PRO-DEX, INC. — Form 10-Q Summary
Business context and reporting period
Unaudited fiscal first quarter ended September 30, 2014, compared with the three months ended September 30, 2013. Pro-Dex designs, develops and manufactures products for medical, dental, industrial and scientific applications. Amounts below are in thousands of dollars except per-share data and where otherwise noted.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $2,595 | $2,555 |
| Gross profit / margin | $828 / 32% | $945 / 37% |
| Operating income (loss) | $(189) | $21 |
| Continuing operations income (loss), net of tax | $(181) | $18 |
| Discontinued operations income, net of tax | $11 | $194 |
| Net income (loss) | $(170) | $212 |
| Operating cash flow | $523 | $(512) |
| Investing cash flow | $(97) | $661 |
Basic and diluted loss per share was $0.04, versus earnings per share of $0.06 a year earlier. Cash and cash equivalents were $3,609 at September 30, up from $3,188 at June 30, 2014; working capital was $6,616. Marketable equity investments were $1,082. Total assets were $11,545 and total liabilities $2,483. Capital lease obligations totaled $13; the company reported operating without a credit facility since September 2012.
Material changes versus the prior comparable period
- Sales grew 2%, but cost of sales increased 10%; gross margin fell about five percentage points. Management attributed the pressure to product mix, higher expected losses on certain fixed-price development contracts, and under-absorbed manufacturing costs from lower production volume.
- Operating expenses rose 10% to $1,017, including higher selling costs, project-related legal fees and transition costs. R&D was broadly unchanged at $384.
- Medical device sales rose to $1,739; dental sales declined to $207. Industrial and scientific sales were approximately flat at $521.
- The largest customer generated $1,507, or 58% of sales, compared with 43% a year earlier. Management said increased shipments to that customer followed a prior suspension of orders. The company reported no expected future repair orders from a former major medical-device customer.
- Net income comparisons were affected by discontinued operations: prior-year results included a $167 gain on sale of the former Astromec facility, as well as Astromec income. Current-quarter discontinued-operations income primarily reflected an earnout payment.
Outlook, risks and unusual items
- Management believed cash and investments would be sufficient to fund operations for the next 12 months. No specific earnings or revenue guidance was provided. Backlog was approximately $6.3 million; order bookings may vary with product launches and customer inventory plans.
- Operating cash flow benefited mainly from $688 of collections of accounts and other receivables; $155 of increased unbilled receivables was a use of cash.
- Customer concentration, the ability to develop products and grow sales in rapidly changing markets, competition, and contract cost-estimation risks are important exposures. Management reported no material changes to the risks in its prior-year Form 10-K.
- Deferred tax assets remained subject to a valuation allowance; the company disclosed $366 of unrecognized tax benefits and did not expect a significant change in that amount over the next 12 months.
- The company had made $20 in refundable escrow deposits toward a proposed $225 acquisition of assets of a Northern California machined-parts business, subject to closing conditions and due diligence.
- A Rule 10b5-1 repurchase plan began in September; 7,665 shares were repurchased for $17, with settlement in October. The board-authorized program permits repurchases of up to 750,000 shares.
- Management described incidental legal proceedings as not currently expected to be material, while noting that outcomes cannot be assured. Disclosure controls were judged effective; staffing changes had reduced some segregation of duties, which management believed was mitigated by other controls.
Most important facts for investors to verify
- Whether sales growth and the $6.3 million backlog convert into shipments, particularly given that one customer accounted for 58% of quarterly sales.
- Whether gross margin recovers as product mix, manufacturing utilization and development-contract costs evolve.
- The composition and liquidity of investments, and cash availability after any acquisition, repurchases or strategic spending.
- The status, closing conditions and final cost of the proposed $225 acquisition.
- Potential realization of deferred tax assets and any change in unrecognized tax benefits.