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| DSCP > SEC Filings for DSCP > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
In October 2006, we announced a plan to exit the vascular closure market and
phase out the Interventional Products ("IP") business. On August 6, 2008, we
completed the sale of assets related to the VasoSeal, On-Site, and X-Site
vascular closure devices, and our collagen operations, to St. Jude Medical, Inc.
for $21.0 million in cash at closing and $3.0 million to be paid upon the
expiration of an 18 month indemnification period. In February 2007, we completed
the sale of our ProGuide™ chronic dialysis catheter and the associated assets
for $3.0 million plus a royalty on future sales of the ProGuide catheter.
In June 2008, we exercised our option to acquire the Peripheral Vascular Stent
business of the Sorin Group of Milan. The acquisition follows our successful
experience as exclusive distributor of the Sorin peripheral stent product line
in Europe, during which sales have grown rapidly since the product launch in
January 2007. With the acquisition, we now gain the opportunity to market the
product line throughout the world. We estimate the worldwide market at
$800 million annually, of which $200 million is in Europe, $500 million is in
the United States and $40 million is in Japan.
Our Safeguard™ assisted pressure device received FDA 510(k) clearance to claim
reduced manual compression time to stop bleeding following femoral arterial
catheterization in diagnostic and interventional procedures in March 2007. In
May 2007, following FDA clearance of the new clinical claim, we tripled the
Safeguard sales and marketing effort in the United States from a pilot sales
group to the entire Cardiac Assist direct sales force. Safeguard is aimed at an
estimated $125 million annual worldwide market.
We are committed to improving our operating margins through increasing the
efficiency of our manufacturing operations and cost containment programs.
Due to the sale of the PM and IP businesses, which are classified as
discontinued operations, the below Results of Operations relates to our
continuing businesses, primarily Cardiac Assist and InterVascular.
Results of Operations
Net Sales (Sales)
Sales increased $8.2 million, or 17%, in the first quarter of fiscal 2009 to
$56.2 million compared to $48.0 million in the first quarter of fiscal 2008.
Favorable foreign exchange translation increased sales by $1.1 million, or 2%,
as a result of the weaker U.S. dollar relative to the Euro and the British
Pound, the primary currencies in countries in which we have direct sales
subsidiaries.
Sales increased $1.0 million, or 5%, in the United States to $22.6 million,
compared to the corresponding period last year, primarily attributable to
increased sales in Vascular Products ($0.6 million) and Cardiac Assist products
($0.2 million). Sales in international markets of $33.6 million increased
$7.2 million or 27% compared to last year. Favorable foreign exchange
translation increased international sales by $1.1 million, or 4%, due to
increased sales in Cardiac Assist ($5.5 million) and Vascular products
($1.7 million).
Cardiac Assist
Sales of Cardiac Assist products in the first quarter of fiscal 2009 increased
14% to $45.4 million, primarily reflecting continued strong sales growth in
international markets for balloon pumps (41%) and intra-aortic balloons (IABs)
(16%).
Sales of the Safeguard device, which grew 20% over last year, has also increased
our presence in the cardiac catheterization lab and given our sales
representatives additional opportunities to promote the use of IABs.
Favorable foreign exchange translation contributed $0.6 million to Cardiac
Assist sales in the first quarter of fiscal 2009.
Vascular Products
Sales of vascular products in the first quarter of fiscal 2009 increased 29% to
$10.4 million. The increase was principally due to higher worldwide sales of
vascular grafts (34%) and a 16% increase in sales of peripheral vascular stent
products. Increased sales of vascular grafts were attributable to higher sales
to our exclusive distributor in the United States and an increase in sales to
international markets (24%) as market share increased to offset continued growth
of less invasive therapies and competitive pricing pressure in the European
markets. Favorable foreign exchange translation contributed $0.5 million to
vascular product sales in the first quarter of fiscal 2009.
Sales of Genisphere products were $0.4 million in the first quarter of fiscal
2009, compared to $0.3 million in the corresponding period last year.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit increased $5.1 million or 16% in the first quarter of fiscal 2009
primarily as a result of increased sales in the Cardiac Assist Products segment
($5.6 million) and the Vascular Products segment ($2.6 million). Gross margin
was 64.8% in the first quarter of fiscal 2009 compared to 65.2% last year. The
lower gross margin percentage in the first quarter of fiscal 2009 compared to
the same period last year was principally due to a less favorable mix of
products as a result of increased sales of lower-margin balloon pumps to
international distributors.
Research and Development Expense (R&D)
R&D expense includes new product development and improvements of existing
products, as well as expenses for regulatory filings and clinical evaluations.
R&D expense was $5.0 million in the first quarter of fiscal 2009, equivalent to
9.0% of sales, compared to $5.0 million or 10.3% of sales last year.
R&D expense for the Cardiac Assist Products segment was $2.6 million in the
first quarter of fiscal 2009 compared to $2.8 million last year, with the
decrease primarily due to higher capitalization of balloon pump software
development costs this year, which reduced R&D expenses compared to the prior
year ($0.1 million).
R&D expense for the Vascular Products segment was $1.3 million in the first
quarter of fiscal 2009 compared to $1.1 million in the corresponding period last
year, with the increase primarily attributable to increased new product
development costs ($0.2 million) and unfavorable foreign currency translation
($0.1 million)
The balance of consolidated R&D is in the Corporate and Other segment and
amounted to $1.1 million in fiscal 2009, unchanged compared to the corresponding
period last year. Corporate and Other R&D includes corporate design, technology,
regulatory and Genisphere R&D expenses.
Selling, General & Administrative Expense (SG&A)
Total SG&A expense was $24.6 million in the first quarter of fiscal 2009, or
43.8% of sales, compared to $20.4 million, or 42.7% of sales.
SG&A expense for the Cardiac Assist Products segment of $19.3 million, increased
$2.5 million or 15% in the first quarter of fiscal 2009 primarily attributable
to increased selling and clinical expenses ($1.0 million) related to increased
headcount and the AMI clinical study, higher corporate allocation ($1.0 million)
and unfavorable foreign currency translation ($0.3 million). As a percentage of
segment sales, SG&A expense was 42.5% in the first quarter of fiscal 2009
compared to 42.3% in the corresponding period last year.
SG&A expense for the Vascular Products segment of $6.1 million, increased
$1.7 million or 37% in the first quarter of fiscal 2009 primarily attributable
to unfavorable foreign currency translation ($0.5 million), increased profit
sharing expense ($0.2 million) and higher corporate allocation ($0.7 million).
As a percentage of segment sales, SG&A expense was 59.1% in the first quarter of
fiscal 2009 compared to 55.5% in the corresponding period last year.
Segment SG&A expense includes allocated corporate G&A charges. The higher
corporate allocations noted above in the Cardiac Assist and Vascular Products
segments were primarily attributable to increased corporate expenses for bonus
($0.7 million), the addition of a COO ($0.5 million) and increased legal fees
($0.4 million).
The weaker U.S. dollar compared to the Euro and the British Pound increased
total SG&A expense by approximately $0.9 million in the first quarter of fiscal
2009.
Special Charges
In connection with Getinge AB's proposed acquisition of the Company, we incurred
acquisition related expenses for legal, investment banking and other
professional fees of approximately $1.5 million in the first quarter of fiscal
2009.
Interest Income
Interest income of $1.6 million in the first quarter of fiscal 2009 increased
$1.0 million compared to the same period last year due to an increase in the
average investment portfolio balance ($259.0 million vs. $43.9 million)
partially offset by a decrease in the interest rate yield to 2.3% from 4.3%.
Gain on Sale of Investment
We had a preferred stock investment of $5.0 million in Masimo Corporation, a
supplier to our Patient Monitoring business. On August 13, 2007, Masimo
completed its initial public offering, and concurrently,
we sold substantially all of our investment in Masimo, resulting in a pretax
gain on the sale of approximately $13.2 million in the first quarter of fiscal
2008.
Income Taxes
In the first quarter of fiscal 2009, the consolidated effective tax rate for
continuing operations was 38.6% compared to 39.0% in the same period last year.
The higher tax rate in the first quarter last year reflected the higher tax rate
on the gain on the sale of an investment of $13.2 million. Our effective tax
rate is generally impacted by changes in the geographic mix of our earnings.
On October 3, 2008, the Emergency Economic Stabilization Act 2008 ("EESA") was
signed into law. The EESA extended the R&D tax credit to December 31, 2009 and
is retroactive to January 1, 2008. Our effective tax rate for the first quarter
of fiscal 2009 does not reflect the benefit of the R&D tax credit for fiscal
2009 nor the favorable impact of the retroactive provisions of the EESA to
January 1, 2008 because the new law was passed after the end of the first
quarter of fiscal 2009.
Net Earnings from Continuing Operations
Net earnings from continuing operations were $4.0 million, or $0.25 per diluted
share, in the first quarter of fiscal 2009 compared to $11.9 million, or $0.76
per diluted share, in the first quarter of fiscal 2008. The lower earnings in
the first quarter of fiscal 2009 was primarily attributable to the after-tax
gain on sale of investment of $6.5 million in the first quarter last year.
Net Loss from Discontinued Operations
Net loss from discontinued operations of the PM and IP businesses was
$1.7 million in the first quarter of fiscal 2009, and $0.1 million in the same
period last year with the increased loss primarily attributable to lower sales
in the first quarter of fiscal 2009.
Gain on sale of Discontinued Operations
In the first quarter of fiscal 2009, we recognized a gain on sale of the IP
business of $0.6 million, net of tax.
Liquidity and Capital Resources
We consider our cash and cash equivalents, short-term investments and our
available unsecured lines of credit to be our principal sources of liquidity.
Cash and cash equivalents and short-term investments at September 30, 2008 were
$243.3 million compared to $250.2 million at June 30, 2008. Long-term
investments were $23.0 million and $22.8 million at September 30, 2008 and
June 30, 2008, respectively. Working capital was $291.4 million at September 30,
2008 compared to $279.2 million at June 30, 2008, and the current ratio was
6.5:1 compared to 4.0:1 at the end of fiscal 2008.
The increase in working capital and the current ratio was primarily due to an
increase in cash and cash equivalents ($168.2 million) and a decrease in income
taxes payable ($33.4 million), partially offset by a decrease in short-term
investments ($175.1 million) and accounts receivable ($16.0 million).
The increase in cash and cash equivalents and the decrease in short-term
investments was primarily due to investing the proceeds from a matured Treasury
bill into a United States Government money market mutual fund at the end of
September 2008.
From a cash and short-term investments perspective, we remain primarily invested
in highly-liquid and highly-rated securities, including U.S. treasury
securities, U.S. government agency securities, Foreign government treasury
securities, and Guaranteed foreign current deposits.
The decrease in accounts receivable was principally due to the lower sales and
continued collection of the $30.0 million of PM accounts receivable.
In the first quarter of fiscal 2009, we used $24.3 million of net cash in our
operating activities compared to $9.2 million of cash provided from operating
activities in the first quarter of the prior year. The decrease in cash provided
by operations in the first quarter of fiscal 2009 was primarily attributable to
a reduction in income taxes payable as a result of the payment of taxes related
to the gain on sale of the PM business in the fourth quarter last year.
In the first quarter of fiscal 2009, we provided a net $191.4 million of cash
from investing activities. Net sales and maturities of investments yielded
$178.3 million and proceeds from the sale of the IP business added $21.0 million
of cash. These $199.3 million of proceeds were spent on $3.5 million of
investment purchases, $3.6 million of capital expenditures and technology and
$0.6 million of capitalized software.
In the first quarter of fiscal 2009, we provided a net $3.1 million of cash from
financing activities, primarily from $2.9 million of proceeds from the exercise
of stock options and $0.3 million of excess tax benefits to be realized from
stock-based awards.
At September 30, 2008, we had available unsecured lines of credit totaling
approximately $101.0 million, with interest payable at LIBOR-based rates,
determined by the borrowing period. Of the total available, $25.0 million
expires in October 2008 and $50.0 million expires in March 2009. We also have
$26.0 million in credit lines with no expiration date. These lines of credit are
renewable annually at the option of the banks. The $25.0 million credit line
that expired in October 2008 was not renewed by the bank. We plan to seek
renewal of all other lines of credit.
We purchased approximately 2,500 shares of our common stock during the first
quarter of fiscal year 2009. We have a remaining balance of $1.0 million
available under the stock repurchase program authorized by the Board of
Directors on May 16, 2001. Due to the pending merger, we do not plan on
repurchasing additional shares of our common stock during the remainder of
fiscal 2009.
On September 15, 2006, the Board of Directors approved an additional stock
repurchase program for $40 million of our common stock. Purchases under this
program may be made from time to time on the open market or in privately
negotiated transactions, and may be discontinued at any time at the discretion
of the Company.
On September 16, 2008, the Board of Directors declared a quarterly cash dividend
of $0.10 per share, which was paid on October 15, 2008 to stockholders of record
as of October 1, 2008.
We believe that our existing cash and investment balances, future cash generated
from operations and existing credit facilities will be sufficient to meet our
projected working capital, capital and investment needs. The moderate rate of
current United States and European inflation has not significantly affected the
Company.
Subsequent Event
On October 15, 2008, we transferred approximately $45.2 million to a Grantor
Trust ("Trust") to provide for amounts which may become payable in the future to
certain of our executives pursuant to various employment, supplemental benefit
and severance agreements upon a change of control of the Company. The funding of
the Trust was required as a result of the Merger Agreement entered into on
September 15, 2008, providing for the acquisition by Getinge of all of the
outstanding shares of our common stock for $53.00 per share
Information Concerning Forward Looking Statements
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not strictly historical are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and are intended to be covered by the safe harbors
provided therein. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Many of these risks cannot be predicted or
quantified and are at least partly outside our control. The forward-looking
statements included in this press release are made only as of the date of this
report and the Company undertakes no obligation to update these forward-looking
statements to reflect subsequent events or circumstances.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses for each period. We regularly
evaluate our estimates and assumptions on an on-going basis and adjust as
necessary to accurately reflect current conditions. These estimates and
assumptions are based on current and historical experience, on information from
third party professionals and on various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from those
estimates. Our critical accounting policies include Revenue Recognition,
Allowance for Doubtful Accounts, Inventory Valuation, Income Taxes and Pension
Plan Actuarial Assumptions, as disclosed in our Form 10-K for the fiscal year
ended June 30, 2008.
Recent Accounting Pronouncements
On July 1, 2008, we adopted the provisions of the Financial Accounting Standards
Board ("FASB") Emerging Issues Task Force Issue No. 06-10, Accounting for
Deferred Compensation and Postretirement Benefits Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements. The Task Force concluded
that an employer should recognize a liability for the postretirement benefit
related to a collateral assignment split-dollar life insurance arrangement in
accordance with either FASB Statement No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, or Accounting Principles Board
Opinion No. 12, Omnibus Opinion, based on the substantive agreement with the
employee. The Task Force also concluded that an employer should recognize and
measure an asset based on the nature and substance of the collateral assignment
split-dollar life insurance arrangement. The Supplemental Benefits Plan for the
Chairman and Chief Executive Officer, Mr. Lawrence Saper, provides survivor
benefits in the form of a $10 million life insurance policy, maintained pursuant
to a collateral assignment split-dollar agreement among Mr. Saper, the Company
and a trust for the benefit of Mr. Saper's family. At adoption date, we
recognized a $3.5 million noncurrent liability for the present value of the
premium reimbursement through a cumulative effect adjustment to retained
earnings. The noncurrent liability is reflected in other liabilities in our
condensed consolidated balance sheet.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines "fair value" as: the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In addition, SFAS 157 establishes a
fair value hierarchy to be used to classify the source of information used in
fair value measurements, new disclosures of assets and liabilities measured at
fair value based on their level in the hierarchy and a modification of the
long-standing accounting presumption that the transaction price of an asset or
liability equals its initial fair value. In February 2008, the FASB issued Staff
Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the
provisions of SFAS 157 relating to nonfinancial assets and liabilities until
fiscal years beginning after November 15, 2008 (our fiscal year 2010 beginning
July 1, 2009). Accordingly, we adopted the required provisions of SFAS 157 at
the beginning of our fiscal 2009 (July 1, 2008) and the remaining provisions
will be adopted at the beginning of our fiscal 2010. The fiscal 2009 adoption
did not result in a material impact to our consolidated financial statements,
but it did result in certain additional disclosures. We are currently evaluating
the impact of adopting the remaining parts of SFAS 157 on our consolidated
financial statements. See Note 12 for additional information
(disclosure) related to the impact of adopting SFAS 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115 ("SFAS 159"). This statement provides an option to report
selected financial assets and liabilities at fair value. In addition, SFAS 159
establishes presentation and disclosure requirements for those assets and
liabilities which the registrant has chosen to measure at fair value. SFAS 159
is effective for fiscal years beginning after November 15, 2007 (our fiscal year
2009 beginning July 1, 2008). We have not elected the fair value option for
eligible items that existed at the beginning of our fiscal 2009.
In December 2007, the FASB issued SFAS No. 160, ("SFAS 160") Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51.
This statement amends ARB 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
. . .
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