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| MTSI > SEC Filings for MTSI > Form 10-K on 22-Jun-2009 | All Recent SEC Filings |
22-Jun-2009
Annual Report
We believe our business continues to grow for several reasons. First, the aging global population results in more medication being prescribed and increases the number of people that reside in skilled nursing and assisted living facilities. These increases cause revenue to increase for our pharmacy customers, which in turn leads to increased orders for our packaging supplies for medications and our fulfillment automation. As our customers grow, we grow with them. Second, we have made strategic acquisitions in Europe, which have added to the growth of our core products. We believe Europe is a receptive market for our packaging and automation systems, and we expect the European market to continue to represent an expanding portion of our total consolidated revenue. We continue to look for potential acquisitions in Europe to further expand in that market. Third, we have invested heavily in technology that has enhanced the automation we sell. As a result, we have experienced growth in sales of both prepackaging equipment, as well as our highly advanced robotic OnDemand systems.
Our operating margins have been impacted by our expansion into new markets and our introduction of new products which has led to us hiring additional personnel and investing in our infrastructure. We believe that our increased investment in personnel and infrastructure has helped to, and will continue to help to, set the stage for future growth and take advantage of our opportunities. We believe these investments will enhance our chance of success in markets such as retail pharmacy, nutraceutical and our traditional long term care market in the United States and Europe. We believe that our successful launch of our products into the retail pharmacy market, our introduction of automation into the retail pharmacy medication delivery model and the continued acceptance of our OnDemand system automation by our long term care market customers in the United States and Europe will combine to significantly increase our revenue and, ultimately, improve our operating margins.
We believe that our packaging automation products help us ensure that our customers will continue to purchase our consumable products, and therefore, provide us with a very reliable recurring stream of profitable revenue. We remain committed to leverage that consumable product revenue stream to achieve our long-term objectives of creating more value for our shareholders.
The information set forth below represents selected quarterly results of operations for each of the quarters in fiscal years ended March 31, 2009 and 2008.
Fiscal Year Ended March 31, 2009
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For The Three Months Ended
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September 30, December 31,
June 30, 2008 2008 2008 March 31, 2009
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(In Thousands, Except Percentages and Per Share Amounts)
(Unaudited)
Income Statement Data:
Net Sales $ 19,366 $ 20,702 $ 19,234 $ 16,973
Gross Profit $ 6,033 $ 6,661 $ 6,192 $ 6,423
Gross Profit Percentage 31.2 % 32.2 % 32.2 % 37.8 %
Net Income $ 374 $ 555 $ 687 $ 865
Net Income Per Basic Common Share $ 0.06 $ 0.09 $ 0.11 $ 0.13
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Net Income Per Diluted Common Share $ 0.06 $ 0.08 $ 0.10 $ 0.13
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Fiscal Year Ended March 31, 2008
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For The Three Months Ended
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September 30, December 31,
June 30, 2007 2007 2007 March 31, 2008
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(In Thousands, Except Percentages and Per Share Amounts)
(Unaudited)
Income Statement Data:
Net Sales $ 14,820 $ 14,118 $ 14,720 $ 14,151
Gross Profit $ 5,462 $ 5,842 $ 5,645 $ 4,980
Gross Profit Percentage 36.9 % 41.4 % 38.3 % 35.2 %
Net Income $ 533 $ 775 $ 611 $ 136
Net Income Per Basic Common Share $ 0.09 $ 0.12 $ 0.10 $ 0.02
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Net Income Per Diluted Common Share $ 0.08 $ 0.12 $ 0.09 $ 0.02
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FISCAL YEAR 2009 COMPARED TO FISCAL YEAR 2008
Segment Results of Operations
We evaluate our business under three segments: (a) Consumables; (b) Packaging Automation; and (c) Medication Administration Systems. The Consumables segment primarily consists of the manufacturing and sale of punch cards and blisters and other consumable medication packaging. The Packaging Automation segment consists of products that provide our customers with the ability to package medication into our consumable products in an efficient manner. This type of automation allows the packaging of medication in either a pre-pack or an on-demand manner, which means that our pharmacy customers can elect to package medications for inventory awaiting an order from their long-term care customers or wait until the long-term care customers require the medication and package it at that time. The Medication Administration Systems segment consists of automation products designed to provide our customers with a system to administer medication to residents at long-term care facilities. We currently sell one product, MedLocker® and have developed another product, MedTimes®. These segments represent the manner in which we now manage our operations. Prior to this change, we managed our business in one segment.
Segment Results of Operations
Operating profit (loss), as presented below is net sales less cost of sales
and other operating expenses that are directly identifiable to the respective
segment or allocated on the basis of sales or manpower. Operating profit is
reconciled to income before taxes in Note 19 to the Consolidated Financial
Statements included in the report.
Consumables
Years Ended March 31,
------------------------------------------
2009 2008
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(In Thousands, Except Percentages)
Net Sales $ 53,948 $ 50,415
Gross Profit 22,015 21,296
Gross Profit % 40.8 % 42.2 %
Operating Profit $ 7,259 $ 7,438
Operating Profit % 13.5 % 14.8 %
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Net sales as of March 31, 2009 increased approximately $3.5 million, or 7.0%, primarily due to growth in sales to the United States long-term care market of approximately 8.7%. The growth in the United States is primarily attributable to the increase in medications dispensed in long-term care facilities that our customers service. Although net sales in Europe increased by 18.8%, when expressed in the functional currency of the country in which the sales are made, net sales increased 3.7% in terms of United States Dollars as a result of exchange rate fluctuations between the United States Dollar and the British Pound and the Euro.
Gross profit percentage decreased in fiscal year 2009 primarily due to higher overhead costs allocated to this segment, as well as lower gross profit associated with European operations that resulted from the strengthening of the United States Dollar compared to the British Pound and the Euro.
Operating margins declined in fiscal year 2009 primarily due to (a) lower gross profit percentage; (b) higher depreciation expense associated with assets related to this segment; (c) and foreign currency fluctuations.
Packaging Automation
Years Ended March 31,
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2009 2008
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(In Thousands, Except Percentages)
Net Sales $ 21,710 $ 7,161
Gross Profit 3,163 623
Gross Profit % 14.6 % 8.7 %
Operating Loss $ (1,093 ) $ (2,849 )
Operating Loss % (5.0 %) (39.8 %)
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Net sales as of March 31, 2009 increased $14.5 million, or 203%, primarily because of the sale of OnDemand machines under an agreement with our largest customer. We recorded $14.6 million in revenue associated with 23 machines that were installed and accepted by the customer.
Our operating loss during the year ended March 31, 2009 was lower than the prior fiscal year and our gross profit percentage increased because we realized additional gross profit dollars on the increased net sales, which offset a portion of the indirect costs associated with this segment.
Medication Administration Systems
Years Ended March 31,
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2009 2008
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(In Thousands, Except Percentages)
Net Sales $ 617 $ 233
Gross Profit 131 10
Gross Profit % 21.2 % 4.3 %
Operating Loss $ (1,351 ) $ (594 )
Operating Loss % (219.0 %) (254.9 %)
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Net sales as of March 31, 2009 increased due to increased sales of our MedLocker systems.
Our operating loss for the year ended March 31, 2009 was higher than the prior fiscal year because we have added personnel to develop the MedTimes product, and we have increased research and development expenditures for this product.
Consolidated operating income (loss) represents operating income (loss) for the Consumables, Packaging Automation and Medication Administration Systems segments less share-based compensation expense and corporate asset depreciation expense.
Consolidated Results of Operations
Net Sales
Our consolidated net sales increased 31.9% for the fiscal year ended on March 31, 2009 compared with the prior year. The increase was primarily due to the installation of OnDemand machines that we sold to our largest customer pursuant to a contract that we entered into with them in May 2007. There were sixteen OnDemand Express II machines and eight OnDemand AccuFlex® machines sold as part of that contract. During fiscal year 2009, we recorded approximately $14.6 million in revenue that was associated with fifteen OnDemand Express II machines and 8 OnDemand AccuFlex machines. In addition, our consolidated net sales increased due to an approximately 7.0% increase in the sale of our consumable products, primarily punch cards and blisters. This increase resulted from sales to existing institutional pharmacy customers who continue to grow as a result of a general increase in the amount of medication dispensed to an increasing population of skilled nursing home and assisted living facility residents, as well as sales to new customers that we have gained by way of increased market penetration at the expense of our competition.
We also experienced a growth in sales for our Medication Administration Systems segment as a result of success we have had with our MedLocker product.
Our net sales in Europe increased 18.8% in fiscal 2009 compared to the prior year when these sales are expressed in the functional currencies of the country in which the product was sold. However, because the United States Dollar strengthened during fiscal year 2009 in relationship to the British Pound and the Euro, our net sales in Europe increased 3.7% when expressed in United States Dollars.
Cost of Goods Sold/Gross Profit
Our consolidated gross profit decreased to 33.2% in fiscal year 2009 from 37.9% in the prior year primarily because of the proportion of sales that were derived from OnDemand machines in fiscal year 2009 compared to the prior year. The gross profit margin that we realize on the sale of OnDemand machines is significantly lower than the gross profit margin on consumable products. In addition, the gross profit margin that we realized in fiscal 2009 from the sale of consumable products in Europe was lower compared to the prior year because of the change in the relative value between the United States Dollar, the British Pound and the Euro. The majority of the consumable products that we sell in Europe is manufactured in the United States and sold in the functional currency of the countries we sell our products in. Also, although our consolidated gross profit dollars increased in fiscal 2009 compared with the prior year, it did not increase in proportion to our net sales due, in part, to an increase of approximately 16.8% in our manufacturing overhead. The increase in manufacturing overhead resulted primarily from increased costs associated with our Packaging Automation systems segment that related to additional personnel and other resources required to install and service the OnDemand machines we sold in fiscal year 2009.
Selling, General and Administration Expenses ("SG&A")
Our consolidated SG&A expenses increased 16.2% to $18.3 million in fiscal year 2009 from $15.7 million in the prior year. The increase was primarily due to:
(a) additional technical and software support personnel added to manage the installed base of OnDemand machines;
(b) higher research and development expenditures;
(c) increased franchise and other state and local taxes resulting from an increase in the number of states in which we file tax returns; and
(d) foreign currency transaction losses related to sales of products between United States and foreign subsidiaries.
Depreciation and Amortization
Our depreciation and amortization expense increased 5.8% to $2.9 million in fiscal year 2009 from $2.8 million in the prior year. The increase resulted primarily from increased depreciation associated with capital expenditures made during the previous fiscal year.
Interest Expense
Interest expense decreased 24.8% to $479,000 in fiscal year 2009 from $637,000 in the prior year due to lower outstanding debt, as well as lower interest rates.
Income Tax Expense
Income tax expense increased to $1.1 million in fiscal year 2009 from $0.7 million in the prior year because of higher net income before tax.
Our effective tax rate was 31.4% in fiscal year 2009 compared with 26.4% in the prior year. Our effective tax rate increased primarily due to the fact that we recorded the benefit of state tax net operating losses in the previous year and adjusted uncertain tax positions in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2009, we had net income of approximately $2.5 million compared to $2.1 million in the prior year. Cash provided by operating activities was approximately $5.6 million during the fiscal year ended March 31, 2009 compared to approximately $859,000 for the prior fiscal year. The increase results primarily from the fact that we were successful in gaining the acceptance of the OnDemand machines we sold to our largest customer and installed in the prior fiscal year, and thereby, significantly reducing our inventory of these machines and deposits we had outstanding with our outsourced manufacturer of the machines.
Investing activities used approximately $2.5 million during the fiscal year ended March 31, 2009 compared with $5.2 million during the prior fiscal year. The decrease results primarily from the fact that in the prior year we spent approximately $2.0 million for a new punch card press. The press increased our capacity to produce punch cards to meet our expected needs through fiscal year 2010, and therefore, a similar expenditure was not required in fiscal year 2009.
Financing activities used approximately $3.6 million during the fiscal year ended March 31, 2009 compared with $4.7 million provided during the prior fiscal year. Our free cash flow increased in fiscal year 2009 compared to the prior fiscal year because our capital expenditures were less and our operating cash flow increased, and therefore, we used our free cash flow to reduce our debt.
We had working capital of $12.7 million at March 31, 2009, compared to $13.6 million at March 31, 2008. The decrease in working capital resulted primarily from the reduction in inventory and deposits to outsourced manufacturers that we had funded primarily with our revolving line of credit.
We do not maintain significant cash balances because available cash is used to pay down our revolving line of credit. Cash on hand of $493,000 and $662,000 at March 31, 2009 and 2008, respectively, is held in banks located in the United States, the United Kingdom and Germany. We view the excess availability on our line of credit as our cash reserve. At March 31, 2009, we had approximately $4.1 million available on our revolving line of credit.
Our revolving line of credit is collateralized by a first security interest in all of our assets and contains provisions that require us to maintain certain financial covenants. We were in compliance with all provisions of the loan agreements as of March 31, 2009. Our credit facility was originated in November 2007 and expires in November 2010. Availability on the revolving line of credit reduces by $335,000 each quarter through August 2010.
Our short-term and long-term liquidity is primarily dependent on our ability to generate cash flow from operations. Inventory levels may change based upon our success in selling our OnDemand systems. Increases in net sales may result in corresponding increases in accounts receivable. Cash flow from operations and borrowing availability on the revolving line of credit is anticipated to support anticipated working capital needs and capital expenditures requirements for at least the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not have any off-balance sheet arrangements.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenue and expenses for the respective period-ended for such statements. The determination of estimates requires the use of judgment since future events and their effect on our operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances. These estimates and our actual results are subject to the risk factors listed above under "Item 1. Business." Nevertheless, our management believes the following items involve a higher degree of complexity and judgment.
Revenue Recognition
We recognize revenue on the sale of machines, other than OnDemand machines, and all consumables when title and risk of loss to the products shipped has transferred to the customer. We recognize revenue related to the sale of our OnDemand machines as prescribed in SOP 97-2, Software Revenue Recognition, because the software component of the OnDemand machine is significant and not incidental to the value and functionality of the machine. In addition, the sale of an OnDemand machine represents an arrangement that encompasses multiple deliverables and therefore each deliverable represents a separate unit of accounting. The separate deliverables are comprised of (a) the OnDemand machine installed at the customers location; (b) the user training; (c) certain component parts that are sold separately, principally cassettes that hold medications; and (d) maintenance. These separate deliverables are incidental to the functionality of the machine. The vendor specific objective evidence (VSOE) of fair value of the deliverables outlined in (b-d) has been determined based upon the value of these deliverables if they were sold separately. The fair value of the deliverable outlined in (a) has been determined using the residual method which equals the total selling price of the OnDemand machine, including installation, training and cassettes, less the aggregate fair value of (b-d). The terms of the sale arrangement for an OnDemand machine is typically FOB shipping point, at which time title and risk of loss transfers to the customer, however; because the installation of the machine is essential to the functionality of the machine the recognition of any of the revenue associated with the machine is deferred until the machine is installed. For those cassettes that are provided to the customer after the OnDemand machine is installed, the revenue associated with those cassettes is recognized upon their delivery. When the training is performed, we recognize the revenue associated with the training. Revenue associated with annual maintenance contracts is recognized in equal amounts over a twelve-month period.
Revenue includes certain amounts invoiced to customers for freight and handling charges. We include the actual cost of freight and handling incurred in the cost of sales.
Revenue is reported net of rebates and discounts provided to customers. Rebates are generally determined based upon pricing agreements that offer certain customers incentives to purchase products from us. Discounts are provided from time to time primarily to compensate customers for inconveniences caused by late shipments, defective product or pricing errors.
Accounts Receivable
Trade accounts receivable are recorded based upon the invoiced amount, are generally not interest bearing and are considered past due when full payment is not received by the specified credit terms. We do not typically require collateral when granting credit; however, customer credit worthiness is reviewed prior to granting credit. We normally estimate the uncollectibility of our accounts receivable. We consider many factors when making our estimates, including analyzing accounts receivable and historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the reserve for uncollectible accounts. We review the status of our accounts monthly, assessing the customer's ability to pay. When a specific account is deemed uncollectible, the account is written off against the reserve for uncollectible accounts. An additional reserve of one percent of accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $86,000.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. The elements of costs included in the valuation of inventory are the direct costs associated with materials purchased, direct labor expended to manufacture the inventory and an allocation of general overhead expenses incurred to operate the manufacturing facilities. The allowance for inventory obsolescence and slow moving inventory is reviewed on a regular basis. We review various information related to the age and turnover of specific inventory items to assist with this assessment. An additional reserve of one percent of inventory would require an increase in the inventory reserve accounts and would result in additional expense of approximately $100,000.
Self-Insurance Plan Reserve
We have a medical health benefit self-insurance plan, which covers substantially all of our employees. During the fiscal year ended March 31, 2009, we were reinsured for claims that exceed $100,000 per participant and an annual maximum aggregate limit of approximately $1.3 million. Future claims may affect the reinsurance limits that may be available to us.
Income Taxes
Income taxes are provided for under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers anticipated future taxable income, . . .
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