Pro-Dex, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended December 31, 2019; fiscal year ends June 30. Financial statements are unaudited. Pro-Dex designs and manufactures surgical drivers and shavers, primarily for orthopedic and cranio-maxillofacial markets, and also sells rotary air motors.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $7.961 | $6.399 | $15.201 | $13.314 |
| Gross profit / margin | $2.864 / 36% | $2.249 / 35% | $5.644 / 37% | $4.975 / 37% |
| Operating income | $1.668 | $1.193 | $3.159 | $2.920 |
| Net income | $1.249 | $1.179 | $2.354 | $2.528 |
| Diluted EPS | $0.31 | $0.28 | $0.58 | $0.59 |
- Quarterly sales increased 24%, gross profit 27%, operating income 40%, and net income 6% year over year. Six-month sales increased 14%, while net income declined 7%.
- Quarterly gross margin expanded by about one percentage point; the six-month margin was unchanged. Higher repair revenue was a principal contributor to sales and gross-profit growth.
- For the six months, operating cash flow was $2.558 million, versus $1.508 million a year earlier. Investing used $1.611 million and financing used $2.514 million; cash fell $1.567 million to $6.175 million.
- At December 31, cash was $6.175 million, short-term investments $3.540 million, and long-term investments $1.610 million. Working capital was $16.939 million. Inventory rose to $7.808 million from $6.239 million at June 30, including inventory for the planned thoracic-driver launch.
- Total liabilities were $10.854 million and shareholders’ equity $17.872 million. The term loan balance was approximately $4.2 million, net of unamortized fees; the $2.0 million revolving facility was undrawn. Operating lease liabilities totaled $3.233 million, including current portion.
Material changes and business drivers
- Repair and other sales reached $1.520 million in Q2, versus $44,000 a year earlier; six-month sales were $3.004 million versus $153,000. Management attributed the increase to repairs of orthopedic handpieces sold to its largest customer.
- Medical-device product sales rose 3% in Q2 but fell 7% for the six-month period. The six-month decline included lower sales to legacy customers and contractual price concessions; increased orders from other distributors partly offset the weakness. Industrial and scientific sales declined 29% for the six months, and dental sales continued to contract as the company winds down manufacturing.
- Customer concentration increased: Customer 1 represented 71% of Q2 sales and 74% of six-month sales, compared with 64% in each prior-year period. The two largest customers together accounted for 82% of six-month sales.
- Operating expenses rose 13% in Q2 and 21% over six months, including higher selling and R&D costs. R&D spending was $881,000 for the half-year, up from $735,000.
Outlook, risks, and notable items
- Backlog at December 2019 was approximately $15.8 million; $15.7 million was scheduled for delivery in the third and fourth quarters of FY2020. Backlog consists of acknowledged firm orders and is not a guarantee of revenue.
- Management expected the thoracic driver to launch later in FY2020’s third quarter, after technical delays involving performance with a specific customer attachment. The product was described as substantially complete; other product development launches were delayed to prioritize it. Management expected repair revenue in the remaining FY2020 quarters to be comparable to Q2.
- No specific full-year revenue or earnings guidance was provided. Management said it believed cash, receivables, and operating cash flow would meet requirements for at least the next 12 months, while noting possible future need for debt or equity capital and that working-capital needs can rise when procuring long-lead materials.
- The company adopted lease accounting Topic 842 on July 1, 2019, recording approximately $3.3 million of right-of-use assets and lease liabilities. Prior periods were not restated.
- Investment holdings totaled $5.150 million at market value, with a $100,000 net unrealized gain at December 31. The portfolio included $1.410 million of Air T, Inc. securities; two Pro-Dex directors also serve on Air T’s board and have ownership interests. Q2 comprehensive income included $705,000 of after-tax unrealized investment gains. The prior-year six-month net income included a $356,000 gain on an investment sale.
- The board approved a new program in December authorizing repurchases of up to one million shares. The company repurchased 156,685 shares for $2.215 million during the six months. Legal proceedings are described only as incidental to the business, with no specific case or quantified exposure disclosed. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the backlog converts to shipments and cash on the stated schedule, and whether the thoracic-driver launch proceeds after the reported technical delay.
- How sustainable repair revenue is, given its unusually large year-over-year increase and its concentration in the largest customer.
- Largest-customer dependency, legacy-customer trends, and the effect of contractual pricing concessions on medical-device sales and margins.
- Investment portfolio performance, related-party governance and exposure, and the impact of market-value changes on comprehensive income and equity.
- Cash conversion as inventory grows, ongoing share repurchases, debt service, and the company’s assertion that liquidity is sufficient for at least 12 months.