Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2013, with nine-month results for the period ended that date; comparisons are to the corresponding 2012 periods. This filing reports fiscal 2013 Q3, despite the request metadata referring to 2012 Q3. Financial statements are unaudited.
Business context
Pro-Dex designs and manufactures surgical and dental devices and motion-control products and software. Continuing operations are based in Irvine, California, and Beaverton, Oregon. The Astromec motor product line, sold in February 2012, is reported as discontinued operations. The company’s former largest medical-device customer stopped ordering its products in 2012 as it developed its own devices.
Key financial results
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Nine months ended March 31, 2013 | Nine months ended March 31, 2012 |
|---|---|---|---|---|
| Net sales | $3.060 million | $4.539 million | $9.527 million | $13.601 million |
| Gross profit / margin | $883,000 / 29% | $1.203 million / 27% | $3.151 million / 33% | $4.558 million / 34% |
| Loss from continuing operations | $765,000 | $547,000 | $1.184 million | $529,000 |
| Net loss | $747,000 | $487,000 | $1.112 million | $332,000 |
| Net loss per share | $0.22 | $0.15 | $0.34 | $0.10 |
- For the quarter, sales fell 33%, primarily due to a $1.7 million decline in sales to the former largest medical-device customer. Gross margin improved two percentage points, reflecting manufacturing efficiencies partly offset by higher warranty expense.
- For the nine months, sales fell 30%; management attributed the decline primarily to a $5.5 million reduction in sales to the former largest customer. Gross margin decreased one percentage point, mainly from unfavorable product mix.
- Operating expenses were $1.654 million for the quarter and $4.354 million for nine months. Lower selling and administrative costs were partly offset by proxy-contest expenses and, in the quarter, higher R&D costs as a percentage of sales.
- Operating cash flow was negative $1.281 million for nine months, versus positive $621,000 in the prior-year period. The company cited $955,000 of inventory buildup, primarily for firm backlog orders and repair and warranty needs.
- Cash declined to $2.039 million at March 31, 2013 from $4.112 million at June 30, 2012. Working capital was $6.026 million, down from $6.618 million. The company had no bank debt after repaying the remaining $685,000 term-loan balance in September 2012; capital leases totaled $22,000.
- Total assets were $11.251 million and shareholders’ equity was $8.596 million at March 31, 2013. Inventories rose to $3.746 million from $2.791 million.
Material changes, outlook and risks
- Customer concentration remains significant: the current largest customer represented 58% of quarterly sales and 51% of nine-month sales, and 59% of receivables at March 31, 2013. Management warned that repair revenue from the former largest customer could decline to zero or a negligible amount.
- Management said existing cash and expected operating cash flows should fund operations for the next 12 months. The company has no credit facility; if expected cash flows are not achieved, it may need financing, which may not be available on acceptable terms.
- Management continued a plan to pursue additional revenue and reduce costs not critical to growth, but gave no quantified sales or earnings guidance and cautioned that success and timing are uncertain. Backlog was $6.8 million at March 31, 2013.
- On April 22, 2013, the company agreed to sell its Carson City facility for $980,000, subject to buyer due diligence, financing and closing conditions. Closing was scheduled on or before July 8, 2013; completion was not assured. The asset’s carrying amount was $733,000.
- A board change following a contested election triggered change-of-control provisions. The CEO and president separated on February 25, 2013 and received $165,423 under his change-of-control agreement, plus other separation-related amounts. The CFO became CEO and president; annualized base compensation increased to $225,000. The board adopted a revised director compensation plan expected to reduce annualized director compensation expense by approximately $140,000.
- The company maintained a valuation allowance of approximately $3.1 million against deferred tax assets. It reported $339,000 of unrecognized tax benefits and said it did not anticipate a significant change in that amount within 12 months.
- Risks include reliance on a concentrated customer base, competition and the need to develop products and grow sales. Two directors controlled voting power over approximately 23.5% of common shares as of May 2, 2013. A former Santa Ana site was identified for further screening in a groundwater-contamination report; the company said no further evaluation was then planned for fiscal 2013, and future liability was uncertain.
Important facts for investors to verify
- Whether the $6.8 million backlog converts to shipments and cash, and whether inventory levels and operating cash use improve.
- Whether the company can reduce dependence on its largest customer and replace lost orders from the former largest customer.
- Whether the Carson City property sale closes on the disclosed terms and schedule.
- Whether cash-flow assumptions support management’s 12-month liquidity assessment, particularly without a credit facility.
- Developments in warranty costs, tax-asset realizability, the Santa Ana site screening, and obligations under change-of-control agreements.