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| SYNO > SEC Filings for SYNO > Form 10-Q on 5-Mar-2009 | All Recent SEC Filings |
5-Mar-2009
Quarterly Report
For the quarter ended For the quarter ended
January 31, 2009 January 31, 2008 Change
$ % $ % $ %
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
For the quarter ended For the quarter ended
January 31, 2009 January 31, 2008 Change
$ % $ % $ %
Gross margin 9,441 70.4 7,621 67.4 1,820 23.9
Selling, general and
administrative 6,347 47.3 5,655 50.0 692 12.2
Research and
development 854 6.4 683 6.1 171 25.0
Operating expenses 7,201 53.7 6,338 56.1 863 13.6
Operating income $ 2,240 16.7 % $ 1,283 11.3 % $ 957 74.5 %
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We generated net revenue of $13,414 in the first quarter of fiscal 2009, an increase of $2,108 or 19% from $11,306 in the year-ago quarter. The following table summarizes net revenue by product group and geography:
For the quarter ended
January 31,
2009 2008
Peri-StripsŪ $ 4,875 $ 3,885
Biomaterial patch products 5,270 4,259
Devices for microsurgery 1,786 1,753
Surgical tools and other 1,483 1,409
Total $ 13,414 $ 11,306
Domestic $ 11,267 $ 9,460
International 2,147 1,846
Total $ 13,414 $ 11,306
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The increase in net revenue in the first quarter of fiscal 2009 compared to the
prior-year quarter was primarily due to the following:
- Incremental worldwide units sold and product mix changes increased revenue
approximately $1,700; and
- Higher average net selling prices primarily due to various worldwide hospital list price increases for certain of our products increased revenue by approximately $400.
The increase in worldwide units sales was primarily attributable to our direct
sales force growing product sales, as well as increased market acceptance of
VeritasŪ Collagen Matrix ("Veritas") into the domestic hernia and general
surgery markets and PSD Veritas into the European market.
Worldwide net revenue from Peri-Strips was $4,875 in the first quarter of fiscal
2009, an increase of 25% from $3,885 in the first quarter of fiscal 2008.
Peri-Strips growth rate exceeded the estimated growth of procedures in which the
product is used, which we believe was attributable to product performance, our
direct sales force communicating the benefits of Peri-Strips, and the increased
international market penetration of PSD Veritas. Peri-Strips is a bovine
pericardium-based staple-line buttress used primarily to control bleeding and
leakage of bodily fluids in various medical procedures, primarily gastric bypass
surgery. Included in the Peri-Strips product line was revenue from our two
linear products: PSD Apex, our permanent buttress, and PSD Veritas, our
remodelable buttress, as well as revenue from PSD Veritas Circular.
Revenue from Biomaterial patch products increased $1,011 or 24% to $5,270 in the
first quarter of fiscal 2009. A 53% increase in domestic units sold, driven by
the hernia and general surgery markets, was the primary driver of the increase.
Veritas is a remodelable tissue platform used in surgery to repair and replace
soft tissue. Other drivers of the revenue increase included a 7% increase in
unit volumes of Tissue-Guard sold worldwide and list price increases of our
Tissue-Guard products in most worldwide geographies in the first quarter. Our
Tissue-Guard family of products are used to repair and replace damaged tissue in
an array of surgical procedures, including cardiac, vascular, thoracic, and
neurological procedures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Revenue from Devices for microsurgery was $1,786 in the first quarter of fiscal
2009, up slightly from $1,753 in the year-ago period. Revenue was essentially
flat due to the following factors: customer utilization of existing inventories,
reduced capital purchases by hospitals which slowed sales of the premium S&T
instruments and turnover of two of our sales staff positions, which diverted
sales management's time and focus.
Our gross margin increased three percentage points to 70% in the first quarter
of fiscal 2009 from 67% during the first quarter of fiscal 2008. The margin
increase was due primarily to sales mix (product and geographic), higher average
net selling prices and improved manufacturing efficiencies and utilization in
the current year. Factors which affect gross margin include sales mix among
geographies and product lines, volume and other production activities.
Accordingly, our gross margins may fluctuate from period to period based on
variations in these factors.
Selling, general and administrative ("SG&A") expense during the first quarter of
fiscal 2009 was $6,347, an increase of $692 or 12% from SG&A expense of $5,655
in the first quarter of fiscal 2008. As a percentage of net revenue, SG&A
expense was 47% in the first quarter of fiscal 2009 as compared to 50% in the
prior-year quarter. The current quarter SG&A increase was due to the expansion
of our direct sales force from 43 to 49 sales representatives as well as general
and administrative investments in new business development, clinical personnel
and information technology. Additionally, stock-based compensation expense was
$194 in the current quarter, up from $112 in the first quarter of fiscal 2008.
In fiscal 2009, we expect to continue to expand the size of our sales force to
as many as 58 sales representatives by the end of fiscal 2009. In addition, we
expect to invest in post market clinical study activity in fiscal 2009 to
provide data in support of our product lines in several market indications. As a
result, we expect SG&A expense to increase significantly in fiscal 2009 as
compared to fiscal 2008.
Research and development ("R&D") expense totaled $854 during the first quarter
of fiscal 2009, an increase of $171 or 25% from the prior-year quarter, driven
by increased project activity during the current-year period. In fiscal 2009, we
expect R&D expense to increase compared to fiscal 2008 due to several
activities, including research to support current indications for use of
Veritas, exploring potential opportunities for further expanding the indications
for use of Veritas, improving the delivery system for our Peri-Strips products
and advancing the technology of the Coupler, among others. R&D expense
fluctuates from period to period based on the timing and progress of internal
and external project-related activities and the timing of such expense will
continue to be influenced primarily by the number of projects and the related
R&D personnel requirements, development and regulatory approval path, and
expected timing and nature of costs for each project.
We recorded operating income of $2,240 in the first quarter of fiscal 2009, an
improvement of $957 compared to operating income of $1,283 in the first quarter
of fiscal 2008. Interest income was $339 in the first quarter of fiscal 2009
compared with $585 in the first quarter of fiscal 2008, primarily due to
significantly lower investment yield in the current period.
We recorded a provision for income taxes in the first quarter of fiscal 2009 of
$916 at an effective tax rate of 35.5%, the rate we presently expect for the
full fiscal year. In the first quarter of fiscal 2008, we recorded income tax
expense of $673 at an effective rate of 36%.
During the first quarter of fiscal 2008, we recorded a net gain on sale of our
interventional business of $5,340 which reflected a pre-tax gain of $11,423 and
a tax provision of $6,083. Approximately $4,100 of book basis goodwill had a tax
basis of $0, thereby resulting in a higher gain for tax purposes. Additionally
in the first quarter of fiscal 2008, we recorded a net operating loss related to
our discontinued operations of $20. Included within the loss was a first quarter
of fiscal 2008 operating loss of $30 and a benefit from income taxes of $10.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Liquidity and Capital Resources
Cash, cash equivalents, restricted cash and investments totaled $65,097 as of
January 31, 2009, a decrease of $9,691 from $74,788 as of October 31, 2008.
Included in the above, we have $17,047 of investments (inclusive of $5,290 of
ARS) classified as non-current and $2,950 of restricted cash as of January 31,
2009. Working capital at January 31, 2009 and October 31, 2008 was $57,062 and
$62,097, respectively. We have no long-term debt. We currently expect our cash
and investments on hand, along with funds from operations to be sufficient to
cover both of our short- and long-term operating requirements, subject however,
to numerous variables, including research and development priorities,
acquisition opportunities and the growth and profitability of the business.
The decrease in cash, cash equivalents, investments and restricted cash was
primarily due to the use of cash of $8,126 to repurchase 496,000 shares of our
common stock in the first quarter of fiscal 2009, as well as $2,438 of cash used
for various working capital requirements.
Operating activities used cash of $173 in the first three months of fiscal 2009,
as compared to providing cash of $165 during the first three months of fiscal
2008. During the current quarter, working capital requirements used cash of
$2,438, driven by payments for year-end accruals of stock repurchases, sales
commissions and incentive compensation. Partially offsetting the use of cash for
working capital was net income of $1,663 and non cash items of $602.
Investing activities used cash of $9,689 during the three months of fiscal 2009
compared to cash provided of $59,731 during the first three months of fiscal
2008. In fiscal 2009, we used cash of $9,403 to purchase short- and long-term
municipal bonds as part of our investment strategy. In the first quarter of
fiscal 2008 we had net proceeds of $33,600 from the sale of investments as we
liquidated a majority of our ARS holdings. We also recorded $202 in purchases of
property, plant and equipment, compared to purchases of $329 in the first
quarter of fiscal 2008. Additionally in fiscal 2008, we recorded $29,500 in
proceeds from the sale of the interventional business. As noted above, $2,950 of
the sale proceeds were recorded as restricted cash. In fiscal 2009, we may spend
up to $2,000 for investments in capital assets necessary to support our expected
future growth.
Financing activities used cash of $8,039 in the first three months of fiscal
2009, primarily for the stock repurchase program noted above. Proceeds from
stock-based compensation plans totaled $87 in the first quarter of fiscal 2009,
as compared to $352 in the prior-year quarter.
At January 31, 2009, our investments included six auction rate securities
("ARS") with a par value of $9,000 and an estimated fair value of $5,290. Five
of the six ARS we own are governed under the complex requirements of the
Regulation Triple-X reinsurance trust and backed by the securitization of life
insurance premiums. These five securities are further backed by monoline
insurance. The other ARS is secured as a senior debt obligation of the issuer,
which is a financial services company that offers credit risk protection on
structured financial assets in the form of credit derivatives.
The auctions for our ARS have continued to fail, which occurs when there is not
enough demand to sell all of the securities that holders desired to sell at
auction. The immediate effect of a failed auction means such holders cannot sell
the securities at auction and the interest rate on the security resets to a
contractual maximum rate. During the first quarter of fiscal 2009, we received a
notice of default from the issuer of one of our ARS investments due to the
issuer's failure to make the interest payment for January 2009. As a result, the
monoline insurer for the ARS made the interest payments to us for January and
February 2009 and we are currently dependent upon the monoline insurer for the
credit support (interest and principal) for this holding. The issuers of our
five other ARS have continued to meet their debt interest payment obligations as
contractually required.
At January 31, 2009, the ARS investments were not liquid and in the event we
would need to access these funds, we would not be able to do so without a
significant loss of principal, unless a future auction on these investments is
successful, the broker dealer redeems the securities or the securities mature.
In recent months, several issuing and distributing ARS dealers have announced
settlement agreements with various government agencies whereby the
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
dealers plan to repurchase their customers' ARS at par over an extended time
period. During the current quarter, the State of Washington filed charges
against our third-party broker dealer, alleging violations of state securities
law and demanding, among other items, restitution at par value for all of the
broker dealer client's ARS. Our third-party broker dealer is disputing these
allegations. The future timing, proceedings and outcome of the ARS matter
between the State of Washington and our broker dealer is currently unknown.
As of January 31, 2009, our third-party broker dealer had not provided an
estimate of fair value for our ARS, and there was no observable ARS market
information available. In the absence of such information, and taking into
account the volatility in the overall investment markets, we performed a
valuation assessment to provide a fair value estimate of our ARS as of
January 31, 2009. Based on the valuation assessments of fair value for our ARS,
we recorded a temporary impairment of $3,710 related to our ARS investments of
$9,000 (par value) as of January 31, 2009. This impairment reflects a $1,281
decrease in the estimated fair value of our ARS in the first quarter of fiscal
2009, which is due to the higher value placed on liquidity by the financial
markets in response to further economic deterioration in the first quarter of
fiscal 2009, as well as the notice of default as discussed above.
We believe that the underlying issuers or the third-party insurers of our ARS
will be able to continue to pay interest when due or repay the invested
principal at par upon maturity, if applicable. However, the fair value of the
ARS investment could change significantly and we may be required to record
additional temporary ARS impairment, or any impairment could become "other than
temporary" in the future based on market conditions and continued uncertainties
in the credit markets as well as other facts and circumstances. Through
February 28, 2009, we have continued to receive interest payments on the ARS in
accordance with their terms. We believe we will ultimately be able to liquidate
our investments without significant loss of principal primarily due to the
collateral and third-party insurance securing most of the ARS. However, we may
not be able to recover our ARS investments' par value until final maturity (with
a current weighted average maturity of 27 years). Due to the ongoing
uncertainties involving our ARS, we believe the recovery period for these
investments is likely to be longer than 12 months and have classified these
investments as long-term as of January 31, 2009.
Based on our ability to access our cash and cash equivalents, our expected
operating cash flows, and our other sources of cash, we do not anticipate the
current lack of liquidity on these investments will affect our ability to
operate our business as usual.
Critical Accounting Policies
Investments: Our investments consist of tax-exempt municipal bond investments
and taxable auction rate securities. Our investment policy seeks to manage these
assets to achieve our goal of preserving principal, maintaining adequate
liquidity at all times, and maximizing returns subject to our investment
guidelines. We account for all of our investments as "available-for-sale" and
report these investments at fair value, with unrealized gains and losses
excluded from earnings and reported in "Accumulated Other Comprehensive Income
(Loss)," a component of shareholders' equity. At January 31, 2009, we recorded a
temporary impairment of $3,710 on the valuation of our ARS, along with an
unrealized gain on other investments of $265, which was reflected as a net
Accumulated Other Comprehensive Loss of $3,445 at January 31, 2009. See Note 4
to the consolidated condensed financial statements included in this Quarterly
Report on Form 10-Q for additional investment information.
We review our impairments in accordance with Emerging Issues Task Force ("EITF")
03-1 and FSP SFAS 115-1 and 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments to determine the
classification of the impairment as "temporary" or "other-than-temporary." A
temporary impairment charge results in an unrealized loss being recorded in the
other comprehensive income component of shareholders' equity. Such unrealized
loss does not reduce net income for the applicable accounting period because the
loss is not viewed as other-than-temporary. As indicated above, we believe that
the impairment of our ARS was temporary as of January 31, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Goodwill and Other Intangible Assets: We account for goodwill and other
intangible assets under Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, which provides that goodwill and
indefinite-lived intangible assets are reviewed annually for impairment, and
between annual test dates in certain circumstances. We perform our annual
impairment test for goodwill and other intangible assets in the fourth quarter
of each fiscal year. In assessing the recoverability of goodwill and other
intangible assets, projections regarding estimated future cash flows and other
factors are made to determine the fair value of the respective assets. If these
estimates or related projections change in the future, we may be required to
record impairment charges for these assets.
Revenue Recognition: Our policy is to ship products to customers on FOB shipping
point terms. We recognize revenue when the product has been shipped to the
customer if there is evidence that the customer has agreed to purchase the
products, delivery and performance have occurred, the price and terms of sale
are fixed and collection of the receivable is expected. All amounts billed to
customers in a sales transaction related to shipping and handling are classified
as net revenue. Our sales policy does not allow sales returns.
Inventories: Inventories, which are comprised of raw materials, subassemblies
and finished goods, are valued at the lower of cost, first-in, first-out
("FIFO") or market. Overhead costs are applied to work in process and finished
goods based on annual estimates of production volumes and overhead spending.
These estimates are reviewed and assessed for reasonableness on a quarterly
basis and adjusted as needed. The estimated value of excess, slow-moving and
obsolete inventory as well as inventory with a carrying value in excess of its
net realizable value is established by us on a quarterly basis through review of
inventory on hand and assessment of future product demand, anticipated release
of new products into the market, historical experience and product expiration.
Stock-Based Compensation: The Company accounts for stock based payment awards in
accordance with SFAS No. 123(R), Share Based Payments ("SFAS 123(R)"). The
Company recognizes stock based compensation based on certain option valuation
assumptions within the Black-Scholes Model. These assumption inputs are used to
determine an estimated fair value of stock based payment awards on the date of
grant and require subjective judgment. Because employee stock options have
characteristics significantly different from those of traded options, and
because changes in the input assumptions can materially affect the fair value
estimate, the existing models may not provide a reliable single measure of the
fair value of the employee stock options. Management assesses the assumptions
and methodologies used to calculate estimated fair value of stock-based
compensation on a regular basis. Circumstances may change and additional data
may become available over time, which could result in changes to these
assumptions and methodologies and thereby materially impact our fair value
determination. If factors change and the Company employs different assumptions
in the application of SFAS 123(R) the amount of compensation expense associated
with SFAS 123(R) may differ significantly from what was recorded in the current
period.
Derivative Instruments and Hedging Activities: We may enter into derivative
instruments or perform hedging activities. However, our policy is to only enter
into contracts that can be designated as normal purchases or sales.
New Accounting Standards
Effective November 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements. The
adoption of SFAS No. 157 did not have a material impact on the Company's
financial condition or results of operations. SFAS No. 157 defines fair value as
the price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. SFAS No. 157 also describes three levels of inputs that may be
used to measure fair value:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Level 1 - quoted prices in active markets for identical assets and liabilities.
Level 2 - observable inputs other than quoted prices in active markets for
identical assets and liabilities.
Level 3 - unobservable inputs in which there is little or no market data
available, which require the reporting entity to develop its own assumptions.
The fair value of the Company's investments other than its ARS was determined
based on Level 1 inputs. The fair value of these investments was $265 higher
than its cost as of January 31, 2009. The fair value of the Company's ARS
investments (described in Note 4 above) was determined based on Level 3 inputs
utilizing a discounted cash flow model, in addition to an evaluation of each
. . .
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