Pro-Dex, Inc. — Form 10-Q summary
Business and period: Pro-Dex designs and manufactures surgical drivers and shavers, principally for medical-device customers, and also sells industrial air motors. This unaudited report covers the three and six months ended December 31, 2020 (fiscal 2021 second quarter and first half); amounts below are in U.S. dollars, generally millions unless stated.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net sales | $8.265 in 2020; $7.961 in 2019 (+4%) | $16.855 in 2020; $15.201 in 2019 (+11%) |
| Gross profit / margin | $2.596 / 31%; $2.864 / 36% in 2019 | $6.071 / 36%; $5.644 / 37% in 2019 |
| Operating income | $0.521; $1.668 in 2019 | $2.070; $3.159 in 2019 |
| Net income | $0.337; $1.249 in 2019 | $1.602; $2.354 in 2019 |
| Diluted earnings per share | $0.08; $0.31 in 2019 | $0.40; $0.58 in 2019 |
- Quarterly sales growth did not translate into higher profit: gross profit fell 9% and net income fell about 73%. Management attributed the lower gross margin mainly to manufacturing-cost under-absorption and higher inventory and warranty charges.
- First-half medical-device sales rose 14%, substantially due to $2.4 million of thoracic-driver and accessory sales, which had not occurred in the prior-year period. Sales to two legacy medical-device customers declined about $0.5 million and $0.4 million, respectively.
- First-half operating expenses increased 61% to $4.001 million, led by R&D, up 136% to $2.080 million, and G&A, up 24% to $1.641 million. Management cited product-development investment, staffing, Franklin Property costs, legal fees, and other overhead.
- Comprehensive income was $1.750 million for the quarter and $2.908 million for the half-year, including net-of-tax unrealized gains on marketable equity investments of $1.413 million and $1.306 million, respectively. These investment gains are distinct from operating performance.
Cash, liquidity, and debt
- At December 31, cash and equivalents were $5.523 million; working capital was $17.776 million. Current assets were $22.710 million and current liabilities $4.934 million. Marketable equity securities totaled $6.122 million, including $3.238 million classified as long-term.
- Six-month operating cash flow was $1.085 million, down from $2.558 million. The company used $6.703 million in investing activities, principally for the $6.499 million Franklin Property purchase and equipment; financing provided $4.720 million, including the property loan. Cash declined $0.898 million over the period.
- Notes payable and capital-lease obligations totaled $8.854 million at period-end ($0.479 million current and $8.375 million noncurrent); operating lease liabilities were reported separately. The property purchase was funded with a $5.207 million secured loan at 3.55%, with monthly payments and a $3.1 million balloon due at November 2030 maturity.
- Under amended bank facilities, Term Loan A had a December 31 balance of about $3.7 million; Term Loan B ($1.0 million) and the $2.0 million revolving facility were undrawn. The company also had potential additional borrowing capacity under Term Loan A, subject to the facility terms and availability period.
- Management said cash, receivables, and operating cash flows were expected to meet requirements for at least the next 12 months. It noted that additional debt or equity capital could be needed for working capital or equipment; the ATM equity facility was available, but no shares had been sold under it as of the report.
Business developments, outlook, and risks
- The company acquired an approximately 25,000-square-foot Tustin industrial building for growth capacity. Build-out was ongoing; management expected initial operations in fiscal 2021’s fourth quarter, including a clean room to support battery and new-product manufacturing.
- Backlog at December 2020 was approximately $16.6 million, of which $15.9 million was scheduled for delivery in fiscal 2021’s third and fourth quarters. Backlog comprises acknowledged firm orders and does not include all revenue expected under existing contracts.
- Management reported no material adverse effect from COVID-19 on results to date, but noted accepted customer requests to delay some shipments, potential pressure on elective-procedure demand, and uncertainty about future effects. Paid absences reduced production hours and contributed to under-absorption of manufacturing costs.
- Management expected R&D spending to remain elevated in the near term and acknowledged that anticipated revenue growth may be uneven and is not assured. Development programs included a CMF driver, an ENT shaver, and a ventilator; stated market-launch timing and estimated annual revenue are management estimates, not guarantees.
- The largest customer represented 70% of quarterly sales and 65% of first-half sales. An amended supply agreement extends supply of its surgical handpieces through calendar 2025, but concentration remains significant. The company also disclosed related-party connections to Air T, Inc., in which it held $1.510 million of common and preferred stock at period-end.
- Warranty accruals rose to $0.347 million from $0.213 million at June 30, 2020; management cited higher accruals for several products. Legal proceedings were described only as incidental to the business; the filing gives no specific matter or quantified exposure. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $16.6 million backlog converts to shipments and revenue on the expected schedule, and whether order timing or customer delays change.
- Trends in customer concentration, especially the largest customer’s orders and the impact of the calendar-2025 supply agreement and price concessions.
- Whether gross margins recover as COVID-related production disruptions ease and warranty costs normalize.
- Franklin Property build-out timing, total costs, operational benefits, and the resulting debt-service and balloon-payment obligations.
- R&D program progress, actual launch dates and commercial uptake, as well as cash requirements and any future ATM or debt financing.
- Valuation and liquidity of the marketable equity portfolio, including thinly traded holdings and related-party governance considerations; reported unrealized gains affected comprehensive income.