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| MTSI > SEC Filings for MTSI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
The Company continues to experience growth in its net sales for several reasons. First, the global aging population results in more medication being prescribed and increases the number of people that reside in skilled nursing and assisted living facilities. Our pharmacy customers deliver medication to those residents and we provide pharmacies with packaging supplies for medications as well as automation for fulfillment. As the businesses of our customers grow, our business grows with them. Second, we have made strategic acquisitions in Europe which have added to the organic growth of our core products. We believe Europe represents a market that is very receptive to our packaging and automation systems and we expect the European market to continue to represent an expanding portion of our total consolidated revenue. Third, we have invested heavily in technology that has enhanced the automation we sell. As a result, we have experienced growth in sales of both prepackaging equipment, as well as our highly advanced robotic OnDemand systems.
Recently, our operating margins have been impacted by the sale of our OnDemand machines to our largest customer at margins lower than other products we sell. We have continued to invest in our personnel and other resources related to our medication administration segment. This investment has been necessary to help set the stage for future growth and take advantage of our opportunities. We anticipate that ultimately our operating margins will benefit from the significant impact on our revenue that could result from a successful launch of our MedTimes® product and consumable products into the retail pharmacy market, the possible further automation of the retail pharmacy medication delivery model and the continued acceptance of our OnDemand system automation by our long-term care market customers in the U.S. and Europe.
We believe that our base of business in the long-term care market provides us with a very reliable recurring stream of profitable revenue, and we remain committed to leverage that base to achieve our long-term objectives to grow the Company and create more value for our shareholders.
The following table sets forth, for the three- and six-month periods indicated, certain key operating results and other financial information.
Three Months Ended September
30, Six Months Ended September 30,
----------------------------- ---------------------------------------
2008 2007 2008 2007
------------ ----------- ----------------- ----------------
(In Thousands; Except Per Share Amounts)
Net Sales $ 20,702 14,118 $ 40,068 $ 28,938
Gross Margin Percentage 32.2 % 41.4 % 31.7 % 39.1 %
Operating Income Percentage 4.9 % 10.3 % 4.3 % 8.6 %
Net Income $ 555 $ 775 $ 929 $ 1,308
Net Income Per Common Share
-Diluted $ 0.08 $ 0.12 $ 0.14 $ 0.19
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 and 2007
Net sales for the three months ended September 30, 2008 increased 46.6% to $20.7 million compared with $14.1 million during the same period of the prior fiscal year. This increase is attributable to an increase in net sales for consumable punch cards and prepack machines both to new and existing customers. In addition, revenue associated with the sale of OnDemand machines was $5.7 million during the three months ended September 30, 2008 compared with $425,000 during the same period of the prior fiscal year. This increase relates primarily to the acceptance of nine OnDemand machines by our largest customer during the three months ended September 30, 2008. Also, our net sales in Europe increased 15.1% due to increased penetration of our products in that market.
Cost of sales for the three months ended September 30, 2008 was $14.0 million compared with $8.3 million during the same period of the prior fiscal year. Cost of sales as a percentage of sales increased to 67.8% from 58.6% during the same period of the prior fiscal year. Cost of sales as a percentage of sales increased primarily because the proportion of revenue associated with OnDemand machines, which have a higher cost of sales percentage than consumables.
Selling, general and administration expenses for the three months ended September 30, 2008 increased 28.5% to $4.9 million from $3.8 million of the prior fiscal year primarily due to travel and personnel costs associated with support of our OnDemand machine installations, general administrative costs in the U.S. and Europe, foreign currency exchange fluctuations due to a stronger U.S. dollar, increased research and development expenses and higher employee benefit costs associated with medical claims for our self-insured health plan, legal, auditing and consulting expenses.
Depreciation and amortization expense for the three months ended September 30, 2008 increased 31.3% to $792,000 from $603,000 during the same period of the prior fiscal year. The increase resulted primarily from increased depreciation and amortization associated with capital expenditures and acquired intangible assets.
Interest expense for the three months ended September 30, 2008 decreased 16.9% to $138,000 from $166,000 during the same period of the prior fiscal year. The decrease results primarily from a decrease in interest rates.
Income tax expense decreased 39.2% to $313,000 during the three months ended September 30, 2008 compared with $515,000 during the same period of the prior fiscal year. The decrease results from the fact that our net income before tax decreased and our effective tax rate decreased to 36.1% from 39.9%. Our effective tax rate decreased as a result of higher net income from our European operations, which are taxed at lower rates.
Segments
During the first quarter of fiscal year 2009, we began to evaluate our
business under three segments: (a) consumables; (b) packaging automation; and
(c) medication administration systems. The consumable segment primarily consists
of the manufacturing of punch cards and blisters and other consumable medication
packaging. The packaging automation segment consists of products that provide
our customers with the ability to package medication into our consumable
products in an efficient manner. This type of automation allows the packaging of
medication in either a pre-pack or an on-demand manner, which means that our
pharmacy customers can elect to package medications for inventory awaiting an
order from their long-term care customers or wait until the long-term care
customers require the medication and package it at that time. The medication
administration systems segment consists of automation products designed to
provide our customers with a system to administer medication to residents at
long-term care facilities. We currently sell one product, MedLocker, and have
developed another product, MedTimes, which is now in beta stage. These segments
represent the manner in which we now manage our operations. Prior to this
change, we managed our business as one segment.
Segment Results of Operations
Operating income (loss), as presented below is net sales less cost of sales and other operating expenses that are directly identifiable to the respective segment or allocated on the basis of sales or manpower. Operating income is reconciled to earnings before income taxes in Note 10 to the Consolidated Financial Statements included in the report.
Consumables
Three Months Ended September 30,
---------------------------------------
2008 2007
------------------ -----------------
(In Thousands)
Net Sales $ 13,738 $ 12,877
Operating Income $ 1,767 $ 2,316
Operating Margin 12.9 % 18.0 %
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Net sales in the second quarter increased approximately $861,000, or 6.7%, primarily due to growth in sales to the U.S. long-term care market of approximately 5.3% and growth in the European domiciliary and retail markets of approximately 15.1%. The growth in the U.S. is primarily attributable to the increase in medications dispensed in long-term care facilities. The European growth is primarily the result of increased penetration of our products into that market.
Operating margins declined in the second quarter primarily due to (a)
increases in raw material costs primarily related to materials that have a high
petroleum-based content; (b) additional personnel added to the Company's
headquarters and allocated to this segment based on revenue; (c) higher audit,
tax and consulting costs; (d) increased research and development expenses; (e)
higher depreciation expense associated with assets related to this segment; and
(f) higher employee benefit costs due to increased medical claims under the
Company's self-insured medical plan.
Packaging Automation
Three Months Ended September 30,
--------------------------------------
2008 2007
------------------ ----------------
(In Thousands)
Net Sales $ 6,897 $ 1,174
Operating Loss $ (156 ) $ (545 )
Operating Margin (2.3 %) (46.4 %)
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Net sales in the second quarter increased $5.7 million, or 487.5%, because of an agreement with our largest customer for the sale of twenty-four OnDemand machines. During the second quarter, we recorded $5.1 million in revenue associated with nine machines that were installed and accepted by the customer.
Our operating loss during the second quarter was lower than the prior fiscal year because we realized additional gross profit on the increased net sales, which offset a portion of the indirect costs associated with this segment.
Medication Administration Systems
Three Months Ended September 30,
----------------------------------------
2008 2007
------------------- -----------------
(In Thousands)
Net Sales $ 67 $ 67
Operating Loss $ (426 ) $ (240 )
Operating Margin (635.8 %) (358.2 %)
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Net sales in the second quarter were unchanged compared to the same period last year.
Our operating loss during the second quarter was higher than the prior fiscal year because we have added personnel to develop the MedTimes product and increased research and development expenditures.
Consolidated operating income represents operating income (loss) for the consumables, packaging automation and medication administration segments less share-based compensation expense and corporate asset depreciation expense.
Six Months Ended September 30, 2008 and 2007
Net sales for the six months ended September 30, 2008 increased 38.5% to $40.1 million compared with $28.9 million during the same period of the prior fiscal year. This increase is primarily attributable to an increase in net sales for consumable punch cards and pre-pack machines primarily because of additional sales made to new and existing customers. In addition, revenue associated with the sale of OnDemand machines was $10.7 million during the six months ended September 30, 2008 compared with $2.5 million during the same period of the prior fiscal year. This increase relates primarily to the acceptance of sixteen OnDemand machines by our largest customer during the six months ended September 30, 2008. Also, our net sales in Europe increased 22.5% due to increased penetration of our products in that market.
Cost of sales for the six months ended September 30, 2008 was $27.4 million compared with $17.6 million during the same period of the prior fiscal year. Cost of sales as a percentage of sales increased to 68.3% from 60.9% during the same period of the prior fiscal year. Cost of sales as a percentage of sales increased primarily because the proportion of revenue associated with OnDemand machines, which have a higher cost of sales percentage than consumables.
Selling, general and administration expenses for the six months ended September 30, 2008 increased 23.5% to $9.4 million from $7.6 million of the prior fiscal year primarily due to travel and personnel costs associated with support of our OnDemand machine installations, general administrative costs in the U.S. and Europe, foreign exchange loss due to a stronger U.S. dollar, increased research and development expenses and higher employee benefit costs due to increased medical claims under our self-insured health plan, legal, auditing and consulting expenses.
Depreciation and amortization expense for the six months ended September 30, 2008 increased 32.2% to $1.6 million from $1.2 million during the same period of the prior fiscal year. The increase resulted primarily from increased depreciation and amortization associated with capital expenditures and acquired intangible assets.
Interest expense for the six months ended September 30, 2008 decreased 16.7% to $264,000 from $317,000 during the same period of the prior fiscal year. The decrease results primarily from a decrease in interest rates.
Income tax expense decreased 39.8% to $526,000 during the six months ended September 30, 2008 compared with $874,000 during the same period of the prior fiscal year. The decrease results from the fact that our net income before tax decreased and our effective tax rate decreased to 36.2% from 40.1%. Our effective tax rate decreased as a result in higher net income from our European operations, which are taxed at lower rates.
Segment Results of Operations
Operating income (loss), as presented below is net sales less cost of sales and other operating expenses that are directly identifiable to the respective segment or allocated on the basis of sales or manpower. Operating income is reconciled to earnings before income taxes in Note 10 to the Consolidated Financial Statements included in the report.
Consumables
Six Months Ended September 30,
-------------------------------------
2008 2007
----------------- ----------------
(In Thousands)
Net Sales $ 26,831 $ 24,665
Operating Income $ 3,382 $ 4,428
Operating Margin 12.6 % 18.0 %
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Net sales during the six months ended September 30, 2008 increased approximately $2.2 million, or 8.8%, primarily due to growth in sales to the U.S. long-term care market of approximately 6.2% and growth in the European domiciliary and retail markets of approximately 22.5%. The growth in the U.S. is primarily attributable to the increase in medications dispensed in long-term care facilities. The European growth is primarily the result of increased penetration of our products into that market.
Operating margins declined during the six months ended September 30, 2008 primarily due to (a) higher freight costs that resulted from increased fuel surcharges and a higher percentage of products sold indirectly to our end customers through wholesalers, which are shipped at our expense; (b) increases in raw material costs primarily related to materials that have a high petroleum-based content; (c) increased scrap rates and labor costs; (d) additional headquarters personnel and allocated to this segment based on revenue; (e) higher audit, tax, consulting and legal costs; (f) increased research and development expenses; (g) higher depreciation expense associated with assets related to this segment; and (h) higher employee benefit costs due to increased medical claims under the Company's self-insured medical plan.
Packaging Automation
Six Months Ended September 30,
--------------------------------------
2008 2007
------------------ ----------------
(In Thousands)
Net Sales $ 13,087 $ 4,150
Operating Loss $ (402 ) $ (1,249 )
Operating Margin (3.1 %) (30.1 %)
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Net sales during the six months ended September 30, 2008 increased $8.9 million, or 215.3%, because of an agreement with our largest customer for the sale of twenty-four OnDemand machines. During the six months ended September 30, 2008, we recorded $9.2 million in revenue associated with sixteen machines that were installed and accepted by the customer. In addition, we sold two AccuFlex machines to other independent pharmacies, which resulted in approximately $653,000 in revenue.
Our operating loss during the six months ended September 30, 2008 was lower than the prior year because we realized additional gross profit on the increased net sales, which offset a portion of the indirect costs associated with this segment.
Medication Administration Systems
Six Months Ended September 30,
--------------------------------------
2008 2007
------------------ ----------------
(In Thousands)
Net Sales $ 150 $ 123
Operating Loss $ (906 ) $ (485 )
Operating Margin (604.0 %) (394.3 %)
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Net sales during the six months ended September 30, 2008 increased due to increased sales of our MedLocker systems.
Our operating loss during the six months ended September 30, 2008 was higher than the prior year because we have added personnel to develop the MedTimes product and increased research and development expenditures.
Consolidated operating income represents operating income (loss) for the consumables, packaging automation and medication administration segments less share-based compensation expense and corporate asset depreciation expense.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 30, 2008, we had net income of $929,000 compared with $1,308,000 during the same period of the prior fiscal year. Cash provided by operations increased to $2.0 million from $306,000 during the six months ended September 30, 2008 and 2007, respectively, primarily due to decreases in inventory and prepaid and other assets. We had working capital of $13.7 million at September 30, 2008 compared to $13.6 million at March 31, 2008 and $9.5 million at September 30, 2007.
Investing activities used $2.1 million during the six months ended September 30, 2008 compared with $1.5 million during the same period of the prior fiscal year. The increase results primarily from an increase in capital expenditures for manufacturing equipment used primarily in our consumables segment, as well as additional information technology equipment used throughout the Company.
Financing activities used $424,000 during the six months ended September 30, 2008 compared with $1.4 million provided in the same period of the prior fiscal year. Cash provided by operations this year has been sufficient to fund investing activities and provide for a reduction in debt. In the prior year, additional borrowing was required to fund investing activities.
Our short-term and long-term liquidity is primarily dependent on our ability to generate cash flow from operations. Inventory levels may change significantly as we complete the manufacturing and installation of our OnDemand machines pursuant to the contract with our largest customer. Increases in net sales may result in corresponding increases in accounts receivable. Cash flow from operations and borrowing availability under the Credit Facility is anticipated to support an increase in accounts receivable and inventory.
We have new product development projects underway, principally related to our MedTimes system, which are expected to be funded by cash flow from operations. These projects are monitored on a regular basis to attempt to ensure that the anticipated costs associated with them do not exceed our ability to fund them from cash flow from operations and other sources of capital.
There was $11.3 million borrowed and an additional $1.7 million available under our Credit Facility at September 30, 2008. Subsequent to the end of the quarter, we received payments from our largest customer and used a portion of those funds to reduce the balance on the revolving line of credit by approximately $1 million.
The Credit Facility contains financial covenants that, among other things, require us to maintain certain financial ratios. We were in compliance with all provisions of the loan agreements at September 30, 2008.
We believe that the cash generated from operations during this fiscal year, and amounts available under the Credit Facility will be sufficient to meet our capital expenditures, product development, working capital needs and the principal payments required by our term loan agreements.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenue and expenses for the respective period-ended for such statements. The determination of estimates requires the use of judgment since future events and their affect on our operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under these circumstances. These estimates and our actual results are subject to the risk factors listed under Part II, Item 1A of the Form 10-Q for the fiscal quarter ended September 30, 2008 and those listed under Item 1A. Risk Factors in our Form 10-K for the fiscal year ended March 31, 2008. Nevertheless, our management believes the following items involve a higher degree of complexity and, judgment and therefore, has commented on these items below.
Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, MTSP, MTS Limited and MTS GmbH. All significant inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition
We recognize revenue on the sale of machines, other than OnDemand machines, and all consumables when title and risk of loss to the products shipped has transferred to the customer. We recognize revenue related to the sale of our OnDemand machines as prescribed in SOP 97-2, Software Revenue Recognition, because the software component of the OnDemand machine is significant and not incidental to the value and functionality of the machine. In addition, the sale of an OnDemand machine represents an arrangement that encompasses multiple deliverables and therefore each deliverable represents a separate unit of accounting. The separate deliverables are comprised of (a) the OnDemand machine installed at the customers locations; (b) the user training; (c) certain component parts that are sold separately, principally cassettes that hold medications; and (d) maintenance. These separate deliverables are incidental to the functionality of the machine. The vendor specific objective evidence of fair value of the deliverables outlined in (b-d) has been determined based upon the value of these deliverables if they were sold separately. The fair value of the deliverable outlined in (a) has been determined using the residual method which equals the total selling price of the OnDemand machine, including installation, training and cassettes, less the aggregate fair value of (b-d). The terms of the sale arrangement for an OnDemand machine is typically FOB shipping point, at which time title and risk of loss transfers to the customer, however, because the installation of the machine is essential to the functionality of the machine the recognition of any of the revenue associated with the machine is deferred until the machine is installed. For those cassettes that are provided to the customer after the OnDemand machine is installed, the revenue associated with those cassettes is recognized upon their delivery. When the training is performed, we recognize the revenue associated with the training. Revenue associated with annual maintenance contracts is recognized in equal amounts over a twelve-month period.
Revenue includes certain amounts invoiced to customers for freight and handling charges. We include the actual cost of freight and handling incurred in the cost of sales.
Revenue is reported net of rebates and discounts provided to customers and sales taxes. Rebates are generally determined based upon pricing agreements that offer certain customers incentives to purchase products from us. Discounts are provided from time to time primarily to compensate customers for inconveniences caused by late shipments, defective product or pricing errors.
Accounts Receivable
Trade accounts receivable are recorded based upon the invoiced amount, are generally not interest bearing and are considered past due when full payment is not received by the specified credit terms. We do not typically require collateral when granting credit; however, customer credit worthiness is reviewed prior to granting credit. We normally estimate the uncollectibility of our accounts receivable. We consider many factors when making our estimates, . . .
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