Pro-Dex, Inc.

Net sales for the fiscal first quarter ended September 30, 2014 were $2.6 million, up 2% from $2.5 million a year earlier. Gross profit was $828,000, down 12% from $945,000, and gross margin was 32% versus 37% in the prior-year quarter. Operating expenses rose 10% to $1 million from $924,000. Loss from continuing operations was $181,000, versus income from continuing operations of $18,000 last year. Net loss was $170,000, or $0.04 per share, compared with net income of $212,000, or $0.06 per share, in the prior-year period, which included a $167,000 gain on sale of the former Carson City facility. For the outlook, management expects to enter the manufacturing and product shipment phase for development projects within this fiscal year and said additional product sales could begin when those projects commercialize later in the current fiscal year.

CEO Harold Hurwitz emphasized that the apparent earnings weakness was mostly about comparison effects: last year’s quarter had unusually high repair revenue after the largest customer had suspended orders, while this year’s mix was more typical and less profitable. He said he prefers the current setup because product shipments to the largest customer have resumed and follow-on frame contracts have been received. He also pointed to the final testing phase of development projects, the expectation of shipments within the fiscal year, and the launch of the Engineering Services Division as signs of future growth.

The financial story centered on revenue mix and margin pressure. Gross profit fell $117,000 because of lower volumes of high-margin repairs, more lower-margin product sales, accruals for anticipated losses on fixed-price product development services, and under-absorbed manufacturing costs; these were partially offset by lower inventory and warranty charges. Operating expenses increased by $76,000, or 10%, mainly due to business development expenses and project-related legal costs. Management also highlighted that operating cash flow has been positive for the third consecutive quarter, with $840,000 generated over the past three quarters, and noted no tax issues with net operating losses; it also said about 41,000 shares had been repurchased so far under an approved board plan.

In Q&A, the main analyst-style question was about the timing of product development projects. Management said it remains in the final phase of testing and still expects to move into manufacturing and product shipments within the current fiscal year. Questions also covered share repurchases, where management said just over 41,000 shares had been bought back and that the current repurchase plan is not for the full $750,000 board-approved amount. On the new Engineering Services Division, management said it should be additive and synergistic, with potential to help both consulting/placement revenue and business development.