Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013 (the first quarter of fiscal 2014), compared with the three months ended September 30, 2012. Unaudited consolidated results; dollar figures below are in U.S. dollars.
Business context
Pro-Dex designs and manufactures products for medical, dental, industrial, and scientific applications. Medical products represented 65% of quarterly sales. The Astromec motor product line is reported as a discontinued operation following its 2012 sale.
Financial performance
| Metric | Quarter ended Sep. 30, 2013 | Quarter ended Sep. 30, 2012 | Change / context |
|---|---|---|---|
| Net sales | $2.555 million | $3.461 million | Down 26% |
| Gross profit / margin | $945,000 / 37% | $1.236 million / 36% | Gross profit down 24%; margin improved 1 percentage point |
| Operating expenses | $924,000 | $1.288 million | Down 28% |
| Continuing-operations income (loss) | $18,000 | ($59,000) | Improved by $77,000 |
| Discontinued-operations income | $194,000 | $42,000 | 2013 includes a $167,000 gain on sale of the former Carson City facility |
| Net income (loss) | $212,000 | ($17,000) | 2013 diluted and basic EPS: $0.06; 2012: ($0.01) |
| Net cash used in operations | $512,000 | $172,000 | Cash use increased |
| Cash at quarter end | $1.829 million | $3.125 million | Balance-sheet comparison is Sep. 30, 2013 versus June 30, 2013: cash increased from $1.680 million |
Sales declined mainly because sales to the largest medical-device customer fell by $840,000 and motion-control sales declined by $265,000; growth from other medical-device customers partly offset those decreases. Management attributed improved gross margin primarily to production efficiency and lower warranty costs. Selling and general and administrative expenses fell, while research and development expense was $375,000.
Liquidity, debt, and balance sheet
- At September 30, 2013, current assets were $7.776 million and current liabilities were $1.894 million; reported working capital was $5.882 million, versus $5.033 million at June 30, 2013.
- Total assets were $10.453 million and total liabilities were $2.229 million. Capital lease obligations totaled $20,000. The company had no bank debt or active credit facility; its Union Bank term loan was repaid and the facility terminated in September 2012.
- Operating cash use reflected, among other factors, a $500,000 decrease in accounts payable, accrued expenses, and deferred rent; increases of $139,000 in inventory and $154,000 in unbilled receivables also used cash.
- Investing activities provided $661,000, chiefly from $900,000 net proceeds on the Carson City property sale, partly offset by $228,000 of investment purchases. Cash rose by $149,000 during the quarter.
- Management said existing cash and expected operating cash flows should fund operations for the next 12 months, but warned that failure to achieve anticipated cash flows could require new financing, which may not be available on acceptable terms.
Changes, outlook, and material matters
- Customer concentration: The largest customer contributed 42% of quarterly sales and represented 38% of accounts receivable, compared with 56% and 59%, respectively, in the prior-year quarter. A second customer contributed 11% of sales.
- Backlog: $5.8 million at September 30, 2013. Management noted that order bookings can vary with product launches and customer inventory plans; shipments and revenues are not typically seasonal.
- Capital allocation: The Board authorized repurchases of up to 750,000 shares, with no stated expiration date; none had been purchased by quarter end. The company held marketable equity securities valued at $654,000, including $61,000 of unrealized gains.
- Discontinued operation and unusual item: The former Astromec facility was sold for $980,000 gross, with $900,000 net proceeds and a $167,000 gain. Quarterly earnout income from the Astromec sale was $29,000, versus $47,000 a year earlier.
- Taxes: A $3.4 million valuation allowance against deferred tax assets was reported at June 30, 2013. Unrecognized tax benefits were $355,000 at September 30; management did not anticipate a significant change over the next 12 months.
- Risks and contingencies: The company cited product-development and sales execution, rapid technological change, competition, and customer and market variability. Its former Santa Ana site was identified for further screening in a report concerning possible groundwater contamination; DTSC had informed the company that no further evaluation of the site had taken place. The company said incidental legal proceedings were not considered material, while noting outcomes could not be assured.
- Controls: Management concluded disclosure controls were effective as of September 30, 2013, and reported no material changes in internal control over financial reporting during the quarter.
No quantified sales or earnings guidance was provided. Management’s stated outlook was that available cash and operating cash flows should support the next 12 months; actual results may differ from forward-looking expectations.
Important facts for investors to verify
- How much of reported net income depends on discontinued operations and the one-time property-sale gain, versus recurring continuing operations.
- Whether the largest customer’s lower sales persist and how customer concentration affects future revenue and receivables.
- Whether the $5.8 million backlog converts to shipments and cash on expected timing, including collection of unbilled receivables.
- Whether operating cash use improves and the company can fund operations without a credit facility or new financing.
- Progress, authorization parameters, and any purchases under the 750,000-share repurchase program, as well as risks and valuation changes in marketable equity investments.
- Any developments in the former Santa Ana site screening and the company’s tax valuation allowance and unrecognized tax benefits.