Business context and reporting period
Pro-Dex, Inc. designs and manufactures surgical drivers and shavers, primarily for orthopedic, thoracic and cranio-maxillofacial markets, and also sells industrial air motors. This Form 10-Q reports the fiscal third quarter and first nine months ended March 31, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | 2023: $13.079 million; 2022: $9.265 million | 2023: $35.448 million; 2022: $29.426 million |
| Gross profit / margin | $3.811 million / 29%; prior year $2.858 million / 31% | $9.390 million / 26%; prior year $9.689 million / 33% |
| Operating income | $2.065 million; prior year $1.021 million | $4.152 million; prior year $3.940 million |
| Net income / diluted EPS | $1.313 million / $0.36; prior year $0.462 million / $0.12 | $3.268 million / $0.89; prior year $2.450 million / $0.65 |
| Operating cash flow | Not reported separately for the quarter | $4.835 million; prior year $4.432 million |
- Quarterly sales rose 41%; nine-month sales rose 20%. Nine-month gross profit declined 3% and gross margin fell 7 percentage points, despite higher sales.
- At March 31, 2023, cash and equivalents were $2.088 million; current assets $31.145 million; current liabilities $10.144 million; reported working capital $21.001 million. Marketable equity investments totaled $2.683 million.
- Balance-sheet notes payable totaled $12.361 million ($3.114 million current and $9.247 million non-current); operating lease liabilities were separately reported. The company had drawn $1.8 million on its $7.0 million revolving facility and reported $5.2 million available; a separate $3.0 million supplemental facility was undrawn.
- Nine-month investing cash use was $0.733 million, principally equipment and facility spending; financing cash use was $2.863 million. Cash increased $1.239 million from June 30, 2022.
Material changes versus prior comparable periods
- Quarterly repairs and other revenue increased to $4.816 million from $1.665 million, mainly from increased repairs of the largest customer’s orthopedic handpieces. The company also recorded $0.520 million in negotiated compensation for upgrades performed July–December 2022.
- Medical-device product sales increased 7% for the quarter and 2% for nine months. Thoracic sales declined; NRE and prototype revenue increased substantially. Dental and component revenue declined as the company is no longer manufacturing dental products.
- Quarterly gross margin declined 2 percentage points, attributed mainly to increased under-absorption of manufacturing costs and additional manufacturing, assembly and quality costs during facility validation. Nine-month cost of sales also reflected $1.4 million of additional costs from the enhanced repair program and $1.1 million higher under-absorbed costs.
- Accounts receivable fell to $10.565 million from $15.384 million at June 30, 2022, while inventory increased to $15.145 million from $12.678 million. Nine-month operating cash flow benefited from $4.817 million in collections of receivables, partly offset by the inventory increase and reductions in accounts payable/accruals and deferred revenue.
- The company repurchased 86,422 shares for $1.547 million during the nine months. Shares outstanding were 3,545,309 at May 4, 2023, versus 3,596,131 at June 30, 2022.
Outlook, commentary and risks
- No quantitative revenue or earnings guidance is provided. Management said it expects sufficient cash, receivables and operating cash generation to meet requirements for at least 12 months, with potential additional liquidity from investments or borrowing.
- Management expected to begin operations at the new Tustin facility in fiscal Q4 2023, subject to ongoing verification and validation activities. The facility is intended to provide capacity for growth, including battery and new-product manufacturing.
- Backlog was approximately $18.8 million at March 31, 2023; $8.5 million was scheduled for delivery in fiscal Q4, with the balance scheduled for the next fiscal year and beyond. Backlog is firm purchase orders and excludes some contract-related expected revenue.
- Customer concentration is significant: the largest customer represented 66% of nine-month sales and 74% of receivables at March 31; the top two customers represented 83% of nine-month sales and 94% of receivables. The largest customer’s supply agreement runs through calendar 2025.
- Management cited supplier delays, longer lead times, higher prices and surcharges, including more costly substitute components. It also noted variability in order bookings and the possibility that new-product development may not succeed or deliver estimated sales. Management expects repair revenue to remain elevated but at reduced margins for the remainder of the fiscal year.
- The company stated it was in compliance with debt covenants at March 31, 2023, but cannot assure continued compliance. Debt facilities are secured and include covenants and default provisions. The filing reports no material changes to the prior annual report’s risk factors and no subsequent events requiring disclosure.
- Two board members have ties to Air T, Inc., in which Pro-Dex held $1.149 million of common stock at March 31, 2023; the filing describes investment-committee oversight and approval processes. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether repair-program revenue and the negotiated compensation are recurring, and what margins the enhanced repairs will earn.
- Customer order trends, the timing and conversion of the $18.8 million backlog, and continued dependence on the largest customer.
- Whether the Tustin facility begins operations as expected and whether utilization improves manufacturing-cost absorption and margins.
- Inventory levels, supplier availability and component costs, and the company’s ability to convert receivables and backlog into operating cash.
- Debt repayment and covenant capacity, borrowing availability, and any reliance on additional equity issuance or investment sales.
- Potential volatility and liquidity of the marketable equity portfolio, including the related-party connections disclosed for Air T, Inc.