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| CHDX > SEC Filings for CHDX > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Healthcare Services Division
The Healthcare Services division operates our network of private healthcare
facilities in China. During the three month period ended September 30, 2008 and
the same quarter last year, the division consisted of a network of United Family
Hospitals and Clinics (UFH) in Beijing and Shanghai. In Beijing, the UFH network
included Beijing United Family Hospital and Clinics, and two affiliated
free-standing, primary care clinics. In Shanghai, the UFH network included
Shanghai United Family Hospital and Clinics and one affiliated, free-standing,
primary care clinic. In addition, beginning in April 2008, UFH began a pilot
project in the City of Wuxi to assess the business potential of contracted
healthcare management services. On September 3rd, 2008, we announced that we had
received Joint Commission International (JCI) accreditation at our United Family
Healthcare facilities in Shanghai and reaccredidation of our facilities in
Beijing.
The division has begun expansion of the United Family network of private
healthcare facilities in China. In addition to existing cash resources, during
fiscal 2008 we raised additional capital and established credit facilities in
the aggregate amount of approximately $105 million to be used principally toward
the development and construction of healthcare facilities in connection with
this expansion (see "Liquidity and Capital Resources"). The projects include
affiliated clinic operations in Shanghai and Guangzhou and new joint venture
hospitals in Guangzhou and Beijing. As of the end of the quarter, the affiliated
clinic project in Guangzhou was substantially complete. We announced the opening
of the facility, The Guangzhou United Family Health Center, on October 6th,
2008. The proposed Shanghai Pudong District clinic has encountered delays due to
zoning restrictions imposed by the Chinese government. At the end of the current
period, we decided to abandon the initial site and to relocate the clinic rather
than challenge the zoning restrictions. As a result, we incurred certain project
cost during the period, and now expect the opening of the clinic facility in
early fiscal 2010. The joint venture hospitals in both Guangzhou and Beijing
were in early development phase. During the period ended September 30, 2008, the
development expenses for these projects were $645,000, in addition, to date we
have recognized $1,931,000 in construction in progress related to work on the
projects.
For the three months ended September 30, 2008, revenue from the division was
$19,069,000, an increase of 26% over the three months ended September 30, 2007
revenue of $15,102,000 (for information on how the timing of our revenues may be
affected by seasonality and other fluctuations, see " Timing of Revenues "). The
increased revenue is attributable to growth in both inpatient and outpatient
services provided in the Beijing and Shanghai markets, but was less than
expected. Revenue growth was negatively impacted during the period due to a
number of factors, including disruptions in travel and tourism related to
China's Olympic preparations, which included difficulty in obtaining visas to
enter the country for both tourists and business travelers. Total Healthcare
Services operating costs increased over the periods by 38%, to $18,017,000 from
$13,062,000. Salaries for the division increased by $2,773,000 over the periods
(representing 51% of division revenue in the recent period and 46% of revenue in
the prior period). This increase was due to the renewal of multi-year physician
contracts coming up in an inflationary environment and the hiring of new
personnel to meet the demand for expected continuing increases in services in
both the Beijing and Shanghai facilities, as well as pre-opening staffing for
the Guangzhou clinic which opened in October 2008. Other costs increased
$2,182,000 over the periods, primarily due to cost increases related to the
additional excise taxes ($480,000), increase in direct patient care services
($420,000), increase in cost allocated from the parent company ($354,000), the
Pudong clinic project ($332,000), office rent ($189,000) and depreciation
expense ($113,000). The Healthcare Services division had income from operations
before foreign exchange gains of $1,052,000 for the three months ended
September 30, 2008, compared with income from operations before foreign exchange
gains of $2,040,000 in the prior period. In the current period, the impact of
exchange rate fluctuations between the periods had a positive impact on income
from operations of approximately $183,000.
.
Medical Products Division
The Medical Products division markets, distributes and sells select medical
capital equipment, instrumentation and other medical products for use in
hospitals in China and Hong Kong on the basis of both exclusive and
non-exclusive agreements with the manufacturers of these products.
In the three months ended September 30, 2008, this division had revenue of
$19,041,000, a 9% increase from revenue of $17,550,000 for the three months
ended September 30, 2007. Revenues during the period included approximately
$4,600,000 in shipments of robotic surgical systems. Revenues in the division
are normally impacted by factors such as credit availability to our customers
and other factors as outlined in "Timing of Revenues". During the period, we
experienced continuing disruption to business operations as a result of the
May 2008 earthquake in Sichuan Province in southwestern China. In the weeks
since June 30, 2008, we experienced recovery in markets other than southwestern
China and the stabilization of the market situation following the close of the
Olympics toward the end of the current period. During the Olympics period,
movement of freight through the transportation hubs of Beijing and Shanghai was
restricted and our second quarter results were negatively impacted as a result,
as the majority of our shipments transit through these customs ports.
While we continued to be impacted by delays in Chinese Government approval of
product registrations during the quarter, on July 2, 2008, we were pleased to
announce receipt of important product registration approvals. These approvals
coupled with back-loaded demand for products resulting from the earthquake
disruptions resulted in improved performance in the division in the second
quarter compared to the first quarter results. We believe that these factors
coupled with the delivery of recently announced major contracts and our current
government backed loan contracts will result in significantly improved
performance in the second half of this fiscal year.
Gross profit for the Medical Products division increased to $5,854,000 from
$4,634,000 over the periods. As a percentage of revenue, gross profit from the
Medical Products division increased to 31% during the recent period from 26%
during the same period last year. The gross profit margin in the current period
was above historical averages due to higher margins on certain contract
shipments which accounted for a significant portion of total division revenue in
the period.
Expenses for the Medical Products division increased to $5,272,000 from
$4,330,000 over the periods and, as a percentage of division revenue, increased
to 28% from 25% over the periods. In addition, increased expenses during the
period were a result of increased sales activity in advance of expected greater
increases in sales which were not realized to the expected levels due to the
negative factors in the marketplace as discussed above. Salaries for the
division increased by $273,000 over the periods. The other costs for the
division increased $670,000 over the periods, primarily due to increased costs
allocated from the parent company ($493,000) and travel expenses ($136,000). The
division had income from operations before foreign exchange gains of $582,000 in
the recent period, compared with income from operations before foreign exchange
gains of $304,000 in the prior period. In the current period, the impact of
exchange rate fluctuations between the periods had a negative impact on income
from operations of proximately $208,000.
Other Income and Expenses
Interest expense during the recent quarter was incurred on the short-term
portion of debt ($435,000), short-term portion of capitalized leases ($36,000),
long-term debt ($23,823,000) and long-term capitalized leases ($5,000), totaling
$253,000. Interest expense of $187,000 was recorded in the same quarter of the
prior year.
Interest income during the recent quarter and prior period was $321,000 and
$74,000 respectively, due to higher cash balances in the current period.
Miscellaneous expense during the recent quarter and prior period was $603,000
and $21,000 respectively. During the current period, we recorded a loss of
$594,000 for the change in the fair value of derivatives related to our
short-term and noncurrent investments (see "Liquidity and Capital Resources").
Taxes
The Company has estimated its annual effective tax rate for the full fiscal
year 2009 and applied that rate to its income before income taxes in determining
its provision for income taxes for the six months ended September 30, 2008 in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes"
(SFAS 109) and APB Opinions No. 28, "Interim Financial Reporting" (APB 28). The
Company also records discrete items in each respective period as appropriate. In
determining the Company's provision for income taxes, net deferred tax assets,
liabilities, valuation allowances, and uncertain tax positions, management is
required to make judgments and estimates related to projections of domestic and
foreign profitability, the timing and extent of the utilization of loss
carryforwards, applicable tax rates, transfer pricing methods, expected tax
authority positions on audit, and prudent and feasible tax planning strategies.
Judgments and estimates related to the Company's projections and assumptions are
inherently uncertain and therefore, actual results could differ materially from
projections.
For the three months ended September 30, 2008 and 2007, the Company's
consolidated annualized effective tax rate from operations was 22.6% and 34.0%,
respectively. The Company's effective tax rate from operations decreased during
the three months ended September 30, 2008 due primarily to the decrease of the
statutory tax rate in China and a change in estimate regarding the realization
of deferred tax assets generated during FY 2009 by certain entities that are
establishing new clinics and hospitals in China.
Six months ended September 30, 2008 compared to six months ended September 30,
2007
Our revenue for the six months ended September 30, 2008 was $70,179,000, up
18% from the six months ended September 30, 2007 revenue of $59,423,000. We
experienced an increase in revenue over the periods of 26% in the Healthcare
Services division and an increase in revenue of 10% in the Medical Products
division. Costs and expenses were $67,778,000 for the six months ended
September 30, 2008 as compared with $55,444,000 for the prior period. The
average rate of inflation in China increased over the six month to 6.5% compare
to 4.8% in the prior period and the RMB continued to appreciate against the USD
dollar (see "Foreign Currency Exchange and Impact of Inflation"). Healthcare
Services division operating costs increased 35% over the periods and operating
costs in the Medical Products division increased by 15%. We recorded income from
operations of $2,401,000 for the recent period, as compared to income from
operations of $3,979,000 for the same period last year. We recorded net income
of $700,000 for the recent period, as compared to net income of $2,448,000 for
the same period last year. Costs at the parent level of the Company, which have
been allocated among the segments as described below, increased $1,633,000
between the periods, including salaries ($1,052,000), professional fees
($181,000), bank service fee ($177,000), excise taxes ($91,000) and office rent
($85,000).
Healthcare Services Division
The Healthcare Services division operates our network of private healthcare
facilities in China. During the six month period ended September 30, 2008 and
the same period last year, the division consisted of a network of United Family
Hospitals and Clinics (UFH) in Beijing and Shanghai. In Beijing, the UFH network
included Beijing United Family Hospital and Clinics, and two affiliated
free-standing, primary care clinics. In Shanghai, the UFH network included
Shanghai United Family Hospital and Clinics and one affiliated, free-standing,
primary care clinic. In addition, beginning in April 2008, UFH began a pilot
project in the City of Wuxi to assess the business potential of contracted
healthcare management services. On September 3rd, 2008, we announced that we had
received Joint Commission International (JCI) accreditation at our United Family
Healthcare facilities in Shanghai and reaccredidation of our facilities in
Beijing.
The division has begun expansion of the United Family network of private
healthcare facilities in China. In addition to existing cash resources, during
fiscal 2008 we raised additional capital and established credit facilities in
the aggregate amount of approximately $105 million to be used principally toward
the development and construction of healthcare facilities in connection with
this expansion (see "Liquidity and Capital Resources"). The projects include
affiliated clinic operations in Shanghai and Guangzhou and new joint venture
hospitals in Guangzhou and Beijing. As of the end of the six months period, the
affiliated clinic project in Guangzhou was substantially complete. We announced
the opening of the facility, The Guangzhou United Family Health Center, on
October 6th, 2008. The proposed Shanghai Pudong District clinic has encountered
delays due to zoning restrictions imposed by the Chinese government. At the end
of the current period, we decided to abandon the initial site and to relocate
the clinic rather than challenge the zoning restrictions. As a result, we
incurred certain project cost during the period, and now expect the opening of
the clinic facility in early fiscal 2010. The joint venture hospitals in both
Guangzhou and Beijing were in the early development phase. During the period
ended September 30, 2008, the development expenses for these projects were
$725,000, in addition, to date we have recognized $1,931,000 in construction in
progress related to work on the projects.
For the six months ended September 30, 2008, revenue from the division was
$38,641,000, an increase of 26% over the six months ended September 30, 2007
revenue of $30,661,000 (for information on how the timing of our revenues may be
affected by seasonality and other fluctuations, see "Timing of Revenues"). The
increased revenue is attributable to growth in both inpatient and outpatient
services provided in the Beijing and Shanghai markets, but was less than
expected. Revenue growth was negatively impacted during the period due to a
number of factors, including disruptions in travel and tourism related to
China's Olympic preparations, which included difficulty in obtaining visas to
enter the country for both tourists and business travelers; a generally light
flu-season, which occurs in March and April in China, which resulted in lower
than expected patient acuity levels, and an institutional focus on Joint
Commission accreditation preparation. Total Healthcare Services operating costs
increased over the periods by 35%, to $34,814,000 from $25,823,000. Salaries for
the division increased by $4,839,000 over the periods (representing 48% of
division revenue in the recent period and 45% of revenue in the prior period).
This increase was due to the renewal of multi-year physician contracts coming up
in an inflationary environment and the hiring of new personnel to meet the
demand for expected continuing increases in services in both the Beijing and
Shanghai facilities, as well as pre-opening staffing for the Guangzhou clinic
which opened in October 2008. Other costs increased $4,152,000 over the periods,
primarily due to increases in additional excise taxes ($948,000), direct patient
care expenses ($817,000), cost allocated from the parent company ($570,000),
office rent ($496,000), cost related to the Pudong clinic project ($332,000),
depreciation ($209,000), travel expenses ($131,000), utilities ($130,000) and
office supplies ($121,000). The Healthcare Services division had income from
operations before foreign exchange gains of $3,827,000 in the six months ended
September 30, 2008, compared with income from operations before foreign exchange
gains of $4,838,000 in the prior period. In the current period, the impact of
exchange rate fluctuations between the periods had a positive impact on income
from operations of approximately $501,000.
Medical Products Division
The Medical Products division markets, distributes and sells select medical
capital equipment, instrumentation and other medical products for use in
hospitals in China and Hong Kong on the basis of both exclusive and
non-exclusive agreements with the manufacturers of these products.
In the six months ended September 30, 2008, this division had revenue of
$31,538,000, a 10% increase from revenue of $28,762,000 for the six months ended
September 30, 2007. Revenues during the period included approximately $2,000,000
in shipments under a U.S. Export-Import Bank-financed contract and approximately
$4,600,000 in shipments of robotic surgical systems. Revenues in the division
are normally impacted by factors such as credit availability to our customers
and other factors as outlined in "Timing of Revenues". During the first quarter,
we experienced significant disruption to business operations as a result of the
May 12, 2008 earthquake in the Sichuan Province in southwestern China. This
disruption was due to the national disaster relief response from the healthcare
sector nationwide. Chindex directly participated in the disaster relief efforts
through donations of supplies and relief workers provided from the Company's
United Family Healthcare system. This natural disaster resulted in a virtual
standstill of business operations in the southwest markets over the period. In
the markets outside of the direct disaster zone, we also experienced a
significant drop off in order flow and tender processing over the period. In the
weeks since June 30, 2008, we experienced recovery in markets other than
southwestern China and the stabilization of the market situation following the
close of the Olympics toward the end of the current period. During the Olympics
period, movement of freight through the transportation hubs of Beijing and
Shanghai was restricted and our second quarter results were negatively impacted
as a result, as the majority of our shipments transit through these customs
ports.
While we continued to be impacted by delays in Chinese Government approval of
product registrations during the period, on July 2, 2008, we were pleased to
announce receipt of important product registration approvals. These approvals
coupled with back-loaded demand for products resulting from the earthquake
disruptions resulted in improved performance in the division in the period
compared to the prior period. We believe that these factors coupled with the
delivery of recently announced major contracts and our current government backed
loan contracts will result in significantly improved performance in the second
half of this fiscal year.
Gross profit for the Medical Products division increased to $8,455,000 from
$7,477,000 over the periods. As a percentage of revenue, gross profit from the
Medical Products division increased to 27% during the recent period from 26%
during the same period last year.
Expenses for the Medical Products division increased to $10,009,000 from
$8,678,000 over the periods and, as a percentage of division revenue, increased
to 32% from 30% over the periods. In addition, increased expenses during the
period were a result of increased sales activity in advance of expected greater
increases in sales which were not realized to the expected levels due to the
disruption in the marketplace as discussed above. Salaries for the division
decreased by $50,000 over the periods. The other costs for the division
increased $1,381,000 over the periods, primarily due to increased costs
allocated from the parent company ($1,072,000) and travel expenses ($224,000).
The division had a loss from operations before foreign exchange gains of
$1,554,000 in the recent period, compared with a loss from operations before
foreign exchange gains of $1,201,000 in the prior period. In the current period,
the impact of exchange rate fluctuations between the periods had a negative
impact on income from operations of approximately $527,000.
Other Income and Expenses
Interest expense during the recent six month period was incurred on the
current portion of debt ($435,000), current portion of capitalized leases
($36,000), long-term debt ($23,823,000) and long-term capitalized leases
($5,000), totaling $479,000. Interest expense of $374,000 was recorded in the
same period of the prior year.
Interest income during the six month period and prior year period was
$789,000 and $141,000 respectively, due to higher cash balances in the current
period.
Miscellaneous expense during the current six month period and prior six month
period was $596,000 and $47,000 respectively. During the current year period, we
recorded a loss of $594,000 for the change in the fair value of derivatives
related to our short-term and long-term investments (see "Liquidity and Capital
Resources").
Taxes
The Company has estimated its annual effective tax rate for the full fiscal
year 2009 and applied that rate to its income before income taxes in determining
its provision for income taxes for the six months ended September 30, 2008 in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes"
(SFAS 109) and APB Opinions No. 28, "Interim Financial Reporting" (APB 28). The
Company also records discrete items in each respective period as appropriate. In
determining the Company's provision for income taxes, net deferred tax assets,
liabilities, valuation allowances, and uncertain tax positions, management is
required to make judgments and estimates related to projections of domestic and
foreign profitability, the timing and extent of the utilization of loss
carryforwards, applicable tax rates, transfer pricing methods, expected tax
authority positions on audit, and prudent and feasible tax planning strategies.
Judgments and estimates related to the Company's projections and assumptions are
inherently uncertain and therefore, actual results could differ materially from
projections.
For the six months ended September 30, 2008 and 2007, the Company's
consolidated annualized effective tax rate from operations was 66.9% and 33.8%,
respectively. The Company's effective tax rate from operations increased during
the six months ended September 30, 2008 due primarily to the correction of an
error in the first quarter that was not material to prior periods and higher
pretax losses in certain jurisdictions with no related income tax benefit, as
the Company currently lacks evidence that the loss carryforwards in those
jurisdictions will be able to be used prior to their expiration.
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