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| MASI > SEC Filings for MASI > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
This quarterly report on Form 10-Q contains "forward-looking statements" as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products,
technologies or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 29, 2007, which we filed with the SEC on March 4, 2008. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
We are a global medical technology company that develops, manufactures and markets non-invasive patient monitoring products that improve patient care. We invented Masimo SET, which provides the capabilities of Measure-Through Motion and Low Perfusion pulse oximetry to address the primary limitations of conventional pulse oximetry. Pulse oximetry is the non-invasive measurement of the oxygen saturation level of arterial blood, or the blood that delivers oxygen to the body's tissues, and pulse rate. Conventional pulse oximetry is subject to technological limitations that reduce its effectiveness and the quality of patient care. In particular, when using conventional pulse oximetry, arterial blood signal recognition can be distorted by motion artifact, or patient movement, and low perfusion, or low arterial blood flow. Low perfusion can also cause the failure of the conventional pulse oximeter to obtain an accurate measurement. Conventional pulse oximetry readings can also be impacted by bright light and electrical interference from the presence of electrical surgical equipment. Published independent research shows that over 70% of the alarms were false outside the operating room using conventional pulse oximetry. Our Masimo SET platform has significantly addressed many of the previous technology limitations. The benefits of Masimo SET have been validated in over 100 independent clinical and laboratory studies.
We market a family of patient monitoring solutions which incorporate a monitor or circuit board and consumables, including both proprietary single-patient use and reusable sensors and cables. In addition, we offer a remote-alarm/monitoring solution, software and other accessories. Although our Masimo SET platform is only operable with our proprietary sensors, our sensors have the capability to work with certain competitor pulse oximeters through the use of our adapter cables. In 2005, we launched our Masimo Rainbow SET Pulse CO-Oximetry platform utilizing licensed Rainbow technology from Masimo Laboratories, Inc., or Masimo Labs, which enables the non-invasive measurement of not only arterial blood oxygen saturation level and pulse rate, but also carboxyhemoglobin, or carbon monoxide levels in the blood, and in 2006, methemoglobin saturation levels in the blood. Most recently, in May 2008, we received clearance from the FDA for SpHb, our non-invasive measurement of total hemoglobin levels in the blood, and in August 2008, we received FDA clearance of our Single Patient Adhesive Rainbow SpHb sensors. In September 2008, we began shipments of SpHb on a limited basis to select customers. Along with the release of our Masimo Rainbow SET Pulse CO-Oximetry products, we have developed multi-wavelength sensors that have the ability to monitor multiple measurements with a single sensor.
We are continuing the research and development of products for the non-invasive measurement of other measurements based on the Masimo Rainbow SET platform. Included in this development are products for acoustic respiratory monitoring (ARM). Although we plan to continue to research, innovate and develop new technologies and products, we are unable to predict which potential measurements can be achieved, the time and cost to complete development, and ultimately whether we will have any additional measurements approved by the FDA or other regulatory agencies.
The building of our installed base of pulse oximeters, Pulse Co-Oximeters and circuit boards generates recurring sales of our consumables, primarily single-patient use sensors. A user of one of our pulse oximeters or our OEMs' pulse oximeters can obtain the benefit of the Masimo SET or Masimo Rainbow SET only by using our proprietary sensors that are designed for our system. We estimate that our worldwide installed base was approximately 540,000 units as of September 27, 2008, up from 448,000 units as of September 29, 2007. We estimate our installed base to be the number of bedside pulse oximeters and circuit boards that we have shipped in the prior seven year period.
We currently manufacture bedside and handheld pulse oximeters, a full line of single-patient use and reusable sensors and patient cables. We use third-party contract manufacturers for some of our products and components that can be more efficiently manufactured by these parties, primarily circuit boards, cables and plastics for instrument housings. We perform incoming inspection, final assembly and testing of any products or subassemblies manufactured by third-party contract manufacturers to assure quality control.
Masimo Laboratories
Masimo Labs is an independent entity spun off from us to our stockholders in 1998. We are a party to a cross-licensing agreement with Masimo Labs, which was amended and restated effective January 1, 2007, or the Cross-Licensing Agreement, that governs each party's rights to certain of the intellectual property held by the two companies.
Under the Cross-Licensing Agreement, we granted Masimo Labs an exclusive, perpetual and worldwide license, with sublicense rights to use all Masimo SET owned by us, including all improvements on this technology, for the measurement of non-vital signs measurements and to develop and sell devices incorporating Masimo SET for monitoring non-vital signs measurements in any product market in which a product is intended to be used by a patient or pharmacist rather than a professional medical caregiver, which we refer to as the Labs Market. We also granted Masimo Labs a non-exclusive, perpetual and worldwide license, with sublicense rights to use all Masimo SET for the measurement of vital signs in the Labs Market.
We exclusively license from Masimo Labs the right to make and distribute products in the professional medical caregiver markets, or the Masimo Market, that utilize Rainbow technology for the measurement of carbon monoxide, methemoglobin, fractional arterial oxygen saturation, and total hemoglobin, which includes hematocrit. To date, we have developed and commercially released devices that measure carbon monoxide and methemoglobin using licensed Rainbow technology. We also have the option to obtain the exclusive license to make and distribute products that utilize Rainbow technology for the measurement of other non-vital signs measurements, including blood glucose, in product markets where the product is intended to be used by a professional medical caregiver.
Pursuant to FASB Interpretation No. 46(R), or FIN 46(R), "Consolidation of Variable Interest Entities-an Interpretation of ARB No. 51," Masimo Labs is consolidated within our financial statements for all periods presented. Accordingly, all royalties, option and license fees and other charges between us and Masimo Labs have been eliminated in the consolidated financial statements. We anticipate that we will continue to consolidate Masimo Labs pursuant to the guidance set forth in FIN 46(R); however, we may discontinue consolidating Masimo Labs in the event it is permitted under FIN 46(R).
Results of Operations
The following tables provide a comparison of our earnings per share calculated under Emerging Issues Task Force Issue No. 03-6, or EITF 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128", and SFAS No. 128 or SFAS 128, "Earnings per Share", in accordance with GAAP and the non-GAAP if-converted method based solely upon SFAS No. 128. The non-GAAP if-converted method assumes conversion of all shares of our preferred stock into common stock as of December 31, 2006.
Upon closing of our initial public offering on August 13, 2007, all of the outstanding convertible preferred shares were converted into common shares. Therefore, subsequent to this stock conversion, we use the if-converted method under SFAS 128 to calculate earnings per share.
We believe that the following non-GAAP earnings per share information for the three and nine months ended September 29, 2007 is relevant and useful information that can be used by analysts, investors and other interested parties to assess our performance on a comparable basis to the three and nine months ended September 27, 2008 and future reported earnings per share. Accordingly, we are disclosing this unaudited information to permit additional analysis of our performance (in thousands, except share data):
2007 2008
As Reported Non-GAAP As Reported
Three Months Nine Months Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended Ended Ended
September 29, September 29, September 29, September 29, September 27, September 27,
2007 2007 2007 2007 2008 2008
Net income attributable to
common stockholders:
Net income - two class method
(1) $ 4,985 $ 24,871
Accretion of preferred stock (925 ) (4,837 )
Income attributable to
preferred stockholders (2,739 ) (13,526 )
Net income attributable to
common stockholders $ 1,321 $ 6,508
Basic net income per common
share:
Weighted average common
shares outstanding - two
class method 16,704,285 16,654,586
Basic earnings per share for
period during which two
classes of equity securities
were outstanding $ 0.08 $ 0.39
Net income for period during
which single class of equity
securities was outstanding
(1) $ 5,565 $ 5,329 $ 10,550 $ 30,200 $ 13,065 $ 32,457
Weighted average common
shares outstanding - single
class (2) 54,630,610 54,630,610 53,064,738 51,860,652 56,774,983 56,016,978
Basic net income per share
for period during which
single class of equity
securities was outstanding $ 0.10 $ 0.10
Basic net income per common
share $ 0.18 $ 0.49 $ 0.20 $ 0.58 $ 0.23 $ 0.58
Diluted net income per common
share:
Weighted average common
shares outstanding - two
class method 16,704,285 16,654,586
Diluted common share
equivalent: stock options 4,221,224 4,078,314
20,925,509 20,732,900
Diluted earnings per share
for period during which two
classes of equity securities
were outstanding $ 0.06 $ 0.31
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2007 2008
As Reported Non-GAAP As Reported
Three Months Nine Months Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended Ended Ended
September 29, September 29, September 29, September 29, September 27, September 27,
2007 2007 2007 2007 2008 2008
Net income for period during
which single class of equity
securities was outstanding
(1) $ 5,565 $ 5,329 $ 10,550 $ 30,200 $ 13,065 $ 32,457
Weighted average common
shares outstanding - single
class (2) 54,630,610 54,630,610 53,064,738 51,860,652 56,774,983 56,016,978
Diluted common share
equivalent: stock options 4,747,848 4,747,848 4,527,282 4,231,074 3,601,755 4,159,815
59,378,458 59,378,458 57,592,020 56,091,726 60,376,738 60,176,793
Diluted net income per share
for period during which
single class of equity
securities was outstanding $ 0.10 $ 0.09
Diluted net income per
common share $ 0.16 $ 0.40 $ 0.18 $ 0.54 $ 0.22 $ 0.54
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(1) Net income for the three months ended September 29, 2007 was allocated between the periods during which two classes of equity securities were outstanding and during which a single class of equity securities was outstanding based on the respective number of days. The convertible preferred stock was converted into common stock on August 13, 2007, the closing date of the Company's initial public offering. For the three months ended September 29, 2007, two classes of equity securities were outstanding for 43 days and a single class of equity securities was outstanding for 48 days, or 47.3% and 52.7% of the total days in the reporting period, respectively. For the nine months ended September 29, 2007, two classes of equity securities were outstanding for 224 days and a single class of equity securities was outstanding for 48 days, or 82.4% and 17.6% of the total days in the reporting period, respectively.
(2) Weighted average shares outstanding used to compute basic net income per share after conversion of convertible preferred stock; one class of common shares was outstanding for the period from August 13, 2007 to September 29, 2007.
The following table sets forth, for the periods indicated, our unaudited results of operations expressed as dollar amounts and as a percentage of total revenues (in thousands, except percentages).
Three Months Ended Nine Months Ended
September 29, % of September 27, % of September 29, % of September 27, % of
2007 Revenue 2008 Revenue 2007 Revenue 2008 Revenue
Revenue:
Product $ 51,122 79.4 % $ 66,001 84.5 % $ 144,513 77.3 % $ 187,524 83.7 %
Royalty and license fee 13,254 20.6 12,131 15.5 42,497 22.7 36,484 16.3
Total revenue 64,376 100.0 78,132 100.0 187,010 100.0 224,008 100.0
Cost of goods sold 18,809 29.2 22,393 28.7 53,630 28.7 64,917 29.0
Gross profit 45,567 70.8 55,739 71.3 133,380 71.3 159,091 71.0
Operating expenses:
Research and development 6,540 10.2 6,020 7.7 17,455 9.3 18,298 8.2
Selling, general and
administrative 21,594 33.5 29,167 37.3 64,575 34.5 89,062 39.8
Antitrust litigation 508 0.8 46 0.1 982 0.5 491 0.2
Total operating expenses 28,642 44.5 35,233 45.1 83,012 44.3 107,851 48.2
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Three Months Ended Nine Months Ended
September 29, % of September 27, % of September 29, % of September 27, % of
2007 Revenue 2008 Revenue 2007 Revenue 2008 Revenue
Operating income 16,925 26.3 20,506 26.2 50,368 26.9 51,240 22.8
Non-operating income
(expense):
Interest income 726 1.1 545 0.7 1,270 0.7 2,129 1.0
Interest expense (719 ) (1.1 ) (19 ) - (1,831 ) (1.0 ) (722 ) (0.3 )
Other 559 0.9 (413 ) (0.5 ) 770 0.4 (235 ) (0.1 )
Total non-operating income
(expense) 566 0.9 113 0.2 209 0.1 1,172 0.6
Income before provision
for income taxes 17,491 27.2 20,619 26.4 50,577 27.0 52,412 23.4
Provision for income taxes 6,941 10.8 7,554 9.7 20,377 10.9 19,955 8.9
Net income 10,550 16.4 13,065 16.7 30,200 16.1 32,457 14.5
Accretion of preferred
stock (925 ) (1.4 ) - - (4,837 ) (2.6 ) - -
Undistributed income
attributable to preferred
stockholders (2,739 ) (4.3 ) - - (13,526 ) (7.2 ) - -
Net income attributable to
common stockholders $ 6,886 10.7 % $ 13,065 16.7 % $ 11,837 6.3 % $ 32,457 14.5 %
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Comparison of the Three Months ended September 27, 2008 to the Three Months ended September 29, 2007
Revenue. Total revenue increased $13.7 million, or 21.4%, to $78.1 million for the three months ended September 27, 2008 from $64.4 million for the three months ended September 29, 2007.
Product revenues increased $14.9 million, or 29.1%, to $66.0 million for the three months ended September 27, 2008 from $51.1 million for the three months ended September 29, 2007. This increase was primarily due to higher consumable sales resulting from an increase in our installed base of circuit boards and pulse oximeters which totaled 540,000 units at September 27, 2008 up from 448,000 units at September 29, 2007. Revenue generated through our direct and distribution sales channels increased $16.3 million, or 45.6%, to $52.0 million for the three months ended September 27, 2008 compared to $35.7 million for the three months ended September 29, 2007. Contributing to the increase in our direct and distribution sales channel revenue was our Rainbow technology product revenues which increased $1.4 million to $3.0 million in the three months ended September 27, 2008, from $1.6 million in the three months ended September 29, 2007. For the three months ended September 27, 2008, $672,000 of contract product revenue was deferred as compared to $888,000 for the three months ended September 29, 2007. During the three months ended September 27, 2008, $2.6 million of previously deferred revenue was recognized, including $1.9 million related to an agreement in which VSOE was established as a result of a contract amendment and $683,000 related to the collection of cash for excess sensor sales which had been deferred due to uncertainty over collectability. During the three months ended September 29, 2007 $2.0 million of previously deferred revenue was recognized upon the delivery of a contract element. During the three months ended September 27, 2008 revenues from our OEM channel decreased $1.4 million, or 9.1%, to $14.0 million from $15.4 million in the three months ended September 29, 2007.
Our royalty and license fee revenue decreased $1.2 million, to $12.1 million in the three months ended September 27, 2008 from $13.3 million in the three months ended September 29, 2007, primarily due to a lower royalty rate associated with our 2006 settlement agreement with Tyco Healthcare (currently Covidien). For the three months ended September 29, 2007, our reported Covidien royalties were based upon Covidien's actual reported U.S. pulse oximeter sales for that period. For the three months ended September 27, 2008, our reported Covidien royalties are based upon our estimate of Covidien's U.S. pulse oximeter sales for that period and the contractual royalty rate as prescribed by the 2006 settlement agreement. Any adjustments to the quarterly estimate are recorded prospectively in the following quarter, when we receive the Covidien royalty report, which is generally 60 days after the end of each quarter.
Cost of Goods Sold. Cost of goods sold increased 19.1% to $22.4 million in the three months ended September 27, 2008 from $18.8 million in the three months ended September 29, 2007. Total gross profit margin increased to 71.3% for the three months ended September 27, 2008 from 70.8% for the three months ended September 29, 2007. This slight increase in total gross margin was due to improvements in product gross profit margins offset by the $1.2 million year over year decline in Covidien royalty revenues which have no related cost of goods sold. The product gross profit margin rose to 66.1% for the three months ended September 27, 2008, from 63.2% in the comparable prior year period due to manufacturing efficiencies related to higher production volumes and increased sales of Rainbow related products. We incurred $875,000 and $789,000 in Masimo Lab's royalty expenses for the three months ended September 27, 2008 and September 29, 2007, respectively, which, in accordance with FIN 46(R), have been eliminated in our condensed consolidated financial results for the periods presented. Had these royalty expenses not been eliminated, our reported product gross profit margin would have been 64.7% and 61.7% for the three months ended September 27, 2008 and September 29, 2007, respectively.
Research and Development. Research and development expenses decreased 8.0% to $6.0 million for the three months ended September 27, 2008, from $6.5 million for the three months ended September 29, 2007. The decrease was primarily due to increased capitalized costs of $400,000, associated with software development during the three months ended September 27, 2008, and government credits of $250,000 received for certain research and development activities. For the three months ended September 27, 2008, and September 29, 2007, we also incurred $727,000 and $464,000, respectively, of Masimo Lab's engineering expenses, which, in accordance with FIN 46(R), have been included in our condensed consolidated financial statements for the periods presented.
Selling, General and Administrative. Selling, general and administrative expenses increased $7.6 million, or 35.1%, to $29.2 million for the three months ended September 27, 2008 from $21.6 million in the three months ended September 29, 2007. The increase was primarily due to a $3.8 million increase in payroll and payroll related costs, including stock based compensation, consistent with an increase in staffing to 410 at September 27, 2008 from 350 at September 29, 2007. In addition to the increased staffing levels, professional fees increased $1.8 million due to a combination of higher patent litigation expense and increased tax, audit and other professional fees associated with the cost of being a public company. Also, sales related travel increased $1.2 million due to additional sales representatives and increased customer installation activities. For the three months ended September 27, 2008 and September 29, 2007, we also incurred a net $293,000 and $125,000, respectively, of Masimo Lab's administrative expenses, which, in accordance with FIN 46(R), have been included in our condensed consolidated financial statements for the periods presented.
Non-Operating Income (expense). Non-operating income was $113,000 for the three . . .
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