Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, the first quarter of Pro-Dex’s fiscal 2023; comparisons are with the three months ended September 30, 2021. The statements are unaudited. Pro-Dex designs and manufactures powered surgical instruments and also sells industrial air motors.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $11.087 million | $9.988 million | Up 11% |
| Gross profit / margin | $2.956 million / 27% | $3.428 million / 34% | Down $472,000; margin down 7 points |
| Operating income / margin | $950,000 / 9% | $1.318 million / 13% | Down $368,000 |
| Net income | $1.076 million | $1.064 million | Up $12,000 |
| Diluted earnings per share | $0.29 | $0.28 | Up $0.01 |
| Cash from operations | $2.892 million | $2.701 million | Up $191,000 |
Net income benefited from higher other income, including a $204,000 cash dividend from an investment, a $250,000 unrealized gain on marketable equity securities, and a $6,000 realized gain. Interest expense was $130,000. The effective tax rate was 17%, compared with 22%.
Revenue, margins, and operating developments
- Medical-device sales were $7.887 million, down 5%; orthopedic sales fell 1%, CMF sales 13%, and thoracic sales 12%. Repair revenue rose 54% to $2.252 million, while NRE and prototype revenue increased to $907,000 from $196,000.
- Gross margin contracted mainly because of higher component and manufacturing costs and approximately $450,000 of repairs and upgrades to the largest customer’s orthopedic handpieces performed without additional charge. Management said it was negotiating in good faith with that customer for additional remuneration.
- Cost of sales rose 24% to $8.131 million. The quarter included $362,000 of under-absorbed manufacturing costs, compared with $146,000 of over-absorption a year earlier. Management also cited higher material, machine-shop, assembly, and quality costs.
- Operating expenses declined 5% to $2.006 million. R&D was $929,000; management expected R&D spending to remain relatively flat for the rest of the fiscal year. The ENT shaver project had a stated expected launch in calendar Q4 2023 and estimated annual revenue of $1 million; both commercialization and revenue estimates carry risk.
Cash, liquidity, and debt
At September 30, 2022, cash and cash equivalents were $2.798 million, versus $849,000 at June 30, 2022; working capital was $20.162 million. Operating cash flow was supported by collections, including a $4.337 million decrease in receivables, and partly offset by a $2.986 million inventory increase. Cash used in investing was $90,000; cash used in financing was $853,000, including debt principal payments, $354,000 of share repurchases, and $223,000 of employee payroll taxes on vested awards.
Notes payable totaled approximately $13.219 million: $3.297 million current and $9.922 million non-current. The company also reported a $1.954 million non-current lease liability, with $388,000 of current lease liability included in accrued liabilities. The $2.0 million revolving loan was fully drawn and matures November 5, 2023. Term loans mature in 2027, and the property loan matures in 2030. Management believed cash, receivables, and operating cash flow would meet requirements for at least the next 12 months, but said additional debt or equity capital might be needed to support working capital or capital equipment. Its ATM agreement was suspended.
Inventory increased to $15.664 million from $12.678 million, partly to prepare for transferring assembly and repair activity to the Franklin Property. Marketable equity investments totaled $2.702 million and had net unrealized losses of $12,000 at quarter-end.
Outlook, risks, and unusual items
- Backlog was approximately $26.6 million, including $18.6 million scheduled for delivery during the remainder of fiscal 2023. Backlog consists of firm purchase orders and does not capture all expected contract revenue; order timing and customer inventory plans may cause variability.
- Management expected to begin operations at the Franklin Property in fiscal Q3 2023, following FDA authorization and ongoing equipment, process, and clean-room validation.
- Management cited supply-chain delays, longer lead times, higher prices, and surcharges. Alternative sourcing of chips helped address shortages but increased costs. The company also noted a possible effect on demand from COVID-19-related disruption to elective procedures and customer shipment delays.
- Customer concentration is substantial: two customers accounted for 87% of quarterly sales, and those customers represented 99% of gross receivables at September 30. The largest customer alone accounted for 68% of sales and 82% of gross receivables.
- The company reported no material changes to its previously disclosed risk factors and no material legal proceedings described in the filing; it cautioned that ordinary-course proceedings could result in material liability. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the handpiece upgrade and repair work will be reimbursed, and how related costs will affect future gross margins.
- Whether customer concentration, receivable collections, and the largest customer’s demand remain stable.
- Whether supply-chain costs and under-absorbed manufacturing costs ease as production and Franklin Property operations ramp up.
- Whether the $26.6 million backlog converts to shipments on schedule, and whether the ENT shaver launches and achieves the estimated revenue.
- Debt repayment and refinancing needs, particularly the fully drawn revolving facility maturing in November 2023, and the company’s potential need for additional capital.
- The filing’s table of contents contains a period-description inconsistency referring to March 31, while the cover and financial statements identify the quarter ended September 30, 2022; confirm the intended period against the filed report.