Pro-Dex, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The filing is an annual report, not a 2019 fourth-quarter report. Financial comparisons below are with fiscal 2019.
Business context
Pro-Dex designs and manufactures powered surgical drivers and shavers, primarily for orthopedic, thoracic and craniomaxillofacial markets, and also sells rotary air motors. It operates as one segment. Medical devices and related services generated about 95% of fiscal 2020 revenue. Sales are highly concentrated: the largest customer represented 65% of revenue, and the top three represented 92%.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $34.834 million | $27.172 million |
| Gross profit / gross margin | $13.142 million / 38% | $9.780 million / 36% |
| Operating income / margin | $7.066 million / 20% | $4.998 million / 18% |
| Net income | $6.112 million | $4.148 million |
| Diluted earnings per share | $1.50 | $0.97 |
| Cash from operating activities | $4.945 million | $3.326 million |
- Revenue rose 28%, largely due to repair sales, which increased to $6.342 million from $1.137 million, and higher sales to the largest customer. Medical-device sales were $26.639 million, up 9%. The new thoracic driver and related items generated $3.1 million in fiscal 2020 sales.
- Operating expenses were $6.076 million, up 27%; research and development expense increased to $2.315 million from $1.882 million. Development-service work incurred a $370,000 loss.
- Cash and cash equivalents were $6.421 million at year-end, down from $7.742 million. Working capital was $17.447 million. Operating cash flow increased, while inventory rose $1.999 million and accounts receivable rose $1.061 million.
- Borrowings and capital-lease obligations totaled about $3.934 million, primarily the term loan; the $2 million revolving facility was undrawn. The term loan bears 5.53% interest and matures in 2025. Separately, the operating-lease liability was $3.089 million.
- Marketable equity securities were valued at $4.920 million, including $2.360 million classified as long-term; the portfolio had $1.563 million of net unrealized losses. Some holdings are thinly traded.
Material changes and notable items
- Repairs grew sharply and became 18% of revenue, compared with 4% in fiscal 2019. Management attributed much of the increase to repairs of the largest customer’s orthopedic device.
- Backlog declined to $7.0 million from $17.7 million. The company expected year-end backlog and subsequent purchase orders to be delivered in fiscal 2021.
- Pro-Dex collected $952,000, including interest, on its previously impaired Monogram note; the collection was recorded as other income. Management expected to finalize a Monogram development agreement in fiscal 2021.
- The company repurchased 231,274 shares for $3.388 million during fiscal 2020. It approved a new program authorizing repurchases of up to one million shares.
- Adoption of lease accounting in fiscal 2020 added approximately $3.3 million to assets and liabilities. The auditor issued an unqualified opinion on the financial statements; management assessed internal control over financial reporting as effective. The auditor did not provide an internal-control attestation.
Outlook, risks and contingencies
Management said COVID-19 had not materially adversely affected fiscal 2020 results, but the future effect was uncertain. Some customers requested shipment delays. The company warned that deferrals of elective procedures could reduce demand from its largest customer; six employees had tested positive and recovered by August 18, 2020. Management expected repair revenue in fiscal 2021 to be similar to fiscal 2020, and said research and development spending was expected to increase. No full-year revenue or earnings guidance was provided.
Management believed available cash, receivables and expected operating cash flows would cover requirements for at least 12 months, and anticipated renewing the revolving facility. Risks include customer concentration, order cancellation or delay, COVID-related demand and supply disruption, competition, product development and warranty estimates, regulatory compliance, and dependence on key suppliers. The filing reports no material litigation outcome; it notes that legal proceedings may arise and their potential costs cannot be estimated. The company had entered a September 2020 agreement to purchase a 25,230-square-foot Tustin facility for $6.509 million, subject to due diligence and financing; it sought financing for up to 90% of the purchase price.
Important facts for investors to verify
- Whether the largest customer’s purchase commitments through calendar 2021 remain on schedule, and how elective-surgery trends affect demand.
- Whether repair revenue is sustainable and whether the reduced backlog is replenished and converted into shipments.
- Progress, launch timing and commercial uptake of products under development, alongside the losses on development-service contracts.
- Liquidity and covenant compliance, renewal of the revolving credit facility, and financing and closing of the proposed facility purchase.
- Valuation and liquidity of thinly traded investments, customer and supplier concentration, and future effects of COVID-19.