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| MDCI > SEC Filings for MDCI > Form 10-Q on 5-Feb-2009 | All Recent SEC Filings |
5-Feb-2009
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.
All amounts presented in our Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except share and per share data.
Item 2.
Three Months ended December 31, 2008 compared to Three Months ended December 31, 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
December 31,
2008 2007
(dollars in thousands)
Net sales $ 71,995 100.0 % $ 75,898 100.0 %
Gross profit $ 10,083 14.0 % $ 16,736 22.1 %
Selling, general and administrative expenses $ 8,886 12.3 % $ 10,046 13.2 %
Income before income taxes $ 252 0.4 % $ 5,903 7.8 %
Net income $ 157 0.2 % $ 3,648 4.8 %
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The Company's revenue decreased by $3,903 or 5.1% to $71,995 and its net income decreased by $3,491 or 95.7% to $157 for the quarter ended December 31, 2008 over the quarter ended December 31, 2007. The decrease in revenue is comprised of net unit volume decreases of $5,435, which was partially offset by net price/sales mix increases of $1,532.
The net unit volume decreases were primarily from losses in patient bedside utensils, operating room disposables and sterilization products (predominantly patient aids, which are principally comprised of crutches and disposable operating room towels), laboratory products, and specimen containers. Patient bedside utensils experienced a $2,659 decline in sales volume as a result of lower unit volume sales. Management believes that the decline is attributable to competitive pressures, the effect of customers' management of inventory balances in reaction to current economic conditions, back order positions and the termination of a supply contract. A significant component of the Company's net unit volume decreases in patient aids resulted from the Company's inability to negotiate acceptable price increases on crutches to a major customer and the Company's unwillingness to continue to provide these crutches at current pricing levels. This resulted in a decline of approximately $1,127 in net sales with only a negligible impact on profitability for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. These net unit volume declines were partially offset by volume increases primarily from greater domestic penetration of our minor procedure kits and trays product line.
The price/sales mix increases were primarily from increased average selling prices of our minor procedure kits and trays, containment systems for medical waste and specimen containers product lines. The increase in average selling prices of certain containment systems for medical waste and specimen container 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.
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 continued to cause the cost of plastic resin to increase and be extremely volatile. During the three months ended December 31, 2008, the Company experienced a decline in the cost of resin as measured against increases in resin costs incurred since the acquisition of MMP. The Company anticipates that such volatility may continue in the future as evidenced by increases in resin costs, incurred subsequent to December 31, 2008. 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 2% 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; continued inefficiencies incurred at our Gallaway, Tennessee manufacturing facility, increases in the cost of products sourced from foreign vendors, a decline in sales volume, increases in resin 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 and decreased freight costs.
Item 2.
Results of Operations
The following table sets forth the major sales variance components for the
quarter ended December 31, 2008 versus December 31, 2007:
(dollars in thousands)
Three months ended December 31, 2007 net sales $ 75,898
Volume of existing products, net (5,435 )
Price/sales mix, net 1,532
Three months ended December 31, 2008 net sales $ 71,995
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Net sales for the three months ended December 31, 2008 decreased $3,903 or 5.1% to $71,995 from $75,898 for the three months ended December 31, 2007.
The following table sets forth the components of the decrease 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 December 31, 2008 compared to the three months ended December 31, 2007:
Net Sales Unit Sales Average Selling
$ increase % increase Prices/Sales Mix
(decrease) (decrease) % increase
Minor Procedure Kits and Trays $ 1,761 3 % 7 %
Containment Systems for Medical Waste 521 0 % 4 %
Protective Apparel 126 3 % 3 %
Laparotomy Sponges (276 ) (11 )% 3 %
Specimen Containers (621 ) (30 )% 11 %
Laboratory Products (888 ) (30 )% 4 %
Operating Room Towels (1,028 ) (17 )% 3 %
Patient Aids (1,127 ) (99 )% 21 %
Patient Bedside Utensils (2,659 ) (16 )% 1 %
Other, net 288 not meaningful not meaningful
(Decrease) in Net Sales $ (3,903 )
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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, as well as the impact of general economic conditions within our markets. 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 December 31, 2008 decreased $6,653 or 39.8% to $10,083 from $16,736 for the three months ended December 31, 2007. Gross profit as a percentage of net sales for the three months ended December 31, 2008 decreased to 14.0% from 22.1% for the three months ended December 31, 2007. Gross profit decreased as a result of inefficiencies incurred at our Tennessee manufacturing facility of approximately $2,262, declines in unit volume of approximately $1,964, higher resin prices of approximately $1,964, increased costs of products sourced from foreign suppliers, principally from China, of approximately $1,785,
Item 2.
increased operating expenses in our West Virginia and North Carolina manufacturing facilities and the transfer of certain administrative processes to manufacturing overhead of approximately $830. These decreases were partially offset by an increase of approximately $1,532 resulting from higher average selling prices and changes in the mix of products sold and decreased outbound freight costs to customers of approximately $607.
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, 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 was purchased during the months of June and July 2008 was used in production during the three months ended December 31, 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. Management anticipates reductions in these inefficiencies during the remainder of 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
December 31,
2008 2007
(dollars in thousands)
Net sales $ 71,995 $ 75,898
Cost of sales 61,912 59,162
Gross profit 10,083 16,736
Gross profit percentage 14.0 % 22.1 %
Selling, general and administrative expenses 8,886 10,046
As a percentage of net sales 12.3 % 13.2 %
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Selling, general and administrative expenses for the three months ended December 31, 2008 decreased 11.5% to $8,886 from $10,046 for the three months ended December 31, 2007. As a percentage of net sales, selling, general and administrative expenses decreased to 12.3% for the three months ended December 31, 2008 from 13.2% for the three months ended December 31, 2007. The decrease in
Item 2.
selling, general and administrative expenses was primarily 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 and a decrease in bonuses as a result of the Company not meeting certain earnings targets. These decreases were partially offset by an increase in personnel which management believes will facilitate future growth and efficiencies.
Distribution expenses increased $128 to $1,918 for the three months ended December 31, 2008 compared to $1,790 for the three months ended December 31, 2007. The increase in distribution expenses was primarily due to increased labor costs, primarily temporary labor and overtime expenses, caused by backorders resulting from the manufacturing inefficiencies, as previously explained. Sales and Marketing expenses decreased $291 to $4,855 for the three months ended December 31, 2008 compared to $5,146 for the three months ended December 31, 2007. The decrease in Sales and Marketing expenses is primarily due to a decrease in bonuses as a result of the Company not meeting certain earnings targets. General and Administrative expenses decreased $998 to $2,113 for the three months ended December 31, 2008 compared to $3,111 for the three months ended December 31, 2007. The decrease in General and Administrative expenses is primarily due to a decrease in bonuses as result of the Company not meeting certain earnings targets, as well as a decrease in outside consulting fees.
Interest expense for the three months ended December 31, 2008 increased to $945 from $826 for the three months ended December 31, 2007. The increase in interest expense was primarily due to a net increase in the average principal loan balances outstanding partially offset by a decrease in interest rates during the quarter ended December 31, 2008 as compared to the quarter ended December 31, 2007. The increase in principal loan balances were primarily due to a decline in net cash provided by operating activities and an increase in investing activities, which were primarily comprised of equipment purchases in our Tennessee facility and renovations to our new corporate headquarters.
Nine Months ended December 31, 2008 compared to Nine Months ended December 31, 2007
Overview
The following table sets forth certain operational data and operational data as
a percentage of net sales for the periods indicated:
Nine months ended
December 31,
2008 2007
(dollars in thousands)
Net sales $ 223,214 100.0 % $ 218,429 100.0 %
Gross profit $ 36,405 16.3 % $ 50,287 23.0 %
Selling, general and administrative expenses $ 29,270 13.1 % $ 30,700 14.1 %
Income before income taxes $ 5,077 2.3 % $ 16,874 7.7 %
Net income $ 3,183 1.4 % $ 10,428 4.8 %
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Item 2.
The Company's revenue increased by $4,785 or 2.2% to $223,214 and its net income decreased by $7,245 or 69.5% to $3,183 for the nine months ended December 31, 2008 over the nine months ended December 31, 2007. The increase in revenue was primarily due to net price/sales mix increases of $8,395, partially offset by a decline in net unit volume of $3,610.
The price/sales mix increases were primarily from increased average selling prices of our minor procedure kits and trays, patient bedside utensils and containment systems for medical waste product lines. 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 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 net unit volume decreases were primarily from losses in patient bedside utensils, operating room disposables and sterilization products (predominantly patient aids, which are principally comprised of crutches and disposable operating room towels), specimen containers and laboratory products. Patient bedside utensils experienced an $835 decline in sales volume as a result of lower unit volume sales. Management believes that the decline is attributable to competitive pressures, the effect of customers' management of inventory balances in reaction to current economic conditions, back order positions and the termination of a supply contract. A significant component of the Company's net unit volume decreases in patient aids resulted from the Company's inability to negotiate acceptable price increases on crutches to a major customer and the Company's unwillingness to continue to provide these crutches at current pricing levels. This resulted in a decline of approximately $2,258 in net sales with only a negligible impact on profitability for the nine months ended December 31, 2008 compared to the nine months ended December 31, 2007. 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.
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 continued to cause the cost of plastic resin to increase and be extremely volatile. During recent months, the Company experienced a decline in the cost of resin as measured against increases in resin costs incurred since the acquisition of MMP. The Company anticipates that such volatility may continue in the future as evidenced by decreases in resin costs incurred subsequent to December 31, 2008. 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.
Item 2.
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 2% 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; continued inefficiencies incurred at our Gallaway, Tennessee manufacturing facility, increases in resin costs, increases in the cost of products sourced from foreign vendors, 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 for the nine
months ended December 31, 2008 versus December 31, 2007:
(dollars in thousands)
Nine months ended December 31, 2007 net sales $ 218,429
Volume of existing products, net (3,610 )
Price/sales mix, net 8,395
Nine months ended December 31, 2008 net sales $ 223,214
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Net sales for the nine months ended December 31, 2008 increased $4,785 or 2.2% to $223,214 from $218,429 for the nine months ended December 31, 2007.
Item 2.
The following table sets forth the components of the increase in net sales as . . .
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