Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2012; comparisons are with the three months ended September 30, 2011. Balance-sheet comparisons are with June 30, 2012. The filing presents unaudited consolidated results.
Business context and results
Pro-Dex designs and manufactures surgical and dental devices and motion-control products for medical, industrial, scientific, and other customers. The company sold its Astromec fractional-horsepower motor product line in February 2012; it is reported as a discontinued operation. Continuing operations generated $3.461 million in quarterly sales.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $3.461 million | $5.045 million |
| Gross profit / margin | $1.236 million / 36% | $2.108 million / 42% |
| Operating income (loss) | ($52,000) | $357,000 |
| Continuing-operations income (loss) | ($59,000) | $346,000 |
| Discontinued-operations income | $42,000 | $100,000 |
| Net income (loss) | ($17,000) | $446,000 |
| Operating cash flow | ($172,000) | $349,000 |
Liquidity, debt, and cash flow
- At September 30, cash was $3.125 million, working capital was $6.739 million, and total assets were $12.572 million.
- The company repaid the remaining $685,000 term-loan principal on September 24 and terminated its Union Bank credit facilities. No bank debt remained at quarter-end.
- Cash decreased $987,000 during the quarter. Operating activities used $172,000; investing activities used $41,000, principally for equipment; financing activities used $774,000, including the loan repayment.
- Inventory rose $691,000 to $3.482 million, principally for firm backlog orders, repair and warranty needs, and component availability. Receivables increased $212,000; accounts payable and accrued expenses provided a $511,000 offset.
Material changes, outlook, and risks
- Sales fell 31% year over year. Medical-device sales declined $1.8 million, largely reflecting a $2.3 million decline in sales to the company’s former largest customer. Lower sales volume also reduced gross margin from 42% to 36%.
- Operating expenses declined to $1.288 million from $1.751 million, but the reductions did not offset the lower gross profit. The company reported no specific earnings or sales guidance. Management said cash and expected operating cash flows should be sufficient for the next 12 months.
- Backlog was $6.9 million at September 30. Management cautioned that order bookings can vary, including with product launches and customer inventory plans, and said there is no assurance its strategy to add revenue opportunities and reduce noncritical costs will succeed or on what timetable.
- Customer concentration is significant: one customer represented 56% of current-quarter sales and 59% of quarter-end accounts receivable. That customer had stopped ordering two products after developing its own alternatives; current sales to it were repair revenue, which could become negligible if it stops placing repair orders.
- Astromec earnout income of $47,000 was recognized in the quarter and received in October. The company also held $733,000 of real estate for sale related to the former Astromec facility.
- The company maintained a $2.6 million valuation allowance against deferred tax assets and accrued $318,000 of unrecognized tax benefits. A former Santa Ana site was identified for possible further screening related to groundwater contamination; DTSC reported no further evaluation in fiscal 2011 or 2012, and the ultimate relevance or liability remains uncertain.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new customers and products can offset the continuing decline in orders from the former largest customer, and whether customer concentration remains high.
- How the $6.9 million backlog converts into shipments, revenue, and cash, and whether elevated inventory supports orders or creates obsolescence risk.
- Whether gross margins recover as volume changes and whether cost reductions can sustain profitability.
- Whether operating cash flow improves after the quarter’s working-capital investment and debt repayment.
- Developments in the real-estate sale, Astromec earnout receipts, tax positions, and the former-site environmental screening.