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| MDCI > SEC Filings for MDCI > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Forward-Looking Statement
This report on Form 10-Q contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements relate to (i) the
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, (iv) the retention of the Company's
earnings for use in the operation and expansion of the Company's business and
(v) the ability of the Company to avoid information technology system failures
which could disrupt the Company's ability to function in the normal course of
business by potentially causing delays or cancellation of customer orders,
impeding the manufacture or shipment of products, or resulting in the
unintentional disclosure of customer or Company information.
Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout the healthcare supply chain, volatility of raw material costs, volatility in oil prices, foreign currency exchange rates, the impact of healthcare reform, opportunities for acquisitions and the Company's ability to effectively integrate acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company's business, the failure of the Company to successfully compete with the Company's competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's filings with the Securities and Exchange Commission, which include this report on Form 10-Q and the Company's annual report on Form 10-K for the year ended March 31, 2008.
The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements; the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
Item 2.
Three Months ended September 30, 2008 compared to Three Months ended September 30, 2007
Overview
The following table sets forth certain operational data and operational data as
a percentage of net sales for the periods indicated:
Three months ended September 30,
2008 2007
(dollars in thousands)
Net sales $ 73,824 100.0 % $ 72,285 100.0 %
Gross profit $ 11,272 15.3 % $ 16,442 22.7 %
Selling, general and administrative expenses $ 9,923 13.4 % $ 10,229 14.2 %
Income before income taxes $ 720 1.0 % $ 5,288 7.2 %
Net income $ 480 0.7 % $ 3,268 4.5 %
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The Company's revenue increased by $1,539,000 or 2% to $73,824,000 and its net income decreased by $2,788,000 or 85% to $480,000 for the quarter ended September 30, 2008 over the quarter ended September 30, 2007. The increase in revenue is comprised of net price/sales mix increases of $3,560,000, which was partially offset by net unit volume decreases of $2,021,000.
The price/sales mix increases were primarily from increased average selling prices of our patient bedside utensils, containment systems for medical waste and minor procedure kits and trays product lines. The increase in average selling prices of certain patient bedside utensils and containment systems for medical waste products was due primarily to price increases implemented to recover a portion of the increases in plastic resin (the primary raw material utilized in the manufacture of these products). The increase in average selling prices of our minor procedure kits and trays products was the result of a shift in sales mix and due to an increase in sales of kits containing enhanced components.
The net unit volume decreases were primarily from losses in operating room disposables and sterilization products (predominantly patient aids, which are principally comprised of crutches, and disposable operating room towels), patient bedside utensils, containment systems for medical waste and laboratory products (predominantly specimen containers). A significant component of the Company's net unit volume decreases resulted from management's decision to cease shipments of crutches to a major customer due to inadequate margins. This resulted in a decline of approximately $1,219,000 in net sales with only a negligible impact on profitability for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Other volume decreases were the result of several factors, including the termination of certain supply contracts and back order positions in our patient bedside disposable product line which has arisen as a result of production inefficiencies incurred at our Gallaway, Tennessee manufacturing facility. These net unit volume declines were partially offset by volume increases primarily from greater domestic penetration of our minor procedure kits and trays and protective apparel product lines.
Item 2.
Containment systems for medical waste and the product lines added as a result of the acquisition of the membership interest of Medegen Medical Products ("Medegen" or "MMP") on October 17, 2006, represents approximately 50% of the Company's revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. A significant portion of the Company's remaining revenue is derived from products sourced from foreign suppliers based in China. The costs associated with sourcing from these suppliers have increased as a result of inflationary trends, primarily on the cost of raw materials and labor, and the effect of the weakening US dollar versus the Chinese Yuan. Although the US dollar has recently been stable against the Chinese Yuan, the Company anticipates a further weakening of the US dollar versus the Chinese Yuan and a continuation of inflationary trends within China.
The Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.
The Company has entered into agreements with many of the major group purchasing
organizations ("GPO"). These agreements, which expire at various times over the
next several years, in most cases, can be terminated typically on ninety
(90) days advance notice and do not contain minimum purchase requirements. The
Company to date has been able to achieve significant compliance to their
respective member hospitals. The termination of any of these agreements may
result in the significant loss of business.
During the quarter ended June 30, 2008, the Company elected to exercise the ninety (90) day advanced notice termination provisions within one of its GPO agreements, under which the Company supplies disposable operating room towels and laparotomy sponges. The termination of the agreement with the aforementioned GPO amounts to less than 3% of the Company's net sales and has resulted from the Company's inability to negotiate acceptable price increases with the GPO and the Company's unwillingness to continue to provide products to the GPO members at current pricing levels. Although net sales have not been significantly impacted by this termination, the Company cannot predict the future effects on its financial results from such termination.
Gross profit decreased principally as a result of; increases in resin costs, increases in the cost of products sourced from foreign vendors, continued inefficiencies incurred at our Gallaway, Tennessee manufacturing facility, a decline in sales volume, and higher freight costs which, in total, exceeded the increase in gross profit resulting from increased average selling prices and a change in the mix of products sold.
Item 2.
Results of Operations
The following table sets forth the major sales variance components for the
quarter ended September 30, 2008 versus September 30, 2007:
(dollars in thousands)
Three months ended September 30, 2007 net sales $ 72,285
Volume of existing products, net (2,044 )
Price/sales mix, net 3,583
Three months ended September 30, 2008 net sales $ 73,824
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Net sales for the three months ended September 30, 2008 increased $1,539,000 or 2% to $73,824,000 from $72,285,000 for the three months ended September 30, 2007.
The following table sets forth the components of the increase in net sales as well as percent increases or decreases in unit sales and average selling prices by significant product classes for the three months ended September 30, 2008 compared to the three months ended September 30, 2007:
Net Sales Unit Sales Average Selling
$ increase % increase Prices/Sales Mix
(decrease) (decrease) % increase
Minor Procedure Kits and Trays $ 3,140,000 12 % 7 %
Protective Apparel 529,000 24 % 6 %
Patient Bedside Utensils 122,000 (6 )% 6 %
Urology 27,000 (7 )% 6 %
Containment Systems for Medical Waste (197,000 ) (6 )% 5 %
Operating Room Towels (222,000 ) (4 )% 0 %
Laparotomy Sponges (330,000 ) (13 )% 2 %
Patient Aids (1,219,000 ) (97 )% 0 %
Other, net (311,000 ) not meaningful not meaningful
Increase in Net Sales $ 1,539,000
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Management believes that the fluctuations in units sold are predominantly the result of our ability, or inability, to increase penetration within the domestic market, subject to the recent impact of back orders resulting from manufacturing inefficiencies in our Tennessee facility. The increases in average selling prices are primarily due to price increases implemented to recover a portion of the increases in plastic resin and increases in acquisition costs from foreign suppliers.
Gross profit for the three months ended September 30, 2008 decreased $5,170,000 or 31% to $11,272,000 from $16,442,000 for the three months ended September 30, 2007. Gross profit as a percentage of net sales for the three months ended September 30, 2008 decreased to 15.3% from 22.7% for the three months ended September 30, 2007. Gross profit decreased as a result of higher resin prices of approximately $2,402,000, inefficiencies incurred at our Tennessee manufacturing facility of approximately $2,335,000, increased costs of products sourced from foreign suppliers, principally from China of approximately $1,841,000, increased operating expenses in our West Virginia and North Carolina manufacturing facilities and the transfer of certain administrative
Item 2.
processes to manufacturing overhead of approximately $1,045,000, increased outbound freight costs to customers of approximately $666,000 and approximately $464,000 as a result of declines in unit volume. These decreases were partially offset by an increase of approximately $3,583,000 resulting from higher average selling prices and changes in the mix of products sold.
Many of the Company's products are produced from petroleum derived raw materials such as plastic resin. The Company also bears the cost of both inbound and outbound freight shipments of raw materials and finished products, which are significantly impacted by the cost of oil. The cost of crude oil has declined significantly from its peak levels reached during the month of July 2008. The cost of plastic resin has begun to decline; however, such costs currently remain well above levels paid by the Company during the three month period ended March 31, 2008. Management believes that the cost of plastic resin and fuel may continue to decline in the near term. The Company should experience a benefit during the three months ended December 31, 2008 from lower freight costs resulting from a reduction in fuel surcharges previously levied by freight carriers. However, the benefits to the Company from lower plastic resin costs will not be experienced until the three months ended March 31, 2009 as much of the resin that will be used in production during the three months ended December 31, 2008 was purchased during the months of June and July of 2008.
The volatility associated with resin costs and product acquisition costs from foreign suppliers may continue for the foreseeable future. In the past, we have been able, from time to time, to increase selling prices for certain products subject to such cost volatility as a means to recover a portion of the increases. However, we are unable to give any assurance that we will be successful in passing along future cost increases to our customers, if deemed necessary.
The major causes of the manufacturing inefficiencies were equipment productivity issues in our Tennessee plant and other inefficiencies associated with the consolidation of the MMP manufacturing facilities. The inefficiencies have resulted in backorders and other fulfillment issues on certain products. Additionally, freight expenses have increased due to the backorder and order fulfillment issues and freight carrier fuel surcharges. Management anticipates reductions in these inefficiencies during the 2009 fiscal year. However, no assurance can be given that the backorders and order fulfillment issues will not result in the loss of business.
The following table sets forth sales, cost of sales and selling, general and administrative expense data for the periods indicated:
Three months ended September 30,
2008 2007
(dollars in thousands)
Net sales $ 73,824 $ 72,285
Cost of sales $ 62,552 $ 55,843
Gross profit $ 11,272 $ 16,442
Gross profit percentage 15.3 % 22.7 %
Selling, general and administrative expenses $ 9,923 $ 10,229
As a percentage of net sales 13.4 % 14.2 %
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Item 2.
Selling, general and administrative expenses for the three months ended September 30, 2008 decreased 3% to $9,923,000 from $10,229,000 for the three months ended September 30, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 13.4% for the three months ended September 30, 2008 from 14.2% for the three months ended September 30, 2007. Management believes the decrease in selling, general and administrative expenses was due to decreased salary and related expenses as a result of increased efficiencies due to the consolidation of certain administrative functions from the Tennessee facility into its Hauppauge, New York corporate headquarters and transfer of certain administrative processes into cost of goods sold also as a result of the consolidation of the facilities. These decreases were partially offset by an increase in personnel which management believes will facilitate future growth and efficiencies.
Distribution expenses increased $500,000 to $2,019,000 for the three months ended September 30, 2008 compared to $1,519,000 for the three months ended September 30, 2007. Sales and Marketing expenses and General and Administrative expenses decreased $806,000 to $7,904,000 for the three months ended September 30, 2008 compared to $8,710,000 for the three months ended September 30, 2007. Management believes the increase in distribution expenses was primarily attributable to increased labor costs, primarily temporary labor and overtime expenses, caused by backorders resulting from the manufacturing inefficiencies, as explained above.
Interest expense for the three months ended September 30, 2008 decreased to $631,000 from $952,000 for the three months ended September 30, 2007. The decrease in interest expense was attributable to a net decrease in the average principal loan balances outstanding and a decrease in interest rates during the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007.
Six Months ended September 30, 2008 compared to Six Months ended September 30, 2007
Overview
The following table sets forth certain operational data and operational data as
a percentage of net sales for the periods indicated:
Six months ended September 30,
2008 2007
(dollars in thousands)
Net sales $ 151,219 100.0 % $ 142,531 100.0 %
Gross profit $ 26,322 17.4 % $ 33,551 23.5 %
Selling, general and administrative expenses $ 20,384 13.5 % $ 20,654 14.5 %
Income before income taxes $ 4,825 3.2 % $ 10,971 7.7 %
Net income $ 3,026 2.0 % $ 6,780 4.8 %
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Item 2.
The Company's revenue increased by $8,688,000 or 6% to $151,219,000 and its net income decreased by $3,754,000 or 55% to $3,026,000 for the six months ended September 30, 2008 over the six months ended September 30, 2007. The increase in revenue is comprised of net price/sales mix increases of $7,240,000 and net unit volume increases of $1,448,000.
The price/sales mix increases were driven primarily by increased average selling prices of our patient bedside utensils, containment systems for medical waste and minor procedure kits and trays product lines. The increase in average selling prices of certain patient bedside utensils and containment systems for medical waste products was due primarily to price increases implemented to recover a portion of the increases in plastic resin (the primary raw material utilized in the manufacture of these products). The increase in average selling prices of our minor procedure kits and trays products was the result of a shift in sales mix and due to an increase in sales of kits containing enhanced components.
The net unit volume increases were driven primarily by greater domestic market penetration of our minor procedure kits and trays and protective apparel product lines. These volume increases were partially offset by management's decision to cease shipments of crutches to a major customer due to inadequate margins. This resulted in a decline of approximately $1,131,000 in net sales with only a negligible impact on profitability for the six months ended September 30, 2008 compared to the six months ended September 30, 2007.
Containment systems for medical waste and the product lines added as a result of the acquisition of the membership interest of Medegen Medical Products ("Medegen" or "MMP") on October 17, 2006, represents approximately 50% of the Company's revenue. The primary raw material utilized in the manufacture of these product lines is plastic resin. In recent years, world events have caused the cost of plastic resin to increase and be extremely volatile. The Company anticipates that such volatility may continue in the future. A significant portion of the Company's remaining revenue is derived from products sourced from foreign suppliers based in China. The costs associated with sourcing from these suppliers have increased as a result of inflationary trends, primarily on the cost of raw materials and labor, and the effect of the weakening US dollar versus the Chinese Yuan. Although the US dollar has recently been stable against the Chinese Yuan, the Company anticipates a further weakening of the US dollar versus the Chinese Yuan and a continuation of inflationary trends within China.
The Company has been able, from time to time, to increase selling prices for certain of these products to recover a portion of the increased cost. However, the Company is unable to give any assurance that it will be able to pass along future cost increases to its customers, if necessary.
The Company has entered into agreements with many of the major group purchasing
organizations ("GPO"). These agreements, which expire at various times over the
next several years, in most cases, can be terminated typically on ninety
(90) days advance notice and do not contain minimum purchase requirements. The
Company to date has been able to achieve significant compliance to their
respective member hospitals. The termination of any of these agreements may
result in the significant loss of business.
During the quarter ended June 30, 2008, the Company elected to exercise the ninety (90) day advanced notice termination provisions within one of its GPO agreements, under which the
Item 2.
Company supplies disposable operating room towels and laparotomy sponges. The termination of the agreement with the aforementioned GPO amounts to less than 3% of the Company's net sales and has resulted from the Company's inability to negotiate acceptable price increases with the GPO and the Company's unwillingness to continue to provide products to the GPO members at current pricing levels. Although net sales have not been significantly impacted by this termination, the Company cannot predict the future effects on its financial results from such termination.
Gross profit decreased principally as a result of; increases in resin costs, increases in the cost of products sourced from foreign vendors, continued inefficiencies incurred at our Gallaway, Tennessee manufacturing facility and higher freight costs which, in total exceeded the increase in gross profit resulting from higher unit sales, increased average selling prices and a change in the mix of products sold.
Results of Operations
The following table sets forth the major sales variance components six months
ended September 30, 2008 versus September 30, 2007:
(dollars in thousands)
Six months ended September 30, 2007 net sales $ 142,531
Volume of existing products, net 1,448
Price/sales mix, net 7,240
Six months ended September 30, 2008 net sales $ 151,219
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Net sales for the six months ended September 30, 2008 increased $8,688,000 or 6% to $151,219,000 from $142,531,000 for the six months ended September 30, 2007.
The following table sets forth the components of the increase in net sales as well as percent increases or decreases in unit sales and average selling prices by significant product classes for the six months ended September 30, 2008 compared to the six months ended September 30, 2007:
Net Sales Unit Sales Average Selling
$ increase % increase Prices/Sales Mix
(decrease) (decrease) % increase
Minor Procedure Kits and Trays $ 5,574,000 11 % 6 %
Protective Apparel 1,835,000 47 % 9 %
Patient Bedside Utensils 1,823,000 (2 )% 7 %
Containment Systems for Medical Waste 1,048,000 (1 )% 5 %
Urology 236,000 0 % 5 %
Operating Room Towels 197,000 (2 )% 4 %
Laparotomy Sponges (153,000 ) (5 )% 3 %
Patient Aids (1,131,000 ) (61 )% 0 %
Other, net (741,000 ) not meaningful not meaningful
Increase in Net Sales $ 8,688,000
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Item 2.
Management believes that the fluctuations in units sold are predominantly the result of our ability, or inability, to increase penetration within the domestic market, subject to the recent impact of back orders resulting from manufacturing inefficiencies in our Tennessee facility. The increases in average selling prices are primarily due to price increases implemented to recover a portion of the increases in plastic resin and increases in acquisition costs from foreign suppliers.
. . .
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