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| SONO > SEC Filings for SONO > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
Quarterly Report
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements in this report include, without limitation:
• information concerning possible or assumed future results of
operations, trends in financial results and business plans,
including those relating to earnings growth and revenue growth;
• statements about the level of our costs and operating expenses
relative to our revenues, and about the expected composition of
our revenues;
• statements about our future capital requirements and the
sufficiency of our cash, cash equivalents, investments and
available bank borrowings to meet these requirements;
• other statements about our plans, objectives, expectations and
intentions; and
• other statements that are not historical facts.
Words such as "believe," "anticipate," "expect" and "intend" may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties, and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our future quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K. Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business in Item 1A. "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008. These are risks that could cause our actual results to differ materially from those anticipated in our forward-looking statements or from our expected or historical results. Other factors besides the risks, uncertainties and possibly inaccurate assumptions described in this report could also affect actual results.
Overview
The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of SonoSite, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements.
Our business strategy is to lead in the design, development and commercialization of high performance, innovative ultrasound technology and HCU systems. We intend to sustain long-term growth of our business through technological innovation, broadening of sales distribution channels, entry and maintenance of strategic relationships, expanding into new clinical and geographic markets, and delivering high-quality products to customers. We are focusing on the development of innovative products with the objective of improving patient care and efficiency through ease of use, high performance imaging, and providing quicker results to physicians and clinicians. We are also investing in research and development in existing and new lines of business and other areas that we believe may contribute to our long-term growth. Recognizing that one of our greatest challenges is the current state of the global economy, we are focused on increasing sales force efficiency and effective cost management.
Over the last few years, we have laid a foundation for long-term growth by introducing innovative products, entering into strategic relationships, expanding into new markets, and providing high quality products with an industry-leading 5-year warranty. In fiscal year 2009, we plan to continue to build on this foundation and to execute well in key areas, including continuing to innovate using existing and new technologies, to build and maintain key relationships in the sales distribution channels, to improve sales force productivity, to deliver high quality products, and to manage expenses.
Results of Operations
Revenue
Revenue decreased to $51.8 million for the three months ended March 31, 2009 from $52.5 million for the three months ended March 31, 2008. The decrease in 2009 compared to 2008 was attributable to a slowdown in hospital capital spending and an unfavorable foreign exchange impact of approximately 8% for the quarter.
U.S. revenue increased to $23.2 million for the three months ended March 31, 2009 from $22.1 million for the three months ended March 31, 2008. The increase in the first quarter 2009 compared to 2008 was primarily attributable to an increased volume of orders within the enterprise group, partially offset by a 14% decline in direct hospital sales due to reduced hospital capital spending within the difficult economic environment.
Revenue from Europe, Africa and the Middle East decreased to $14.3 million for the three months ended March 31, 2009 from $17.5 million for the three months ended March 31, 2008. The decrease was primarily due to an unfavorable foreign exchange impact of 19% for the three months ended March 31, 2009. On a constant currency basis, sales remained relatively consistent.
Revenue from Latin America and Canada decreased to $4.8 million for the three months ended March 31, 2009 from $5.9 million for the three months ended March 31, 2008. The decrease was primarily due to decreased sales in Latin America as well as an unfavorable foreign exchange impact of 9%, partially offset by an increase in sales in Canada for the three months ended March 31, 2009.
Revenue from Asia Pacific increased to $9.5 million for the three months ended March 31, 2009 from $7.0 million for the three months ended March 31, 2008. The increase was primarily due to increased sales in Japan and Asia, partially offset by an unfavorable foreign exchange of 5% for the quarter.
Fiscal Year 2009 Outlook
Given current economic conditions and foreign currency trends, we anticipate
that revenue could potentially be flat to down 10% in 2009 compared to 2008. We
expect to introduce new products and features, to develop the U.S. physicians'
office market, and to expand our international operations. The expansion of our
international markets, as well as the development of the U.S. hospital and
physician office markets, considering current economic conditions, may not be as
successful as anticipated and we may encounter regulatory and other issues in
selling our products. Our revenue has been significantly and may be further
impacted by fluctuations in foreign exchange rates in the countries in which we
sell our products. Increased competition may also impact our anticipated growth
in revenue. We currently face competition from larger companies that manufacture
cart-based and portable ultrasound systems and have greater financial and other
resources.
Gross margin
Gross margin was 68% for the three months ended March 31, 2009 and 72% for the three months ended March 31, 2008. The gross margin decreased over the prior year quarter as a result of an unfavorable foreign exchange of approximately 2%, a change in product mix of approximately 1%, and an increase in operating costs of approximately 1%.
Fiscal Year 2009 Outlook
Increased competition from existing and new competitors as well as pricing pressure due to economic conditions could result in lower average realized prices and could lower our gross margin. Our gross margin can be expected to fluctuate in future periods based on the mix of business between direct, government and distributor sales; mix of U.S. and international sales; and our product and accessories sales mixes. Changes in our cost of inventory also may impact our gross margin. Adjustments to reduce carrying costs are recorded for obsolete material, earlier generation products and used or refurbished products held either as saleable inventory or as demonstration product. If market conditions change or the introduction of new products by us impacts the market for our previously released products, we may be required to further write down the carrying value of our inventory, resulting in a negative impact on gross margins. We rely on our sales forecasts by product to determine production volume. To the extent our sales forecasts or product mix estimates are inaccurate, we may produce excess inventory or experience inventory shortages, which may result in an increase in our costs of revenue, a decrease in our gross margin or lost sales. Our gross margin may also be impacted by fluctuations in foreign exchange rates.
Operating expenses
Research and development expenses were $7.7 million for the three months ended March 31, 2009, compared to $6.2 million for the three months ended March 31, 2008. The increase compared to the prior year was primarily attributable to increased headcount and other costs related to development of new features and products.
Sales, general and administrative expenses were $25.8 million for the three months ended March 31, 2009, compared to $29.2 million for the three months ended March 31, 2008. The decrease in the quarter compared to prior year was primarily attributable to foreign exchange rates and a decrease in sales costs.
Fiscal Year 2009 Outlook
We anticipate that operating expenses will decrease in 2009 compared to 2008 through effective cost management.
Other loss
Total other loss was $0.2 million for the three months ended March 31, 2009 compared to $2.1 million for the three months ended March 31, 2008. The decrease in loss was primarily attributable to the gain recognized on the repurchase of our convertible senior notes and lower interest expense as a result of less outstanding debt compared to the prior year; partially offset by lower interest income on our investment balances resulting from lower interest rates. Amounts reported in comparable prior periods have been restated due to the adoption of Financial Accounting Standards Board Staff Position (FSP) No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("APB 14-1") on January 1, 2009
Fiscal Year 2009 Outlook
We anticipate that other income will decrease in 2009 as we do not expect to repurchase the same amount of convertible senior notes and will incur additional interest expense as a result of the adoption of APB 14-1 and lower interest rates for interest income.
Income tax expense
Income tax provision was $0.5 million for the three months ended March 31, 2009, compared to $0.2 million for the three months ended March 31, 2008. The decrease in our consolidated effective tax rate for the three months ended March 31, 2009, as compared to 2008, results primarily from the reinstatement of the U.S. research and development tax credit in late 2008 and our qualification for the domestic production activities tax deduction. Amounts reported in comparable prior periods have been restated due to the adoption of APB 14-1.
Fiscal Year 2009 Outlook
We anticipate that our annual consolidated effective tax rate will approximate 39% for fiscal year 2009.
Warranty expense
We expect our warranty liability and expense to continue to increase significantly due to the five-year warranty offered with the MicroMaxx system, M-Turbo system and S Series ultrasound tools as our installed base increases. Should actual failure rates or repair or replacement costs for any of our products differ from estimates, revisions to the estimated warranty liability may be required and our results may be materially affected.
Liquidity and Capital Resources
Our cash and cash equivalents balance was $198.1 million as of March 31, 2009, compared to $209.3 million as of December 31, 2008. Cash and cash equivalents were primarily invested in money market accounts. Our short-term and long-term investment securities totaled $60.0 million as of March 31, 2009, compared to $70.5 million as of December 31, 2008. Investment securities generally consist of high-grade U.S. government or corporate debt. We have the ability to hold our securities until maturity, however, we classify all securities as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies.
As of March 31, 2009, we had $2.0 million in the Columbia Strategic Cash Portfolio, which is in the process of liquidation. Distributions from this portfolio are solely at the discretion of the portfolio manager. We have recorded $0.9 million as a short-term investment and $1.1 million as a long-term investment.
Operating activities used cash of $0.9 million for the three months ended March 31, 2009, compared to cash provided of $7.3 million for the three months ended March 31, 2008. Net income for the three months ended March 31, 2009 was adjusted by non-cash stock-based compensation expense of $2.5 million, depreciation and amortization of $1.0 million, amortization of debt discount and debt issuance costs of $1.3 million, and deferred income taxes of $1.5 million. Operating assets and liabilities were primarily impacted by the timing of payments and receipts. For the three month period ended March 31, 2009 operating assets provided $3.8 million and operating liabilities used $10.6 million. The change in operating assets is due to accounts receivable collections being less than sales for the first quarter of 2009, and the change in operating liabilities is due primarily to the timing of payments of accounts payable and accrued expenses.
Investing activities provided cash of $8.9 million for the three months ended March 31, 2009, compared to cash used of $23.6 million for the three months ended March 31, 2008. The cash provided in 2009 was primarily due to net proceeds from the sale or maturity of investment securities of $10.4 million, offset by purchases of property and equipment of $1.1 million and payment of $0.4 million of earn-out consideration associated with the acquisition of SonoMetric Health, Inc.
Financing activities used cash of $20.9 million for the three months ended March 31, 2009, compared to cash provided of $0.7 million for the three months ended March 31, 2008. Cash used in financing activities was due to the repurchase of our convertible debt and associated warrants for $21.8 million and minimum tax withholding on stock-based awards of $0.5 million partially offset by the sale of call options for $1.4 million.
We believe that our existing cash and cash generated from operations will be sufficient to fund our operations and anticipated capital expenditures and repurchases of convertible debt in 2009. Nevertheless, we may experience an increased need for additional cash due to:
• any significant decline in our revenue or gross margin;
• any delay or inability to collect accounts receivable;
• any acquisition or strategic investment in another business;
• any significant increase in expenditures as a result of
expansion of our sales and marketing infrastructure, our
manufacturing capability or our product development activities;
and
• any significant increase in our sales and marketing expenditures
as a result of our introduction of new products.
Risk Factors
A complete listing of our risk factors is contained in the Item 1A. "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, investments, warranty obligations, service contracts, incentive compensation, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
As discussed in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the year ended December 31, 2008, our critical accounting policies and estimates include revenue recognition, investments, valuation of inventories, warranty expense, income taxes, stock-based compensation, convertible debt and hedge transaction and acquisitions.
Long term debt. On January 1, 2009, we adopted APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. We bifurcated a component of the conversion option and classified that component in equity. The value of the equity component was calculated by first measuring the fair value of the liability component, using the discount rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds for the convertible debt and the amount reflected as the liability component was recorded as the equity component. We recognize the accretion of the resulting discount as part of interest expense in our consolidated statement of income.
Upon settlement of our Notes, we revalue the liability component, utilizing an interest rate of comparable nonconvertible debt. We allocate a portion of the consideration transferred to the liability component equal to the fair value of that component immediately prior to repurchase. Any difference between the consideration attributed to the liability component and the sum of the net carrying amount of the liability component and unamortized debt issuance costs is recognized as a gain or loss in the statement of income. Any remaining consideration is allocated to the reacquisition of the equity component and is recognized as a reduction of stockholders' equity.
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