the risk factors in its fiscal 2020 10-K.
Investor verification points
- Track collections and operating cash flow following the largest customer’s move to net-90 terms, and confirm whether the backlog converts to shipments as scheduled.
- Assess customer concentration and the sustainability of thoracic-driver revenue, including the impact of elective-surgery trends.
- Monitor research and development spending, product launch timing, and the commercial prospects underlying management’s estimated project revenues.
- Verify completion and financing of the Tustin property purchase, clean-room build-out, and renewal or status of the revolving credit facility, which matured November 6, 2020.
- Review the valuation, liquidity, and related-party governance of the marketable equity portfolio, including the Air T, Inc. holdings and disclosed board relationships.