PRO-DEX, INC. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and results
Pro-Dex designs and manufactures powered surgical and dental instruments and motion-control systems. It also operates injection-molding and engineering-services businesses. Medical devices accounted for 72% of quarterly sales.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $5.412 million | $4.097 million |
| Gross profit / margin | $1.608 million / 30% | $1.058 million / 26% |
| Operating income (loss) | $293,000 | $(119,000) |
| Net income (loss) | $286,000 | $(125,000) |
| Diluted earnings (loss) per share | $0.07 | $(0.03) |
| Operating cash flow | $255,000 | $(641,000) |
Financial position and cash flow
- Cash was $2.168 million at September 30, down $126,000 from June 30, 2016. Working capital was $7.165 million.
- Total assets were $11.929 million and total liabilities were $2.803 million. Notes and capital-lease obligations totaled approximately $161,000; no Summit Loan borrowings were outstanding at quarter-end.
- Investing activities used $326,000, primarily for $316,000 of manufacturing equipment. Financing activities used $55,000, mainly for share repurchases.
- Operating cash flow included working-capital uses from a $696,000 increase in receivables and other receivables and a $255,000 increase in deferred costs. Cash sources included higher payables and accrued expenses, lower inventory, and increased deferred revenue.
Changes, outlook, and risks
- Sales rose 32%, primarily from medical-device growth. Medical-device revenue increased to $3.896 million from $2.600 million; repairs and other revenue fell 75% to $95,000.
- Gross margin improved by about four percentage points, reflecting higher volume and improved production efficiencies. Operating expenses increased 12% to $1.315 million, including a $113,000 impairment charge for the Huber customer list.
- One customer represented 40% of sales, versus 27% a year earlier. Management said a former major customer plans to replace a product it had purchased from Pro-Dex; its sales included approximately $575,000 in the quarter and were expected to decline significantly in the following quarter. Management expects sales to other customers to offset the decline, but gave no assurance.
- Backlog was approximately $18.5 million, with $11.5 million expected to be delivered in fiscal 2017 and the balance in fiscal 2018. Management cited customer concentration, order timing, product launches, and customer inventory plans as sources of uncertainty.
- Management stated existing cash, receivables, and Summit borrowing capacity should cover requirements for at least 12 months under current operations. It also cautioned that negative operating cash flow may recur, particularly when purchasing long-lead-time materials, and that additional financing may be needed and may not be available on acceptable terms.
- A $3.7 million valuation allowance remained against deferred tax assets. Management said it might be released during the fiscal year if taxable-income expectations are realized, with no assurance. Unrecognized tax benefits were $454,000.
- Pro-Dex and the former president of Riverside Manufacturing filed lawsuits against each other in October 2016. The former president had demanded $250,000; the company recorded no accrual and said it believed the claims lacked merit, while acknowledging litigation outcomes are uncertain.
- Management reported disclosure controls were effective and no material changes to internal control over financial reporting. It reported no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether the largest customer’s planned product replacement reduces revenue as expected, and whether growth from other customers offsets it.
- Whether the $18.5 million backlog converts to shipments and collections on the stated schedule, including the cash needed to fund deferred contract costs and long-lead materials.
- Whether improved margins persist as production scales and the company works to reduce costs on newer products.
- Developments in the reciprocal litigation, potential exposure, and whether any liability or settlement is ultimately recorded.
- Any change in liquidity, use of the Summit facility, financing needs, or the valuation allowance against deferred tax assets.