Add
SPAN to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SPAN > SEC Filings for SPAN > Form 10-Q on 11-Aug-2009 | All Recent SEC Filings |
11-Aug-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 third quarter of fiscal 2009 declined 4% to $14.3 million compared
with $14.9 million in the third quarter last year due primarily to a decline in
sales in the medical segment that was partially offset by higher sales in the
custom products segment. The 4% decrease in sales was caused mainly by the
recent expiration of a supply contract for private label therapeutic support
surfaces that made up $1.5 million of our medical sales during the third quarter
last year. Net income was down by 2% during the third quarter to $1.14 million,
or $0.41 per diluted share, compared with $1.16 million, or $0.41 per diluted
share, in the same quarter last year. The earnings decline in the third quarter
was caused mainly by lower sales volume in the medical segment.
Sales for the first nine months of fiscal 2009 declined 7% to $41.1 million compared with $44.3 million in the same period last year. The decline was due to lower sales volumes in the medical segment primarily caused by lower sales of private label support surfaces related to the expired sales contract discussed above. Net income decreased by 14% during the first nine months of fiscal 2009 to $3.1 million, or $1.10 per diluted share, compared with $3.6 million, or $1.25 per diluted share, in the same period last year.
Sales
Medical sales decreased 15% to $9.1 million in the third quarter this year
compared with $10.8 million in last year's third quarter. Of the $1.7 million
decline in medical sales during the quarter, $1.3 million (or 81% of the
decline) was related to the expired private label supply contract with Hill-Rom,
which has been previously disclosed. Sales of private-label support surfaces to
Hill-Rom were $202,000 in the third quarter this year, down from $1.5 million in
the third quarter last year. Excluding the effect of the expired contract in
both periods, medical sales would have declined only 3% to $8.9 million compared
with $9.3 million in the third quarter last year. 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.
Most of the remaining decline in medical sales occurred in our lines of Geo-Mattress® therapeutic support surfaces that were negatively affected by a slowdown in capital purchases among many of our medical customers. Therapeutic support surfaces made up 69% of our medical sales in the third quarter compared with 74% in the third quarter last year.
In addition, sales of our PressureGuard® powered therapeutic support surfaces were up 4% in the third quarter this year compared with the third quarter last year due to modest growth in our PressureGuard APM® and Easy Air® product lines. Medical overlay sales were down 16%, and patient positioner sales declined 12%. Selan skin care sales grew by 1%, and sales of seating products were up by 2%. Medical sales made up 64% of total company sales in the third quarter of this year compared with 73% in the third quarter last year. We believe medical sales in the fourth quarter of fiscal 2009 will be similar to third quarter fiscal 2009 levels.
For fiscal 2009 year to date, medical sales declined 11% to $28.3 million from $31.8 million in the same period last year. The decline in medical sales was due to the expiration of the private label Hill-Rom contract, which represented $2.0 million in sales for the year to date this year compared with $5.8 million in the same period last year. Excluding the effect of the expired contract, medical sales for the first nine months of fiscal 2009 would have increased by 1% to $26.3 million compared with $26.0 million in the same period last year.
Sales of therapeutic support surfaces, which include private label products, fell by 20% during the nine months ended June 27, 2009. Year-to-date sales of medical mattress overlays and patient positioners increased by 3% and 11%, respectively. Sales of seating products were up 13%, and Selan sales decreased by 6% for the first nine months of fiscal 2009 compared with the same period last year.
We launched our Risk Manager bedside safety mat in December 2008. Initial customer response and sales have been very promising at $300,000 for the third quarter. We believe other new product introductions and additions to our support surface and positioner product lines will contribute modestly to sales levels in the fourth quarter of 2009. 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.
Sales in the custom products segment rose 27% to $5.2 million in the third quarter of fiscal 2009 compared with $4.1 million in the third quarter last year. The custom products sales growth was due to strong performance among our consumer product lines, which increased 46% in the third quarter to $4.4 million compared with $3.0 million in the third quarter last year. Most of the consumer sales increase came from our new business with Sam's Club.
Early in 2009, Span-America was selected as one of three companies that would compete to supply consumer mattress pads to Sam's Club. We began shipping the new products in April, and our sales to Sam's in the third quarter of fiscal 2009 were $1.7 million. We learned in late June that one of the three competing suppliers had been eliminated from the competition. Then in August, we were told that Sam's had selected an offshore company as their sole remaining supplier of mattress pads and that Span-America would not be a continuing supplier to Sam's. Our ongoing business with Wal-Mart is unaffected by the Sam's decision. We plan to sell the remaining Sam's-related inventory, and we do not expect significant write-offs or charges in the fourth fiscal quarter related to the loss of the Sam's business.
Within the custom products segment, the third quarter increase in consumer sales was offset somewhat by lower sales of industrial product lines. Industrial sales declined 28% to $745,000 compared with $1.0 million in the third quarter last year due to lower demand from our customers in the automotive, water sports and packaging markets. Our industrial sales have been the most sensitive to the downturn in the economy.
For the first nine months of fiscal 2009, sales in the custom products segment increased 3% to $12.8 million compared with $12.5 million for the same period last year. The increase was due to higher consumer sales, which rose 10% to $10.6 million partially due to the Sam's Club program. The increase in consumer sales was partially offset by a 21% decline in sales of industrial products to $2.2 million compared with $2.8 million in the same period last year.
We expect custom products sales in the fourth quarter of fiscal 2009 to be lower than those of the just completed third fiscal quarter primarily due to the loss of the Sam's Club business.
Gross Profit
Our gross profit increased 1% to $5.0 million in the third quarter of fiscal
2009 compared with $4.96 million in the third quarter last year. The gross
margin also increased to 34.9% in the third quarter this year compared with
33.4% last year. The gross profit and gross margin performance in the third
quarter benefited from declines in labor and manufacturing overhead costs as we
continue to achieve efficiency improvements from implementing lean manufacturing
concepts. Raw material costs increased slightly as a percent of sales in the
third quarter due primarily to the shift in sales mix.
For the first nine months of fiscal 2009, our gross margin increased to 35.2% compared with 34.2% in the same period last year. Our gross profit for the first nine months of fiscal 2009 declined 4% to $14.5 million from $15.1 million in the same period last year. Improvements in labor efficiency and raw material usage, particularly in the lower-margin custom products segment, helped increase our gross margin even though total 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 remained level at $2.3 million for the third quarter of fiscal 2009 compared with the same quarter last year. For the first nine months of fiscal 2009, selling and marketing expenses were flat at $6.6 million compared with the same period last year. We expect total sales and marketing expenses for fiscal 2009 to be similar to those of fiscal 2008.
Research and development expenses increased 71% to $253,000 compared with $148,000 in the third quarter of fiscal 2008. The increase in R&D expenses was related to prototype and testing costs for several new product development projects in the medical segment. For the same reason, R&D expenses for the first nine months of fiscal 2009 increased 21% to $608,000 compared with $503,000 in the first nine months of fiscal 2008. We expect that total R&D expenses for fiscal 2009 will be higher than those of fiscal 2008.
Administrative expenses decreased by 3% to $754,000 in the third quarter of fiscal 2009 compared with $780,000 in the third quarter last year. Administrative expenses for the year-to-date in fiscal 2009 increased 3% to $2.6 million compared with $2.5 million in the first nine months last year. The year-to-date increase was due to a reduction in the cash value of corporate-owned life insurance policies (which is shown as an administrative expense) caused by stock market declines and higher depreciation expense related to a new enterprise resource planning computer system. These expense increases were partially offset by a decline in property and casualty insurance cost. We expect administrative expenses for fiscal 2009 to be slightly higher than those of fiscal 2008.
Operating income decreased by 1% to $1.75 million in the third quarter from $1.77 million in the same quarter last year primarily due to higher research and development costs ($105,000), offset partially by a decline in administrative expenses ($26,000) compared with the third quarter last year. For the fiscal year to date, total operating income declined 15% to $4.7 million compared with $5.5 million in the same period last year primarily due to lower sales volume in the medical segment.
Non-Operating Income and Expenses
We generated net non-operating income of $4,000 in the third quarter of fiscal
2009 compared with net non-operating expense of $12,000 in the third quarter
last year. The $16,000 change from expense to income was primarily caused by a
$16,000 reduction in interest expense. For the first nine months of fiscal 2009,
net non-operating income was $3,000 compared with $48,000 of expense in the same
period last year. The change was caused by a $24,000 decline in investment
income and a $17,000 lower gain on sale of equipment, offset by a $93,000
reduction in interest expense associated with the payoff in December 2008 of our
revolving debt. We expect net non-operating income in the fourth quarter of
fiscal 2009 to be similar to third quarter fiscal 2009 levels.
Net Income and Dividends
Income from continuing operations was flat at $1.16 million, or $0.41 per
diluted share, in the third quarter this year and last year. For the fiscal year
to date in 2009, income from continuing operations declined 15% to $3.1 million,
or $1.11 per diluted share, compared with $3.6 million, or $1.26 per diluted
share, in the same period last year. The 2009 year-to-date decline was caused by
lower medical sales volume during the period.
Net income, which includes discontinued operations, decreased 2% during the third quarter to $1.14 million, or $0.41 per diluted share, compared with $1.16 million, or $0.41 per diluted share, in the same quarter last year. Net income for the first nine months of fiscal 2009 decreased 14% to $3.1 million, or $1.10 per diluted share, compared with $3.6 million, or $1.25 per diluted share, in the first nine months of fiscal 2008. For fiscal 2009 year to date, the loss from discontinued operations was down by 57% to $21,000 (a $0.01 loss per diluted share after taxes) compared with a loss of $48,000 (a $0.02 loss per diluted share after taxes) in the first nine months of last fiscal year. The 2009 expenses for the discontinued safety catheter segment were primarily for patent maintenance fees.
During the first nine months of fiscal 2009, we paid dividends of $738,000, or 24% of net income. These payments represented three quarterly dividends of $0.09 per share. During the first nine months of fiscal 2008, we paid dividends of $695,000, or 19% of net income. These payments represented two quarterly dividends of $0.08 per share and one of $0.09 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the first nine months of fiscal 2009 increased by 21% to $3.7 million compared with $3.0 million in the same period last year. The increase in cash flow compared with the first nine months of last year was caused primarily by a decrease in accounts receivable during the first nine months of fiscal 2009. Cash provided by operations was used during the first three quarters of fiscal 2009 to repay $700,000 of long-term debt, to fund dividends of $738,000, to purchase marketable securities of $500,000, and to fund capital expenditures of $281,000 and share repurchases of $484,000.
Working capital increased by $1.4 million, or 18%, to $9.5 million at the end of the third quarter compared with $8.0 million at the end of last fiscal year. The growth in working capital was caused by increases in cash and securities available for sale and lower balances in accounts payable which were partly offset by the reduction in accounts receivable as discussed above. The current ratio at quarter end increased to 3.0 from 2.5 at fiscal year end 2008.
Accounts receivable, net of allowances, decreased by $886,000, or 11%, to $6.9 million at the end of the third quarter of fiscal 2009 compared with $7.8 million at fiscal year end 2008. The decrease was caused by lower sales levels during the third quarter of fiscal 2009. Days sales outstanding (or average collection time), calculated using a monthly average for our trade accounts receivable, remained at 44 days for the year to date in fiscal 2009 compared with 44 days for the full fiscal year of 2008. All of our accounts receivable are unsecured.
Inventories increased by $139,000, or 3%, to $4.1 million at the end of the third quarter of fiscal 2009 compared with $4.0 million at fiscal year end 2008. Inventory turns, calculated using annualized cost of goods sold, for the first nine months of fiscal 2009 were 8.7 times compared with 9.7 times for the full fiscal year in 2008. The increase in inventory balances and the corresponding decrease in inventory turns were caused mostly by higher levels of raw materials and finished goods for consumer products, which in turn was related to the Sam's Club program. Average days cost of sales in inventory were 41.6 for the first nine months of fiscal 2009 compared with 37.4 for the full fiscal year in 2008. We expect total inventory levels at the end of fiscal 2009 to be similar to those of fiscal year end 2008.
Prepaid expenses increased by $193,000 to $245,000 at June 27, 2009 compared with $52,000 at the end of fiscal 2008 as a result of the payment at the beginning of fiscal 2009 of property and casualty insurance premiums.
Net property and equipment decreased by $285,000 to $6.3 million at the end of the third quarter of fiscal 2009 as a result of depreciation expense of $566,000 partially offset by capital expenditures of $281,000. We expect that capital expenditures during fiscal 2009 will be lower than 2008 levels.
Other assets increased $92,000 to $2.4 million compared with $2.3 million at fiscal year-end 2008 due mainly to an increase in deposits, partially offset by a decrease in the cash value of life insurance policies.
Our trade accounts payable decreased by $868,000, or 34%, to $1.7 million compared with fiscal year end 2008 due to normal monthly fluctuations in the timing of purchases and payments. Accrued and sundry liabilities increased by $294,000, or 11%, to $3.0 million compared with fiscal year end 2008 due to increases in accrued incentive compensation and 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 June 27, 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 nine months of fiscal 2009, we repurchased 46,520 shares of our outstanding common stock at a total cost of $484,000 or an average cost per share of $10.40. Our total stock repurchases from November 2007 through June 2009 were 110,781 shares at a total cost of $1.2 million or an average cost per share of $11.11. 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 127,991 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 for the remainder of 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, and our purchase volumes. We have experienced price decreases in several of our raw materials during the first nine months of fiscal 2009. We expect no further price decreases and believe that raw material prices could increase 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. However, based on recent increases in oil prices and information from our primary foam suppliers, we believe that foam raw material prices could increase in the fall. We currently expect that neither inflation nor deflation will have a significant impact on our operations for the remainder of fiscal 2009.
|
|