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| MDCC > SEC Filings for MDCC > Form 10-Q on 9-Aug-2004 | All Recent SEC Filings |
9-Aug-2004
Quarterly Report
OVERVIEW Except for the historical information contained herein, the following discussion contains "forward-looking" statements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Words such as "believes", "anticipates", "plans", "predicts", "expects", "estimates", "intends", "will", "continue", "may", "potential", "should" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by these forward-looking statements, including, among others, those discussed in this section as well as under "Factors That May Affect Future Results," and "Item 3 - Quantitative and Qualitative Disclosures about Market Risk" and the risks detailed from time to time in the Company's future SEC reports.
We are a leading supplier of high-performance bioanalytical measurement systems which accelerate and improve drug discovery and other life sciences research. Our systems and consumables enable pharmaceutical and biotechnology companies to leverage advances in genomics, proteomics and combinatorial chemistry by facilitating the high-throughput and cost-effective identification and evaluation of drug candidates. Our solutions are based on advanced core technologies that integrate our expertise in engineering, molecular and cell biology, and chemistry. We enable our customers to improve research productivity and effectiveness, which ultimately accelerates the complex process of discovering and developing new drugs.
Our customers include small and large pharmaceutical, biotechnology and industrial companies as well as medical centers, universities, government research laboratories and other institutions throughout the world. The success of our business is impacted by research and development spending trends of these customers, which has been unpredictable over the last three years and remains unpredictable in the near term. We focus on generating revenue growth through the development of innovative products for these customers. In each of the last three years, our internal research and development efforts have enabled us to exceed our goal of generating over 50% of annual revenues from products that are introduced in the last three years.
We divide our revenues into two product families based primarily on the customers to which they are sold into. The Drug Discovery product family includes systems that integrate detection, liquid handling and automation, have price points in excess of $100,000, and are primarily sold to large pharmaceutical and biotechnology companies. Product lines included in the Drug Discovery family are IonWorks, FLIPR, Analyst and Discovery-1 systems. The Life Sciences product family, which includes bench-top detection and liquid handling products, consists of Maxline, MetaMorph, Skatron and Threshold product lines. These single-purpose instruments generally cost less than $50,000 and are sold throughout our entire customer base. We recognize revenue on the sale of these products, when collectibility is reasonably assured, at the time of shipment and transfer of title to customers and distributors. There are no significant customer acceptance requirements or post shipment obligations on our part.
We entered into an Agreement and Plan of Merger and Reorganization, dated as of March 20, 2004, as amended as of May 21, 2004 with Axon Instruments, Inc. ("Axon") and two of our wholly owned subsidiaries, Astros Acquisition Sub I, Inc., and Astros Acquisition Sub II, LLC, pursuant to which Astros Acquisition Sub I, Inc. was merged with and into Axon, immediately following which, Axon was merged with and into Astros Acquisition Sub II, LLC (the "Merger Agreement"). On July 1, 2004, after approval from Molecular Devices and Axon shareholders, the acquisition closed.
Axon designs, manufactures and markets electronic instrumentation equipment and software for cellular neurosciences and biophysical research. This acquisition expands our product portfolio with systems for cellular neurosciences and genomics and combines complementary product lines in high throughput imaging and electrophysiology.
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, bad debts, inventories, intangible assets, equity investments, income taxes and warranty obligations. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2004 and 2003
REVENUES. Revenues increased by 13% to $32.2 million in the second quarter of 2004 from $28.5 million in second quarter of 2003. Drug Discovery product family revenues in the second quarter of 2004 increased by 12% compared to the second quarter of 2003, and represented 48% of total revenues during the quarter. The growth in Drug Discovery was primarily driven by our FLIPR and Discovery-1 product lines. Life Sciences Research revenues increased by 14% compared to the second quarter of 2003, and represented 52% of total revenues during the quarter. The growth in Life Sciences Research was primarilydriven by strong sales of our SpectraMax M2, which was launched in the third quarter of 2003, and strong growth in our MetaMorph product line.
Revenues increased by 12% to $59.5 million in the first six months of 2004 from $53.1 million in the first six months of 2003. Drug Discovery product family revenues in the first six months of 2004 increased by 7% compared to the first six months of 2003, and represented 44% of total revenues during the period. The growth in Drug Discovery was primarily driven by our FLIPR, IonWorks and Discovery-1 product lines, partially offset by sales declines in the Analyst family of products. Life Sciences Research revenues increased by 17% compared to the first six months of 2003, and represented 56% of total revenues during the period. The growth in Life Sciences Research was primarily driven by strong sales of our SpectraMax M2 and strong growth in our MetaMorph product line.
GROSS MARGIN. Gross margin remained largely unchanged at 62.5% in the second quarter of 2004 compared to 62.9% in the same period of the prior year.
Gross margin increased to 62.5% for the first six months of 2004 from 62.1% for the first six months of 2003. This slight increase was driven by strong sales of our SpectraMax M2 and strong growth in our MetaMorph product line.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased in the second quarter of 2004 by 2% to $4.7 million from $4.8 million in the second quarter of 2003. Research and development expenses for the first six months of 2004 decreased by 8% to $8.7 million from $9.5 million for the same period of 2003. These decreases resulted from the settlement of a patent infringement lawsuit late in 2003 and the closure of Cytion, our Switzerland based research organization, in the first quarter of 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses in the second quarter of 2004 increased by 7% to $11.6 million, from $10.8 million in the second quarter of 2003. Selling, general and administrative expenses for the first six months of 2004 increased by 10% to $22.5 million, from $20.5 million in the same period of 2003. These increases were due to the expansion of our sales and support staff within our international operations, as well as increased selling costs associated with higher revenues.
OTHER INCOME (NET). Other income (net) was $49,000 in the second quarter of 2004, compared to $260,000 in the second quarter of 2003. Other income (net) was $85,000 in the first six months of 2004, compared to $566,000 in the same period of 2003. These decreases were largely due to foreign currency
losses in our European businesses and lower average cash and investment balances during the first quarter and six months of 2004.
INCOME TAX PROVISION. We recorded a tax provision of $1.3 million for the second quarter of 2004 compared to $764,000 in the second quarter of 2003. The income tax provision for the first six months of 2004 was $2.1 million as compared to $1.1 million in the first six months of 2003. The income tax provision for the second quarter and first six months of 2004 was based on an estimated effective income tax rate of 35%, up from 30% in the second quarter and first six months of 2003. This increase in our estimated effective income tax rate was due to the full utilization in 2003 of the net loss carryforward amounts relating to certain of our foreign operations.
Liquidity and Capital Resources
We had cash, cash equivalents and short and long-term investments of approximately $54.2 million at June 30, 2004 compared to $60.1 million at December 31, 2003. Operating activities in the first six months of 2004 provided approximately $10.2 million of cash primarily due to net income and decreases in accounts receivable and inventories, partially offset by a decrease in accrued liabilities.
We generated approximately $4.9 million of cash from investing activities in the first six months of 2004, primarily due to $9.9 million in proceeds received from the sale and maturity of short and long-term investments, which were offset by a $3.1 million increase in other assets related to the acquisition of distribution rights in Belgium and capitalized costs associated with the Axon acquisition, as well as $1.9 million in capital expenditures.
In the first six months of 2004, cash used in financing activities was $10.7 million. We repurchased 630,000 shares of our common stock for $12.0 million and raised $1.3 million from the issuance of common stock associated with stock option exercises and shares issued under our employee stock purchase plan. The timing of and amounts received under our employee stock option and purchase plans are determined by the decisions of the respective option or rights holders, and are not controlled by us. Therefore, funds raised from the issuance of common stock under our employee stock option and purchase plans should not be considered an indication of additional funds to be raised in future periods.
On March 20, 2004, we entered into a merger agreement, as amended as of May 21, 2004, with Axon Instruments, Inc. and two of our wholly owned subsidiaries, pursuant to which, subject to certain closing conditions, we agreed to pay an aggregate of approximately $66.2 million in cash to the shareholders and optionholders of Axon and to issue approximately $67.0 million in Molecular Devices common stock to Axon shareholders and optionholders. On July 1, 2004, after the approval of the transaction from Molecular Devices and Axon shareholders, the acquisition closed. As part of the merger transaction, we received a commitment letter from a major financial institution to provide financing of $35.0 million in connection with the transaction contemplated by the merger agreement and for general corporate purposes. Simultaneously with the closing of the acquisition, we entered into a new senior unsecured credit facility, which provides for a revolving credit facility in the amount of up to $35.0 million (reducing to $30.0 million 60 days after initial drawdown). The revolving credit facility will expire and become repayable in full on June 1, 2007 and will be secured in the event that the revolving credit facility is not reduced to the required $30 million level. All loans outstanding under the new senior unsecured credit facility will bear interest at a rate per annum equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. The revolving credit facility may be drawn, paid and reborrowed at our option. We anticipate using this credit facility initially to finance the cash portion of the merger consideration to be paid to Axon shareholders and certain optionholders.
During the six months ended June 30, 2004, we engaged several professional service firms to perform certain accounting, legal and financial advisory services in conjunction with the acquisition of Axon. We expect to pay the remainder of these fees during the last six months of 2004 with our existing cash reserves and anticipated future cash generated from operations. The fees will be capitalized as part of the purchase price for the acquisition.
We believe that our existing cash and cash equivalents, anticipated cash flows from our operations and funds available under the unsecured credit facility described above, will be sufficient to support our current operating plan for the foreseeable future.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on our current plans, which may change, and assumptions that may prove to be wrong. Our ability to generate our anticipated cash flow from operations is subject to the risks and uncertainties discussed below under "Factors That May Affect Future Results", including in particular variations in the amount of time it takes for us to sell our products and collect accounts receivable and the timing of customer orders, competition, risks associated with the pharmaceutical and biotechnology industries, supplier or manufacturing problems or delays, the cost of integrating Axon, and risks associated with past and potential future acquisitions, including risks related to potential difficulties in the integration of operations, strategies, technologies and products of the acquired company. Our future capital requirements will depend on many factors, including:
• the progress of our research and development;
• the number and scope of our research programs;
• market acceptance and demand for our products;
• the costs that may be involved in enforcing our patent claims and other intellectual property rights;
• potential acquisition and technology licensing opportunities;
• the costs associated with repurchasing shares of our common stock;
• manufacturing capacity requirements; and
• the costs of expanding our sales, marketing and distribution capabilities both in the United States and abroad.
We have generated sufficient cash flow to fund our capital requirements primarily though operating and financing activities over the last three years. However, we cannot assure you that we will not require additional financing in the future to support our existing operations or potential acquisition and technology licensing opportunities that may arise. Therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders.
Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments among a variety of high credit-quality issuers.
Factors That May Affect Future Results
Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline.
VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US TO SELL OUR PRODUCTS AND COLLECT ACCOUNTS RECEIVABLE AND THE TIMING OF CUSTOMER ORDERS MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
The timing of capital equipment purchases by customers has been and is expected to continue to be uneven and difficult to predict. Our products represent major capital purchases for our customers. The list prices for our instruments range from $5,000 to $419,500. Accordingly, our customers generally take a relatively long time to evaluate our products, and a significant portion of our revenues is typically derived from sales of a small number of relatively high-priced products. Purchases are generally made by purchase orders and not long-term contracts. Delays in receipt of anticipated orders for our relatively high priced products could
lead to substantial variability from quarter to quarter. Furthermore, we have historically received purchase orders and made a significant portion of each quarter's product shipments near the end of the quarter. If that pattern continues, even short delays in the receipt of orders or shipment of products at the end of a quarter could have a material adverse affect on results of operations for that quarter.
We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our products. Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenues from that customer, if ever, varies widely. Our sales cycles typically range from three to six months, but can be much longer. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenues, and we may never receive any revenues from a customer despite our sales efforts.
The relatively high purchase price for a customer order contributes to collection delays that result in working capital volatility. While the terms of our sales orders generally require payment within 30 days of product shipment and do not provide return rights, in the past we have experienced significant collection delays. We cannot predict whether we will continue to experience similar or more severe delays.
The capital spending policies of our customers have a significant effect on the demand for our products. Those policies are based on a wide variety of factors, including resources available to make purchases, spending priorities, and policies regarding capital expenditures during industry downturns or recessionary periods. Any decrease in capital spending by our customers resulting from any of these factors could harm our business.
WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS.
Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter and shipments from backlog. Our products are typically shipped within ninety days of purchase order receipt. As a result, we do not believe that the amount of backlog at any particular date is indicative of our future level of sales. Our backlog at the beginning of each quarter does not include all product sales needed to achieve expected revenues for that quarter. Consequently, we are dependent on obtaining orders for products to be shipped in the same quarter that the order is received. Moreover, customers may reschedule shipments, and production difficulties could delay shipments. Accordingly, we have limited visibility of future product shipments, and our results of operations are subject to significant variability from quarter to quarter.
MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO, AND INCREASED COMPETITION COULD IMPAIR SALES OF OUR PRODUCTS.
We operate in a highly competitive industry and face competition from companies that design, manufacture and market instruments for use in the life sciences research industry, from genomic, pharmaceutical, biotechnology and diagnostic companies and from academic and research institutions and government or other publicly-funded agencies, both in the United States and abroad. We may not be able to compete effectively with all of these competitors. Many of these companies and institutions have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers are large companies that require global support and service, which may be easier for our larger competitors to provide.
We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new products and provide quality products and services that meet customers' needs. We cannot assure you, however, that we will be able to successfully develop new products or that our existing or new products and services will adequately meet our customers' needs.
Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our products. To remain competitive, we will be required to develop new products and periodically enhance our existing products in a timely manner. We are facing increased competition as new companies entering the market with new technologies compete, or will compete, with our products and future products. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or future products, or that would render our technologies and products obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the launch of our new products may result in loss of market share due to our customers' purchases of competitors' products during any delay.
IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND ENHANCED PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS.
The life sciences instrumentation market is characterized by rapid technological change and frequent new product introductions. In the twelve months ended June 30, 2004, 64% of our revenues were derived from the sale of products that were introduced in the last three years, and our future success will depend on our ability to enhance our current products and to develop and introduce, on a timely basis, new products that address the evolving needs of our customers. We may experience difficulties or delays in our development efforts with respect to new products, and we may not ultimately be successful in developing or commercializing them, which would harm our business. Any significant delay in releasing new systems could cause our revenues to suffer, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, our future success depends on our continued ability to develop new applications for our existing products. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current customers and may not be able to attract new customers, which could seriously harm our business and our future growth prospects.
WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TO DEVELOP NEW PRODUCTS, AND IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR OPERATING RESULTS MAY SUFFER.
We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenues from the sale of new products. Our ability to commercially introduce and successfully market new products is subject to a wide variety of challenges during this development cycle that could delay introduction of these products. In addition, since our customers are not obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. Our products are also generally priced higher than competitive products, which may impair commercial acceptance. We cannot predict whether new products that we expect to introduce will achieve commercial acceptance.
We currently anticipate that our IonWorks product family will include in the near term our recently launched IonWorks HT system and, potentially, an additional IonWorks system based on technology acquired through the acquisition of Cytion S.A. in 2001. Our IonWorks product family may not achieve significant commercial acceptance or generate significant revenues within the time frame that we have anticipated, or at all. Any such failure would adversely affect our financial performance. In particular, we recently launched our IonWorks HT system. This system has not achieved, and may not achieve or
maintain, significant commercial acceptance. The system could fail to obtain significant commercial acceptance due to general economic conditions, competitive conditions, customer concerns related to the price or performance of the IonWorks HT system or other factors. It is likely that any failure of the IonWorks HT system to achieve commercial acceptance within the time frame that we have anticipated would cause us to fail to meet our 2004 revenue expectations, which would likely cause our stock price to decline.
Failure to develop new IonWorks products in a timely and efficient manner, or at all, may prevent us from offering first-to-market products in segments of the . . .
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