Pro-Dex, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022. Although the request metadata refers to 2021 Q4, this filing is an annual report for FY2022, with FY2021 comparisons. Pro-Dex designs and manufactures powered surgical instruments, primarily for orthopedic, CMF and thoracic markets, and also sells rotary air motors.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $42.0 million | $38.0 million |
| Gross profit / margin | $13.1 million / 31% | $13.6 million / 36% |
| Operating income / margin | $5.1 million / 12% | $4.5 million / 12% |
| Net income | $3.9 million | $5.8 million |
| Diluted EPS | $1.02 | $1.48 |
| Cash from operations | $(0.8) million | $(2.1) million |
| Cash and cash equivalents at year-end | $0.8 million | $3.7 million |
| Working capital at year-end | $19.8 million | $18.7 million |
- Sales increased 11%, led by higher orthopedic device revenue and repairs. Medical devices generated $34.0 million, repairs $6.6 million, and NRE/prototype services $1.0 million.
- Gross margin fell five percentage points as material and labor costs rose, supply-chain disruptions increased component costs, and manufacturing overhead was under-absorbed. Operating income increased despite lower gross profit, helped by lower R&D and selling expenses.
- Net income declined largely because FY2021 included $2.7 million of investment-related gains (realized and unrealized), versus a net investment loss in FY2022; FY2022 interest expense was $0.5 million.
- Operating cash use improved, but receivables and inventory absorbed cash: year-over-year increases were $4.4 million and $4.2 million, respectively. Investing activities used $1.2 million, primarily for equipment and improvements.
Balance sheet, debt and liquidity
- Total assets were $47.3 million and total liabilities $23.7 million at June 30, 2022. Notes payable totaled approximately $13.5 million on the balance sheet, in addition to $2.4 million of lease liabilities.
- Cash was $0.8 million; marketable equity investments totaled $2.5 million, including $1.8 million classified as long-term because the securities are thinly traded and may not be readily sold.
- Management said available cash, receivables and expected operating cash flows should meet requirements for at least 12 months. The company also cited its revolving credit facility and a suspended ATM offering as potential funding sources.
- Pro-Dex failed one debt financial covenant at year-end but obtained a lender waiver. Management anticipated covenant compliance in the next fiscal year. The revolving facility had $2.0 million drawn in FY2022 and matures in November 2023; term loans have maturities extending through 2030.
Material changes, outlook and risks
- Customer concentration remains pronounced: the largest customer accounted for 66% of FY2022 sales, and the top three accounted for 88%. The largest customer’s handpiece supply agreement runs through calendar 2025.
- Backlog rose to $16.5 million from $9.7 million; the company expected the June 2022 backlog, plus certain subsequent orders, to ship in FY2023. Backlog is not a guarantee of future revenue.
- Thoracic sales fell 77% to $1.9 million as the customer likely replenished its distribution network. Orthopedic sales rose 21% and CMF sales rose 65%. Management expects repair volumes to increase but cautioned that near-term repair margins may deteriorate while upgrades are provided at no additional cost and pricing is negotiated.
- Supply-chain delays, longer lead times and surcharges persisted. Alternative sourcing of chips helped avoid an anticipated sales decline, but at higher cost; management characterized the impact as short-term, while acknowledging continuing uncertainty.
- The Tustin facility build-out was substantially complete, but validation activities, including clean-room validation, remained underway. Operations were expected to begin in the third quarter of FY2023. No quantified revenue or earnings guidance was provided.
- Other key risks include customer order cancellations or delays, competition and product acceptance, warranty estimates, regulatory compliance, cybersecurity, and dependence on suppliers with limited alternatives for some components.
- A patent-infringement matter for which a customer sought indemnification was not accrued; the third party voluntarily dismissed its claims with prejudice on August 26, 2022, before the filing date.
- The filing revised FY2021 comparative financial statements for an immaterial accounting error related to adoption of ASU 2016-01. The revision increased FY2021 net income by $1.4 million and basic/diluted EPS by $0.36/$0.35; it did not affect cash or operating income.
- The independent auditor issued an unqualified opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether customer concentration, especially the largest customer’s 66% sales share, changes and whether the agreement through 2025 translates into sustained orders.
- Whether FY2023 backlog converts to shipments and cash collection, given elevated receivables and inventory and negative operating cash flow.
- Whether margins recover as supply costs normalize and whether repair pricing improves after the no-charge upgrade period.
- Progress on Tustin facility validation and start-up, and the resulting capacity, costs and capital requirements.
- Debt covenant compliance after the waiver, upcoming principal payments, and liquidity available under the revolving facility.
- Valuation and liquidity of thinly traded investments, a critical audit matter, and the related-party governance disclosures concerning Air T, Inc.