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| SPAN > SEC Filings for SPAN > Form 10-Q on 10-Feb-2009 | All Recent SEC Filings |
10-Feb-2009
Quarterly Report
The statements contained in this quarterly report that are not historical facts are forward-looking statements that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as our expectations for future sales results or expense changes compared with previous periods, are only predictions. Actual events or results may differ materially as a result of risks and uncertainties facing our Company as described in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 27, 2008 and other risks referenced in our Securities and Exchange Commission filings. We disclaim any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
Results of Operations
Overview
Sales for the first quarter of fiscal 2009 declined 2% to $13.4 million compared with $13.7 million in the first quarter of last year due to volume declines in our custom products segment. Income from continuing operations was down 16% to $888,000, or $0.32 per diluted share, compared with $1.1 million, or $0.37 per diluted share, in the first quarter of 2008. The decline in income from continuing operations was caused by lower volume in the custom products segment, a less profitable product mix within the medical segment and an increase in selling and administrative expenses compared with the first quarter last year.
Sales
The sales decrease for the first quarter of 2009 as compared to the first quarter of 2008 was due primarily to the 12% decline in custom products sales to $3.6 million from $4.1 million in the first quarter of 2008.
Within the custom products segment, sales were down in both the consumer and industrial sectors in the first quarter of fiscal 2009 compared with the same quarter last year. Consumer bedding sales were down 13% to $2.8 million compared with $3.2 million in the first quarter of last year. Most of the consumer sales decline was due to lower sales to Wal-Mart in October and November, which we believe resulted primarily from general weakness in the retail market. This was partly offset by higher sales of our fusion mattress pads to other retailers as we expanded our customer base for consumer bedding products. We expect sales growth in the custom products segment beginning in the third quarter of fiscal 2009 as a result of a new program with Sam's Club.
Sales of industrial products also declined in the first quarter of fiscal 2009 and were down 8% to $779,000 compared with $849,000 in the first quarter of last year. Most of the industrial sales decline was caused by lower volume from our automotive customers, particularly in December. Our industrial product lines tend to be the most directly affected when manufacturing activity in our region declines and the economy worsens.
Sales in the medical segment rose 2% to $9.8 million in the first quarter of fiscal 2009 compared with $9.6 million in the first quarter of fiscal 2008. The medical sales performance benefited from price and volume increases compared with the first quarter of 2008. Sales of patient positioners rose 52%, overlay sales were up 39%, and seating product sales increased 32% compared with the prior year's first quarter due to accelerated buying by some customers in advance of a January 1, 2009 sales price increase for these products.
The unusually large sales increases in positioners, overlays and seating products more than offset a decline in sales of therapeutic support surfaces during the quarter. Total sales of therapeutic support surfaces in the first quarter of fiscal 2009 were down 10% to $6.4 million compared with $7.1 million in the same quarter last year, largely due to lower sales of our Hill-Rom private-label products following the expiration of our exclusive supply contract in May 2008. Our sales to Hill-Rom consist mainly of private label therapeutic support surfaces that incorporate our PressureGuard CFT® technology. Sales of our branded therapeutic support surfaces rose 7% in the first quarter of this year compared with the same quarter of last year. That growth in our branded support surfaces was led by our PressureGuard APM2 and Easy Air products. Medical sales represented 73% of total company sales in the first quarter this year compared with 70% in the first quarter last year.
In the medical business, we expect sales of our branded products to grow modestly during the remainder of the fiscal year. However, that expected growth is likely to be partially or fully offset by anticipated declines in our private label sales to Hill-Rom. We have been notified by Hill-Rom that they will cancel their current supply agreement with us effective April 6, 2009. Our sales to Hill-Rom were approximately $1.2 million in the first
quarter of fiscal 2009 and represented 12% of our medical sales or 9% of our total company sales in the first quarter. We believe our sales to Hill-Rom will decline to a minimal level during February and March 2009 as the contract reaches the closing date. We plan to consume or sell our related inventory over this period and do not anticipate incurring any charge to earnings as a result of the agreement termination.
In addition, we expect sales of our positioners, overlays and seating products to be lower in the second quarter of fiscal 2009 than they were in the second quarter of fiscal 2008 because we believe that certain customers accelerated their purchases of these products in the first quarter of fiscal 2009 in advance of the sales price increase effective January 1, 2009. These same customers are likely to temporarily decrease their purchases of these products in the second quarter of fiscal 2009. Sales of these products should return to normal levels in the third quarter of fiscal 2009.
Gross Profit
Gross profit for the first quarter of fiscal 2009 increased 1% to $4.69 million compared with $4.65 million in the first quarter last year. Gross margin rose to 35.0% of net sales in the first quarter of fiscal 2009 compared with 34.0% of net sales in the first quarter of last year. The increases in gross profit and gross margin compared with last year were caused primarily by a more profitable sales mix for the total company even though the sales mix within the medical segment was less profitable than it was in the first quarter last year. Sales in the lower-margin custom products segment declined while sales increased in the more profitable medical segment.
Our gross profit and margin also benefited from lower labor costs as a result of improved efficiency in the first quarter of 2009 compared with the first quarter of last year. We expect our gross margin for the remainder of fiscal 2009 to be slightly lower than the first quarter level due mainly to expected increases in consumer sales and expected declines in sales of private-label support surfaces. However, our future gross margin performance will depend heavily on sales volume, product mix and raw material costs.
Selling, Research & Development and Administrative Expenses
Selling and marketing expenses rose 12% to $2.2 million during the first quarter of fiscal 2009 compared with $2.0 million in the first quarter of fiscal 2008 because of higher commission and freight expenses in the medical segment, which were related to increases in sales of our branded medical products. Total sales and marketing expenses for fiscal 2009 are expected to be higher than those of fiscal 2008.
Research and development expenses decreased 12% to $170,000 for the first quarter of fiscal 2009 compared with $193,000 in the first quarter of fiscal 2008 due to the completion in fiscal 2008 of a development project that involved external design work. R&D expenses will likely fluctuate from quarter to quarter, depending on the nature of our new product development efforts in the medical segment. We expect that total research and development expenses for fiscal 2009 will be higher than those of fiscal 2008.
General and administrative expenses increased by 14% to $939,000 in the first quarter of fiscal 2009 compared with $822,000 in the first quarter of last year. The increase was due to expense associated with a decline in the cash value of corporate-owned life insurance, which in turn was related to the decline in equity markets during the October through December quarter. The cash value of life insurance declined by $144,000, or 8%, during the first quarter of fiscal 2009 and accounted for all of the first quarter increase in administrative expenses. The cash value of life insurance is adjusted to fair market value at the end of each quarter. A decline in market value is treated as an additional administrative expense, and an increase in market value is treated as a reduction in administrative expenses. Administrative expenses for fiscal 2009 are expected to be slightly higher than those of fiscal 2008.
Operating Income
Operating income for the first quarter of fiscal 2009 was down 18% to $1.3 million compared with $1.6 million in the first quarter of last year. The decrease in operating income was caused primarily by lower sales in the custom products segment, a less profitable sales mix within the medical segment and increases in selling and administrative expenses.
Non-Operating Income and Expenses
We had net non-operating expense of $2,000 in the first quarter of fiscal 2009 compared with net non-operating expense of $30,000 in the first quarter of last year. The decrease was caused primarily by a reduction in interest expense to $5,000 in the first quarter of fiscal 2009 compared with $49,000 in the same period last year. The decrease in interest expense was caused by a lower loan balance in the first quarter of this year compared with the same period of last year.
Investment and other non-operating income in the first quarter declined by 85% to $3,000 compared with the same period in fiscal 2008 as a result of lower interest rates on overnight investments and lower cash balances. We expect interest expense to be minimal during the remainder of fiscal 2009. As a result, we expect to have net non-operating income from short-term investments during the remainder of fiscal 2009.
Net Income and Dividends
Income from continuing operations declined by 16% to $888,000, or $0.32 per diluted share, compared with $1.1 million, or $0.37 per diluted share, in the first quarter last year primarily because of lower sales in the custom products segment, a less profitable sales mix within the medical segment and increases in selling and administrative expenses. Similarly, net income, which includes discontinued operations, decreased 15% during the first quarter to $887,000, or $0.32 per diluted share, compared with $1.0 million, or $0.36 per diluted share, in the same quarter last year.
During the first quarter of fiscal 2009, we paid dividends of $246,000, or 28% of net income. This payment represented one quarterly dividend of $0.09 per share. During the first quarter of last year, we paid dividends of $222,000, or 21% of net income. This payment represented one quarterly dividend of $0.08 per share.
Liquidity and Capital Resources
Cash provided by operations during the first quarter of fiscal 2009 declined 9% to $1.1 million compared with $1.2 million in the first quarter of fiscal 2008. The reduction in operating cash flow was caused mainly by lower net income and a decrease in accounts payable during the first quarter of fiscal 2009 compared with increases in accounts payable and accrued expenses during the first quarter of fiscal 2008. Major uses of cash provided by operations during the first quarter were repayment of long-term debt ($700,000), payment of dividends ($246,000), capital expenditures ($105,000) and share repurchases ($279,000).
Working capital decreased by $89,000, or 1%, to $8.0 million at the end of the first quarter of fiscal 2009 compared with the end of last fiscal year. The decrease was caused primarily by lower balances of cash and accounts receivable, which were partially offset by a decrease in accounts payable during the first quarter. The current ratio at quarter end was up slightly to 2.6 from 2.5 at fiscal year end 2008.
Accounts receivable, net of allowances, decreased by $384,000, or 5%, to $7.4 million at the end of the first quarter of fiscal 2009 compared with $7.8 million at the end of fiscal 2008. This change was caused by lower sales in the first quarter of fiscal 2009 compared with the same period last year and normal fluctuations in the timing of payments received from customers. Days sales outstanding (or average collection time), calculated using a monthly average for our trade accounts receivable, was 47.0 days in the first quarter of fiscal 2009 compared with 41.7 days in the first quarter of fiscal year 2008. The increase in collection time was caused partly by the combination of higher medical sales and lower custom products sales in the first quarter of fiscal 2009 compared with the same quarter last year. Medical sales tend to have a longer average collection time than custom products sales. All of our accounts receivable are unsecured.
Inventories increased by $56,000, or 1%, to $4.0 million at the end of the first quarter of fiscal 2009 compared with fiscal year end 2008. Inventory increases occurred in the categories of industrial raw materials and medical finished goods. We expect total inventory levels during fiscal 2009 to be similar to those of fiscal 2008.
Prepaid expenses increased by $186,000 to $238,000 at December 27, 2008 compared with $52,000 at the end of fiscal 2008 as a result of the payment of property and casualty insurance premiums.
Net property and equipment decreased by $78,000 to $6.5 million at the end of the first quarter of fiscal 2009 as the result of the combination of depreciation expense of $183,000 partially offset by capital expenditures of $105,000. We expect capital expenditures during fiscal 2009 to be lower than those of fiscal 2008.
Other assets decreased $174,000 to $2.1 million compared with $2.3 million at fiscal year end 2008 due mainly to a decrease in the cash value of life insurance.
Our trade accounts payable decreased by $474,000, or 19%, to $2.1 million compared with fiscal year end 2008 due to the decline in sales volume and related raw material purchases as well as normal monthly fluctuations. Accrued and sundry liabilities increased by $217,000, or 8%, to $3.0 million compared with fiscal year end 2008 due to an increase in income taxes payable.
During the first quarter of fiscal 2009, we fully repaid our revolving line of credit, reducing the balance from $700,000 at fiscal year end. The maximum principal amount we can borrow at any one time under the agreement is $10 million. The maturity date is June 5, 2012. We believe that we were in compliance with all covenants relating to this agreement as of December 27, 2008.
Our credit facility restricts dividends and stock repurchases during any fiscal year to an aggregate amount of no more than 50% of the sum of (i) our income from continuing operations for that fiscal year plus (ii) the absolute value of any aggregate after-tax, non-cash and extraordinary losses for that fiscal year. However, the loan agreement provides a partial exception to the above restriction to allow payment of regular quarterly dividends. Regardless of our level of income from continuing operations, we may continue to pay regular quarterly dividends in amounts no greater than the previous quarter's regular dividend as long as we remain in compliance with the tangible net worth and leverage ratio covenants in the loan agreement.
In November 2007, we announced a program to repurchase up to 5% (139,000 shares) of our outstanding common stock. Pursuant to this program during the first quarter of fiscal 2009, we repurchased 25,797 shares of our outstanding common stock at a total cost of $279,000. We intend to continue to repurchase our stock from time to time in the open market or in private transactions, depending on market and Company conditions. Considering prior purchases, we are still authorized to repurchase 48,714 shares under the program. The stock repurchase program, however, may be suspended or discontinued at any time.
We believe that funds on hand, funds generated from operations and funds available under our revolving credit facility are adequate to finance operations and expected capital requirements during fiscal 2009 and for the foreseeable future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact Of Inflation
Based on current conditions in the markets for our primary raw materials, we do not expect inflation to be a significant factor for our operations in fiscal 2009. The cost of polyurethane foam, our primary raw material, is indirectly influenced by oil prices. However, other market factors also affect foam prices, including the available supply of component chemicals, demand for related products from domestic and international manufacturers, competition among domestic suppliers, our purchase volumes and regulatory requirements. Recent declines in oil prices and a weakening economy have created expectations for potential decreases in raw material costs. We experienced small price decreases in several of our raw materials in the first quarter of fiscal 2009. Based on the current economic environment, we expect additional price decreases in certain of our raw materials. However, we are also receiving requests from customers to decrease our sales prices in response to lower raw material costs. It is therefore difficult to predict the impact that possible future raw material cost decreases might have on our profitability. The effect of any deflation in raw material costs will depend on the extent to which we have to lower selling prices of our products to respond to sales price competition in the market. We currently expect that neither inflation nor deflation will have a significant impact on our operations in fiscal 2009.
Item 3.
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