Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2017; comparison is the three months ended September 30, 2016. Pro-Dex designs and manufactures powered surgical and dental instruments and also operates its Fineline injection-molding business. Amounts below are in thousands of dollars unless otherwise noted.
Financial performance
- Revenue: $5,162, up 1% from $5,129. Medical-device sales rose 21% to $4,709 and represented 92% of revenue; declines in legacy industrial, dental, injection-molding and contract-services sales offset much of that growth.
- Profitability: Gross profit was $1,860, up 31%; gross margin improved to 36% from 28%. Operating income rose to $862 from $294. Net income was $628 ($0.15 per diluted share), versus $286 ($0.07) a year earlier. The prior-year quarter included a $113 intangible-asset impairment; current-quarter R&D spending increased $103 to $407.
- Cash flow: Operating cash flow was $1,040, versus $255. Cash increased $1,650 to $5,855. Investing used $1,561, principally for a $1,150 loan participation, while financing provided $2,171, primarily from ATM share sales.
- Liquidity and debt: Working capital was $11,995. Total liabilities were $1,892, including $72 of current and long-term notes and capital leases; no borrowings were outstanding under the $500 revolving bank facility. Management said available cash, receivables and operating cash flows were expected to cover requirements for at least 12 months.
- Other balance-sheet items: Inventory increased to $3,512 from $3,085. Shareholders’ equity was $16,275. The company sold 320,000 shares under its ATM during the quarter, generating $2,169 net of fees.
Material changes and business developments
- Higher medical-device sales reflected increased shipments of a surgical handpiece to the largest customer as production ramped toward the customer’s requested 150 units per month. Manufacturing efficiencies and insourcing helped reduce product costs.
- Customer concentration is substantial: the largest customer generated 59% of quarterly sales and represented 60% of gross receivables at September 30. The top three customers accounted for 74% of sales.
- At quarter-end, backlog was approximately $10,200, of which about $9,400 was expected to ship in fiscal 2018 and the balance in fiscal 2019. Backlog and orders may vary with product launches and customer inventory plans.
- The company sold its Oregon Micro Systems division in January 2017 for $636; its results are classified as discontinued operations. It also discontinued placement services, while continuing certain engineering, quality and regulatory consulting work.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management’s stated priorities include retaining core medical-device customers, developing Pro-Dex-branded products using its adaptive torque-limiting technology, and pursuing new product proposals. It expects repair revenue to remain below recent years as newer products remain under warranty.
- Pro-Dex holds a $1,150 participation in a $2,300 loan secured by a hotel-related leasehold interest in Manhattan. The loan bears an initial 22% interest rate; Pro-Dex classified its participation as short-term based on borrower representations. The filing specifically warns that nonpayment could require an impairment. A company director is managing partner of the entity that made the underlying loan.
- Pro-Dex’s $450 Monogram convertible note bears 4% interest and matures in April 2019. An additional $350 advance is conditional on milestones; the deadline was extended, and the company expected to advance it within 60 days of the report. Pro-Dex has an exclusive development, engineering, manufacturing and supply right, but management characterized the opportunity as long-term and uncertain.
- The Riverside-related litigation was dismissed with prejudice after the court enforced a settlement in October 2017. The filing notes other routine legal proceedings but does not quantify potential exposure.
- Management cited risks including customer and order variability, competition, rapid technological change, execution of product-development plans, and possible future capital needs. It reported disclosure controls as effective and no material changes in internal control during the quarter.
Investor facts to verify
- Whether the largest customer sustains the requested shipment pace and whether the concentration in sales and receivables changes.
- Backlog conversion, new order bookings, and the sustainability of the improved gross margin.
- Collectability and classification of the $1,150 loan participation, including the borrower’s repayment capacity and the related-party connection disclosed in the filing.
- Monogram’s milestone progress, any additional advance, and whether planned development and supply agreements generate revenue.
- Cash requirements for inventory, manufacturing capacity and product development, and any future use of the ATM or revolving facility.