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| SPAN > SEC Filings for SPAN > Form 10-Q on 12-May-2009 | All Recent SEC Filings |
12-May-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 second quarter of fiscal 2009 declined 15% to $13.4 million
compared with $15.8 million in the second quarter of last year due to lower
sales in both the medical and custom products segments. Net income decreased by
23% during the second quarter to $1.1 million, or $0.38 per diluted share,
compared with $1.4 million, or $0.48 per diluted share, in the same quarter of
last year. The decrease in net income was primarily the result of lower sales
volumes.
Sales for the first half of fiscal 2009 declined 9% to $26.8 million compared with $29.4 million in the same period of last year. The decline was due to lower sales volumes in both the medical and custom products segments. Net income decreased by 20% during the first six months of fiscal 2009 to $1.9 million, or $0.69 per diluted share, compared with $2.4 million, or $0.84 per diluted share, in the same period of last year.
Sales
Second quarter sales in the medical segment decreased 19% to $9.3 million
compared with $11.5 million in the same quarter of last year. Medical sales were
down from the second quarter of last year mainly due to lower volumes of private
label support surfaces following the expiration of our Hill-Rom private label
supply contract in May 2008. Sales to Hill-Rom in the second quarter of fiscal
2009 were down 70% to $595,000 compared with $2.0 million in the second quarter
of last year and represented 66% of the total sales decline in the medical
segment for the second quarter. In addition to the decline in private label
support surface sales, sales of our PressureGuardŽ Easy AirŽ support surface
decreased because a large order from a long-term care customer that shipped in
last year's second quarter was not repeated in this year's second
quarter. Largely as a result of these two factors, sales of our core therapeutic
support surface products declined 26% to $6.6 million during the second quarter
compared with $8.9 million in the second quarter of last year. Therapeutic
support surfaces made up 70% of our medical sales in the second quarter compared
with 77% in the second quarter of last year.
In other medical product lines, sales of seating products increased by 8% during the quarter compared with the second quarter of last year. Patient positioner sales were down by 2%. Sales of SelanŽ skin care products decreased by 4%, and mattress overlays decreased by 9%. Total medical sales represented 70% of total company sales in the second quarter of this year compared with 73% in the second quarter of last year.
For fiscal 2009 year to date, medical sales declined 9% to $19.1 million from $21.0 million in the same period of last year. The decrease was driven by lower sales of private label support surfaces as discussed above. Excluding private label sales to Hill-Rom of $1.8 million in the first half of fiscal 2009 and $4.3 million in the first half of fiscal 2008, total medical sales would have increased by 4% to $17.3 million for the year-to-date period compared with $16.7 million for the prior-year period. We believe it is useful to view medical sales results excluding the impact of the expired Hill-Rom contract in order to better judge the sales performance of the portion of our medical business that was unaffected by the private label contract expiration. Sales of therapeutic support surfaces, which include private label sales, fell by 19% during the period. Year-to-date sales of medical mattress overlays and patient positioners increased by 14% and 25%, respectively. Sales of seating products were up 20%, and Selan sales decreased by 10% for the first half of fiscal 2009 compared with the same period of last year. The year-to-date sales gains in overlays, positioners and seating products were the result of sales price increases on certain product lines in October 2008 and January 2009 and accelerated purchasing in November and December 2008 by certain customers in advance of the January 1st sales price increase.
We launched our Risk Manager bedside safety mat in December 2008. Initial customer response and sales have been very promising at $182,000 for the second quarter. We believe other new product introductions and additions to our support surface and positioner product lines will contribute modestly to expected improvements in branded medical sales levels in the second half of this fiscal year. However, expected sales increases in our branded medical product lines will be at least partially offset by lower sales of private label support surfaces due to the expiration of the Hill-Rom supply contract as described above.
Sales in the custom products segment were down 6% to $4.0 million in the second quarter of 2009 compared with $4.3 million in the second quarter of last year. The majority of the custom products sales decline came from our industrial product lines. Industrial sales declined 26% to $695,000 compared with $938,000 in the second quarter of last year due mainly to lower sales in the automotive market. Consumer sales, which make up the other part of the custom products segment, declined 1% in the second quarter of this year to $3.3 million compared with $3.4 million in the second quarter of last year. Consumer sales to Wal-Mart were up during the second quarter. However, the increase was offset by lower sales to other consumer customers caused by the general weakness in retail sales.
Sales in the custom products segment for the first half of fiscal 2009 were down 9% to $7.6 million compared with $8.4 million for the first two quarters of fiscal 2008. Consumer sales were down 7% to $6.1 million, and industrial sales declined 18% to $1.5 million. For the remainder of fiscal 2009, we expect custom products sales to increase compared with the first half of fiscal 2009 and the last half of fiscal 2008 as a result of new consumer business with Sam's Club, which began shipping in April 2009.
Gross Profit
Our gross profit decreased 14% to $4.8 million in the second quarter of fiscal 2009 compared with $5.5 million in the second quarter of last year. However, our gross margin for the second quarter increased to 35.7% compared with 35.2% in the same period of last year. For the first half of fiscal 2009, our gross margin increased to 35.4% compared with 34.6% in the same period of last year. Our gross profit for the first half of fiscal 2009 declined 7% to $9.5 million from $10.2 million. The decreases in gross profit for the second quarter and year-to-date periods were related to lower sales volumes which were partially offset by improved manufacturing efficiencies. Improvements in raw material and labor usage, particularly in the lower-margin custom products segment, helped preserve and increase our gross margin even though sales were down. We expect the gross margin for the full year of fiscal 2009 to be slightly higher than that of fiscal 2008.
Selling, Research & Development and Administrative Expenses Selling and marketing expenses decreased 10% in the second quarter of fiscal 2009 to $2.1 million compared with $2.4 million in the prior year. The decreases were largely due to lower evaluation samples and freight expenses in the medical segment related to lower medical sales volume. For the first half of fiscal 2009, selling and marketing expenses were flat at $4.3 million compared with the same period of last year. We expect total sales and marketing expenses for fiscal 2009 to be slightly higher than those of fiscal 2008.
Research and development expenses increased 14% to $185,000 compared with $162,000 in the second quarter of fiscal 2008. The increase resulted from new product development efforts in the medical segment. Total research and development expenses for the first half of fiscal 2009 were flat at $354,000 compared to the first half of fiscal 2008. We expect that total research and development expenses for fiscal 2009 will be slightly higher than those of fiscal 2008.
Administrative expenses decreased by 1% to $878,000 in the second quarter of fiscal 2009 compared with $888,000 in the second quarter of last year. Administrative expenses for the year to date in fiscal 2009 increased 6% to $1.8 million compared with $1.7 million in the first half of last year. The increase for the year-to-date was due to higher depreciation expense related to a new computer system and a reduction in the cash value of corporate-owned life insurance policies caused by recent stock market declines. These expense increases were partially offset by a decline in property and casualty insurance premiums. We expect administrative expenses for fiscal 2009 to be slightly higher than those of fiscal 2008.
Operating income decreased by 25% to $1.6 million in the second quarter from $2.1 million in the same quarter of last year primarily due to lower sales volumes. For the fiscal year to date, total operating income declined 22% to $2.9 million compared with $3.8 in the same period of last year primarily for the same reason.
Non-Operating Income and Expenses
We generated net non-operating income of $1,000 in the second quarter of fiscal
2009 compared with net non-operating expense of $6,000 in the second quarter of
last year. The $7,000 change from expense to income was primarily caused by a
$31,000 reduction in interest expense offset by a $17,500 reduction in a gain on
the sale of equipment, which was included in last year's second quarter. For the
first half of fiscal 2009, net non-operating expense was $500 compared with
$36,000 in the same period of last year. The change was caused by a $23,000
decline in investment income and the reduction in gain on sale of equipment
mentioned above, offset by a $76,000 reduction in interest expense associated
with the payoff in December 2008 of our revolving debt. We expect the quarterly
levels of net non-operating expense during the remainder of fiscal 2009 to be
less than that of fiscal 2008.
Net Income and Dividends
Income from continuing operations decreased by 25% to $1.1 million, or $0.38 per
diluted share, in the second quarter of fiscal 2009 compared with $1.4 million,
or $0.49 per diluted share, in the same period of last year. For the fiscal year
to date in 2009, income from continuing operations declined 21% to $1.9 million,
or $0.69 per diluted share, compared with $2.5 million, or $0.86 per diluted
share, in the same period of last year. The 2009 second quarter and year-to-date
declines were caused by lower sales volume during the periods.
Net income, which includes discontinued operations, decreased 23% during the second quarter to $1.1 million, or $0.38 per diluted share, compared with $1.4 million, or $0.48 per diluted share, in the same quarter of last year. Net income for the first half of fiscal 2009 decreased 20% to $1.9 million, or $0.69 per diluted share, compared with $2.4 million, or $0.84 per diluted share, in the first six months of fiscal 2008. For fiscal 2009 year to date, the loss from discontinued operations was down by 97% to $1,000 (less than $0.01 per diluted share after taxes) compared with a loss of $44,000 (a $0.02 loss per diluted share after taxes) in the first half of last fiscal year.
During the first six months of fiscal 2009, we paid dividends of $493,000, or 25% of net income. These payments represented two quarterly dividends of $0.09 per share. During the first six months of fiscal 2008, we paid dividends of $445,000, or 18% of net income. These payments represented two quarterly dividends of $0.08 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the first six months of fiscal 2009 declined by 11% to $1.6 million compared with $1.8 million in the same period of last year. The decrease in cash flow compared with the first half of last year was caused primarily by the decline in net income during the period. Changes in working capital accounts also reduced cash flow during the first half of fiscal 2009 and consisted of the following: a reduction in accounts receivable related to lower sales volume, an increase in inventory related to new consumer business, a decrease in accounts payable and accrued expenses caused by normal monthly fluctuations, and the payment in the second quarter of various accrued expenses. Cash provided by operations was used during the first two quarters of fiscal 2009 to repay $700,000 of long-term debt and to fund dividends of $493,000, capital expenditures of $217,000 and share repurchases of $356,000.
Working capital increased by $715,000, or 9%, to $8.8 million at the end of the second quarter compared with $8.0 million at the end of last fiscal year. The increase was primarily caused by lower balances in accounts payable and accrued and sundry liabilities which were partially offset by a reduction in accounts receivable as discussed above. The current ratio at quarter end increased to 3.1 from 2.5 at fiscal year end 2008.
Accounts receivable, net of allowances, decreased by $918,000, or 12%, to $6.9 million at the end of the second quarter of fiscal 2009 compared with $7.8 million at fiscal year end 2008. The decrease was caused by lower sales levels during 2009. Days sales outstanding (or average collection time), calculated using a monthly average for accounts receivable balance, was 45 days for the year-to-date in fiscal 2009 compared with 41 days for the first six months of fiscal 2008. All of our accounts receivable are unsecured.
Inventories increased by $342,000, or 9%, to $4.3 million at the end of the second quarter of fiscal 2009 compared with $4.0 million at fiscal year end 2008. The increase occurred primarily in the category of custom products finished goods as we built inventory for new consumer business with Sam's Club, which began shipping in April 2009. Because of the timing of the new consumer business, inventory levels were elevated at the end of the second quarter. Inventory should return to more normal levels during the last half of fiscal 2009. Inventory turns, calculated using annualized cost of goods sold, for the first half of fiscal 2009 were 8.3 times compared with 9.7 times for the full fiscal year in 2008. (Average days cost of sales in inventory were 43.8 for the first half of fiscal 2009 compared with 37.4 for the full fiscal year in 2008.) We expect total inventory levels during fiscal 2009 to be lower than those of fiscal 2008.
Prepaid expenses increased by $352,000 to $404,000 at March 28, 2009 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 $155,000 to $6.4 million at the end of the second quarter of fiscal 2009 as the result of the combination of normal depreciation expense of $372,000 and capital expenditures of $217,000. We expect that capital expenditures during fiscal 2009 will be lower than 2008 levels.
Other assets decreased $93,000 to $2.2 million compared with $2.3 million at fiscal year end 2008 due mainly to a decrease in the cash value of life insurance policies.
Our trade accounts payable decreased by $622,000, or 25%, to $1.9 million compared with fiscal year end 2008 due to normal monthly fluctuations in the timing of purchases and payments. Accrued and sundry liabilities decreased by $512,000, or 19%, to $2.2 million compared with fiscal year end 2008 due to payments of previously accrued expenses in the categories of vendor rebates, profit sharing and property taxes.
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 March 28, 2009.
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% (138,772 shares) of our outstanding common stock. In February 2009, we expanded the repurchase program by 100,000 additional shares, authorizing a total repurchase program of 238,772 shares. Pursuant to this program during the first six months of fiscal 2009, we repurchased 34,238 shares of our outstanding common stock at a total cost of $356,000 or an average cost per share of $10.39. Our total stock repurchases from November 2007 to March 2009 were 98,499 shares at a total cost of $1.1 million or an average cost per share of $11.20. 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 authorized to repurchase an additional 140,273 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 have experienced small price decreases in several of our raw materials during the first half of fiscal 2009. At present, prices for our key raw materials appear to have stabilized. However, these prices could increase again if oil prices rise significantly. In addition, we have received 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 changes 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.
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