Pro-Dex Has a Difficult Second Quarter (Correction)

Editor’s note: The previous version of this story included a subhead indicating that Pro-Dex has lost its current largest customer, which is incorrect.

Already well into the second half of its fiscal year, Pro-Dex Inc. has released its financial results for the second quarter of fiscal 2014 which ended Dec. 31. The Irvine, Calif.-based company, which makes powered rotary drive surgical and dental instruments used primarily in the orthopedic, spine, maxocranial facial and dental markets, took a hit this quarter, with net sales decreasing 12 percent from the same quarter last year.

“Our results for the quarter ended Dec. 31, 2013 were materially influenced by factors adversely affecting gross margins,” said Pro-Dex’s President and CEO Harold A. Hurwitz. “As we have previously publicly discussed, much of our activity this fiscal year relates to the engineering phase of projects to develop a next-generation platform for powered surgical instruments that we believe will result in manufacturing revenues commencing at the end of fiscal 2014 or early fiscal 2015. Most development efforts of this nature, however, have inherent unexpected costs, and the projects in which we are engaged are no different. We anticipate that our development project costs will exceed the development project revenues we expect to earn.”

Net sales for the three months ended Dec. 31, 2013 decreased $367,000 to $2.6 million from $3 million for the quarter ending Dec. 31, 2012 due primarily to decreases of $428,000 in medical device development and manufacturing revenues, and $48,000 in motion control product revenues, which were partially offset by an increase of $152,000 in dental product revenues.

The numbers reveal that it was a $275,000 decrease in repair revenues from what was formerly Pro-Dex’s largest customer that was the major contributor to the $428,00 decrease in the company’s medical device product lines. This loss was partially offset by a compensation from another customer, Pro-Dex’s new largest client, that contributed an increase of $161,000 in product and repair revenues. Pro-Dex has an agreement in place with its former largest customer that commits that customer to a minimum amount of inventory purchases until the agreement’s termination in June 2014, after which Pro-Dex expects the customer to leave. The increase in sales to the company’s current largest customer reflects the resumption of orders from that customer, which had been curtailed since March 2013. Pro-Dex expects to continue receiving such orders through December, the termination date of that customer’s current purchase commitment. Negotiations for future arrangements with that customer have not yet commenced. Medical device sales to other customers decreased $181,000 and medical device design revenues decreased $133,000.

Gross profit for 2Q FY2014 decreased $484,000, or 47 percent, to $549,000 from $1 million for the same period in 2012. Contributing to this decrease were the reduction in sales volume, as mentioned above, and the effects of unfavorable changes in the mix of product sales, which reduced gross profit by $126,000 and $139,000 respectively. Also contributing to the decrease in gross profit was an increase of $199,000 in the accrual for anticipated losses from the development services portion of certain contracts, and an increase of $166,000 in unfavorable production variances related to reduced manufacturing volumes, which were partially offset by a decrease of $60,000 in warranty expense. Other than the reduction in sales volume, the factors affecting gross profit described above also resulted in a decrease of gross margin as a percentage of sales to 21 percent for 2Q FY2014 from 34 percent for the corresponding period in 2012.

“In addition, we incurred unfavorable manufacturing variances for the quarter and six months ended Dec. 31, 2013 as a consequence of our relatively low sales volumes that also eroded gross margins,” Hurwitz continued. “While it is desirable to maintain manufacturing capacity in anticipation of future activity, we may reduce this capacity as necessary to staunch these unfavorable variances.”

Operating expenses (which include selling, general and administrative, and research and development expenses) for the quarter decreased 35 percent to $925,000 from $1.4 million in the prior year’s corresponding quarter, reflecting primarily the effects of the company’s cost reduction program.

Loss from continuing operations for the quarter was $338,000, compared to a loss from continuing operations of $364,000 in the corresponding quarter in 2012. Net loss for the quarter was $338,000, or $0.10 per diluted share, compared to a net loss of $348,000, or $0.11 per diluted share, for the corresponding quarter in 2012.

Ending on a hopeful note, Hurwitz added, “With our cost footprint now right-sized, as evidenced by our year-over-year operating expense performance, the fundamental agenda for Pro-Dex is unchanged—to rebuild our revenue base. To this end, we have restructured our business development capabilities this fiscal year to more efficiently identify and pursue additional business opportunities, and I look forward to reporting on the results of these initiatives in the future.”