Pro-Dex, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2014, compared with fiscal 2013. Although the request metadata says “2013 Q4,” this filing reports the full fiscal year 2014. Pro-Dex designs and manufactures powered surgical and dental instruments and motion-control products. Astromec, sold in 2012, is reported as a discontinued operation.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $10.812 million | $12.249 million |
| Gross profit / margin | $2.966 million / 27% | $3.716 million / 30% |
| Operating loss | $814,000 | $1.895 million |
| Continuing-operations net loss | $651,000 | $1.864 million |
| Consolidated net loss | $488,000 | $1.784 million |
| Operating cash flow | $(329,000) | $(1.271) million |
| Cash and cash equivalents at year-end | $3.188 million | $1.680 million |
| Working capital at year-end | $6.766 million | $5.033 million |
- Sales fell 12%, primarily because medical-device sales declined $1.1 million. The largest customer’s shipments decreased $491,000 after it suspended orders for the first five months of fiscal 2014 and revised its delivery schedule.
- Gross margin fell three percentage points. Higher anticipated losses on fixed-price development contracts and under-absorbed manufacturing overhead outweighed lower warranty and inventory charges.
- Operating expenses declined 33% to $3.780 million, reflecting reductions in selling, general and administrative, and research and development costs.
- Cash used in operations improved year over year but remained negative. Lower inventory provided $1.234 million of cash; increases in accounts receivable and unbilled receivables used $440,000 and $828,000, respectively.
- The company had no bank credit facility and had repaid its $685,000 bank term loan in September 2012. Year-end capital lease obligations were $15,000. Cash plus investments in publicly traded equity securities totaled approximately $4.246 million; the investments were subject to market-value fluctuations.
Material changes and notable items
- Sales had declined from $27.1 million in FY2011 to $17.3 million in FY2012, $12.2 million in FY2013, and $10.8 million in FY2014.
- One customer represented 49% of FY2014 sales ($5.318 million) and 53% of gross accounts receivable at year-end. The top 20 customers generated 82% of sales.
- Backlog decreased to $2.8 million from $6.7 million. In July 2014, the largest customer placed approximately $3.5 million of orders for shipments extending through December 2015.
- A rights offering issued 868,732 shares at $1.90 per share, raising approximately $1.65 million gross and $1.5 million net. The issuance increased shares outstanding to 4,211,019 at June 30, 2014.
- FY2014 included $65,000 in realized gains on investment sales and $167,000 gain on the July 2013 sale of the former Astromec property. Discontinued operations contributed $163,000 of income, reducing the consolidated net loss relative to the loss from continuing operations.
- Accrued losses on development contracts were $468,000 at year-end, up from $176,000. Management recognized $317,000 of such costs in FY2014.
Outlook, risks and contingencies
- Management said existing cash and equity investments should fund operations for the next 12 months. No quantified revenue or earnings guidance was provided.
- Management’s strategic priorities include sustaining business with its largest customer, completing two significant engineering projects and moving related products into manufacturing, finding additional revenue opportunities, and managing reduced costs. Timing and success are not assured.
- Management expected completion of billable non-recurring engineering services under certain contracts generally in FY2015; successful completion was not assured. These fees were 2% of revenue in both FY2014 and FY2013.
- Principal risks include customer concentration and order variability, continuing sales contraction, competition and customer in-house production, development-project losses, supplier constraints, regulatory compliance, and limited access to financing if operating cash flows fall short.
- The Affordable Care Act’s 2.3% excise tax applies to certain medical devices, some of which the company produces; the company may be unable to recover the tax through pricing.
- The board approved a potential acquisition of substantially all assets of a Northern California machining business. As of the filing, the transaction remained subject to due diligence and closing conditions; deposits were refundable in specified circumstances.
- Two directors had voting control over approximately 36.8% of outstanding shares. The filing also disclosed potential conflicts because directors serving on the Investment Committee had interests in companies whose shares the company invested in.
- The auditor issued an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Investor verification points
- Confirm that the largest customer’s July 2014 orders convert to shipments and revenue on the expected schedule, and monitor the resulting customer concentration.
- Assess whether the lower backlog and long-term sales decline stabilize, and whether the two engineering projects reach completion and manufacturing release without further contract losses.
- Review operating cash generation, unbilled receivables, inventory needs, and the company’s liquidity absent a bank credit facility.
- Track the value, concentration, liquidity, and governance of the company’s equity investments and any related-party or director conflicts.
- Check the status and terms of the proposed machining-business acquisition and the use of rights-offering proceeds.