Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2021; unaudited. The filing was signed February 3, 2022. Pro-Dex designs and manufactures surgical drivers and shavers, as well as rotary air motors.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net sales | $10.173 million | $8.265 million | $20.161 million | $16.855 million |
| Gross profit / margin | $3.404 million / 34% | $2.596 million / 31% | $6.832 million / 34% | $6.071 million / 36% |
| Operating income | $1.602 million | $0.521 million | $2.920 million | $2.070 million |
| Net income | $0.925 million | $1.750 million | $1.988 million | $2.908 million |
| Diluted EPS | $0.25 | $0.44 | $0.53 | $0.72 |
Quarterly sales rose 23% year over year, led by medical-device products; six-month sales rose 20%. Quarterly gross margin improved three percentage points, while the six-month margin fell two points, which management attributed mainly to price concessions to its largest customer. Net income declined in both comparisons, substantially reflecting a shift in marketable-equity investment results: the quarter recorded a $0.300 million unrealized loss versus a $1.413 million gain in the prior-year quarter; the six-month figures were a $0.152 million loss versus a $1.306 million gain.
Medical-device sales were $8.389 million for the quarter and $16.673 million for the half-year. For the half-year, orthopedic sales increased $2.9 million and CMF sales increased $2.3 million, while thoracic sales declined about $1.7 million. The largest customer represented 66% of quarterly sales and 68% of six-month sales. Three customers accounted for 89% of sales in each current-year period.
Cash, liquidity and debt
- Cash and cash equivalents were $5.252 million at December 31, 2021, up from $3.721 million at June 30, 2021. Working capital was $20.117 million.
- Six-month operating cash flow was $4.219 million, compared with $1.085 million a year earlier. Investing cash outflow was $1.430 million; financing cash outflow was $1.258 million. Cash increased $1.531 million during the half-year.
- Total liabilities were $20.109 million. Notes payable totaled approximately $12.159 million, including current and long-term balances; the company also reported a $2.248 million non-current lease liability. No revolving-loan amount was drawn.
- Management said cash, receivables and expected operating cash flows should meet requirements for at least 12 months, with a $2.0 million revolving facility and potential ATM equity sales as additional funding sources. The company repurchased 27,952 shares for $0.672 million during the half-year.
Changes, outlook and risks
- Management reported approximately $6.0 million of backlog at December 2021, with $5.7 million scheduled for delivery in the third and fourth fiscal quarters. It noted the largest customer was delaying purchase orders amid a next-generation handpiece release, while expecting orders for the balance of the fiscal year.
- Supply-chain delays, longer lead times and surcharges persisted and worsened into early calendar 2022. Management expected these challenges to reduce net sales and negatively affect financial performance in fiscal Q3 and possibly Q4. The company warned that it may not be able to pass supplier cost increases to customers, some of whom have contractual price protections.
- The approximately 25,000-square-foot Franklin Property build-out was substantially complete; verification and validation were underway, and the company expected to begin certain operations there during the fiscal year. Backlog fulfillment and facility transition remain execution considerations.
- Research and development expense fell to $1.596 million for the half-year, partly because engineers worked on billable customer projects. Management expects R&D investment may rise as it pursues new products and customer relationships; it cautioned that revenue growth may be uneven and that success is not assured.
- The company disclosed a customer indemnification demand related to a third-party patent-infringement complaint. Pro-Dex disputes infringement and/or patent validity, intends to defend the matter, and recorded no accrual; it said resolution could take two years or more. A former employee also alleged wrongful termination and related claims; mediation was scheduled for February 23, 2022. No accrual amount was provided for either matter.
- The filing explains that prior-period results were revised to reflect adoption of accounting guidance requiring changes in equity-investment fair value in net income. The revision increased prior-year quarterly and six-month net income by $1.4 million and $1.3 million, respectively, reclassifying amounts previously reported in other comprehensive income. Management said the historical error was immaterial.
Investor verification points
- Track supply-chain performance, customer order timing and whether the projected fiscal Q3/Q4 sales pressure materializes.
- Assess customer concentration, especially dependence on the largest customer, and confirm the timing and delivery of backlog orders.
- Review gross-margin trends and the impact of customer price concessions, supplier surcharges and cost inflation.
- Monitor liquidity, debt amortization and covenants, along with investment-portfolio volatility and the company’s use of any ATM offering.
- Follow the patent indemnification and former-employee matters, including any subsequent developments or changes to accruals.
- Consider the prior-period income-statement revision when comparing reported earnings and EPS across periods.