Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the first quarter of fiscal 2022 (not calendar 2021 Q1). Comparisons are with the three months ended September 30, 2020. Unaudited financial statements; amounts below are in millions unless noted.
Business context and financial performance
Pro-Dex designs and manufactures powered surgical instruments, primarily for orthopedic, cranio-maxillofacial (CMF), and thoracic markets. It also sells industrial air motors and other products. Medical devices represented 83% of quarterly sales.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $9.988 | $8.590 |
| Gross profit / margin | $3.428 / 34% | $3.475 / 40% |
| Operating income / margin | $1.318 / 13% | $1.549 / 18% |
| Net income | $1.064 | $1.158 |
| Basic / diluted EPS | $0.29 / $0.28 | $0.30 / $0.29 |
| Cash from operating activities | $2.701 | $(0.888) |
At September 30, cash and cash equivalents were $5.177 million; working capital was $19.806 million. Notes payable totaled approximately $12.467 million ($1.248 million current and $11.219 million non-current). The company also reported $2.342 million of non-current lease liabilities and a $353,000 current lease liability within accrued expenses. Capital expenditures and improvements were approximately $848,000.
Changes and drivers versus prior year
- Sales increased 16%, led by medical-device revenue growth of 23%. Orthopedic sales rose 55% and CMF sales rose 57%; thoracic sales fell 88%, primarily because the customer had filled near-term distribution needs.
- Gross profit declined about $47,000 and gross margin fell roughly six percentage points. Management attributed the margin pressure mainly to product mix and higher material and direct manufacturing costs.
- Operating expenses increased 10%. General and administrative expense rose 55%, mainly from non-cash stock-option compensation; research and development expense declined 10%.
- Net income declined about 8%. Other income included a $149,000 unrealized gain on marketable equity investments, compared with a $107,000 unrealized loss in the prior-year quarter.
- Operating cash flow improved to $2.701 million, supported by collections that reduced receivables by $834,000 and lower prepaid expenses; inventory growth of $470,000 partly offset those sources.
Outlook, risks, and unusual items
- Backlog was approximately $12.8 million at quarter-end, of which $12.6 million was scheduled for delivery during the remainder of fiscal 2022. Backlog is firm acknowledged orders and excludes some revenue expected under existing contracts.
- Management said existing cash, receivables, operating cash flows, and access to the revolving facility should meet requirements for at least 12 months. It expects continued investment in product development and manufacturing capacity; it cautioned that revenue growth may be uneven and that success of development and sales efforts is not assured.
- The company was completing build-out and validation of its Tustin facility and expected to begin operations during the second quarter. It reported $847,000 of quarterly spending on equipment and facility improvements.
- COVID-19 had not materially adversely affected results to date, but delayed shipments, supplier lead times, and possible reductions in elective procedures could affect demand and production.
- Customer concentration is significant: the largest customer accounted for 70% of sales and 75% of gross receivables. Two customers together represented 79% of sales.
- A customer sought indemnification in connection with a third-party patent-infringement complaint involving a product Pro-Dex manufactures. The company said its assessment was ongoing and that it believed there was no infringement and/or the patent was invalid; the filing does not quantify potential exposure.
- After quarter-end, on November 5, 2021, the company extended its $2 million revolving-credit maturity to November 5, 2023 and changed the rate to the greater of 2.75% or prime minus 0.5%. No revolving balance was drawn at September 30.
- Disclosure controls were deemed ineffective because of a material weakness involving review of applicable accounting standards, identified through the late adoption of ASU 2016-01. Management described a new monitoring process. The company also revised prior-year statements for this immaterial error, reducing September 2020 quarterly net income by $107,000 and EPS by $0.03.
Most important facts for investors to verify
- Whether the high customer concentration and the largest customer’s order patterns remain stable, including the effect of shipment timing and negotiated volume rebates.
- Whether margins recover from the 34% gross margin, given product mix, material costs, production costs, and the trajectory of operating expenses.
- Whether the $12.8 million backlog converts to revenue as scheduled and whether the Tustin facility becomes operational as expected.
- Progress in remediating the material weakness and any further control or accounting findings.
- Developments in the patent-indemnification matter, the company’s investment portfolio—including its related-party connections to Air T, Inc.—and debt repayment obligations.