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| SURG > SEC Filings for SURG > Form 10-Q on 11-Jun-2012 | All Recent SEC Filings |
11-Jun-2012
Quarterly Report
Overview
Synergetics USA, Inc. ("the Company") is a leading supplier of precision surgical devices. The Company's primary focus is on the surgical disciplines of ophthalmology and neurosurgery. Our distribution channels include a combination of direct and independent sales organizations and important strategic alliances with market leaders. The Company's product lines focus upon precision engineered, disposable and reusable devices, procedural kits and the delivery of various energy modalities for the performance of surgery including: (i) laser energy, (ii) ultrasonic energy, (iii) radio frequency energy for electrosurgery and lesion generation and (iv) visible light energy for illumination, and where applicable, simultaneous infusion (irrigation) of fluids into the operative field. Enterprise-wide sales information is included in Note 10 to the unaudited condensed consolidated financial statements.
The Company is a Delaware corporation incorporated on June 2, 2005 in connection with the reverse merger of Synergetics, Inc. ("Synergetics") and Valley Forge Scientific Corp. ("Valley Forge"). Synergetics was founded in 1991. Valley Forge was incorporated in 1980 and became a publicly-held company in November 1989. Prior to the merger of Synergetics and Valley Forge, Valley Forge's common stock was listed on The NASDAQ Small Cap Market (now known as The NASDAQ Capital Market) and the Boston Stock Exchange under the ticker symbol "VLFG." On September 21, 2005, Synergetics Acquisition Corporation, a wholly owned Missouri subsidiary of Valley Forge, merged with and into Synergetics, and Synergetics thereby became a wholly owned subsidiary of Valley Forge. On September 22, 2005, Valley Forge reincorporated from a Pennsylvania corporation to a Delaware corporation and changed its name to Synergetics USA, Inc. Upon consummation of the merger, the Company's securities began trading on The NASDAQ Capital Market under the ticker symbol "SURG," and its shares were voluntarily delisted from the Boston Stock Exchange.
Recent Developments
We had several developments from fiscal 2010 through fiscal 2012 that we expect will contribute to the growth of our business in the foreseeable future.
On November 16, 2009, the Company announced the signing of an addendum to its three-year agreement with Codman & Shurtleff, Inc. ("Codman"), a division of Johnson & Johnson. Under the terms of the revised agreement, Codman has the exclusive right to market and distribute one of the Company's branded disposable bipolar forceps. Codman began the domestic distribution of the disposable bipolar forceps on December 1, 2009 and international distribution on February 1, 2010. The Codman relationship has been proceeding well and is meeting the Company's expectations for unit and dollar sales volumes.
On April 1, 2010, the Company entered into a definitive agreement with Stryker Corporation ("Stryker") in conjunction with the acquisition by Stryker of certain assets from Mutoh Co., Ltd. and its affiliates, used to produce the Sonopet Ultrasonic Aspirator control consoles and handpieces (previously marketed under the OmniŽ brand by Synergetics in the U.S., Canada and several other countries). The agreement included the sale of accounts receivable, open sales orders, inventory and certain intellectual property related to the OmniŽ product line. In addition, the agreement provides for the Company to supply disposable ultrasonic instrument tips and certain other consumable products used in conjunction with the Sonopet/OmniŽ ultrasonic aspirator console and handpieces and pursue certain development projects for new products associated with Stryker's ultrasonic aspirator products. The agreement has been extended through March 31, 2016. The Stryker relationship has been proceeding well and is meeting the Company's expectations for unit and dollar sales volumes.
Contribution margins for the products supplied to Codman and Stryker have increased, as anticipated, primarily due to the elimination of commercial expenses associated with the distribution of these products. However, sales revenue per unit and gross profit margin for these products have decreased, as the transfer prices to Codman and Stryker are lower than the previous average direct selling prices. Unit volumes with respect to these products have at least doubled.
On April 27, 2010, the Company announced that it had entered into a Settlement and License Agreement with Alcon, Inc. ("Alcon") pursuant to which Alcon agreed to pay the Company $32.0 million, and the Company agreed to produce certain products for distribution by Alcon. The net proceeds to the Company were $21.4 million after contingency payments to attorneys. The Company recognized a gain from this agreement of $2.4 million in the third fiscal quarter of 2010. The remaining $19.0 million has been accounted for as deferred revenue on the balance sheet. As units were to be shipped to Alcon under a Supply Agreement entered into pursuant to the settlement, the Company was to be paid an incremental transfer price. In addition, the Company recognized a portion of the deferred revenue as the estimate of the total units to be delivered to Alcon over a fifteen year period was revised. The Company recognized $907,000 and $696,000 of this deferred revenue during the first nine months of fiscal 2012 and the fiscal year ended July 31, 2011, respectively.
On August 9, 2011, the Company announced that it had elected two new members to its Board of Directors, D. Graeme Thomas and Patricia S. Williams.
On October 27, 2011, the Company announced two new ophthalmic products for the vitrectomy market which were showcased at the 2011 Annual Meeting of the American Academy of Ophthalmology . The Company also announced record sales leads generated from the showcasing of its ophthalmic products.
On November 15, 2011, the Company announced its plans on improving its ratio of independent directors to inside directors to align the governance platform with corporate best practices. As such Mr. David M. Hable was the only inside director nominated and elected at the Annual Shareholders' meeting.
On November 30, 2011, the Company extended its revolving credit facility and its equipment line of credit through November 30, 2013.
On February 13, 2012, Alcon informed the Company that Alcon had decided to cancel the project, orders and forecasts covering the two products to have been supplied under the Supply Agreement. Accordingly, the Company revised the recognition period to the remaining life of the patents which is fourteen years.
On April 23, 2012, Kurt W. Gampp, Jr., Executive Vice President and Chief Operating Officer, tendered his resignation in order to pursue another entrepreneurial opportunity. Mr. Gampp's resignation was effective May 4, 2012.
Summary of Financial Information
The following tables present net sales by category and our results of operations (dollars in thousands):
NET SALES BY CATEGORY
Three Months Ended Mix Three Months Ended Mix
April 30, 2012 April 30, 2011
Ophthalmic $ 8,404 57.7 % $ 9,211 62.8 %
OEM (1) 5,951 40.8 % 5,086 34.7 %
Other (2) 213 1.5 % 373 2.5 %
Total $ 14,568 $ 14,670
Nine Months Ended Mix Nine Months Ended Mix
April 30, 2012 April 30, 2011
Ophthalmic $ 26,073 60.4 % $ 25,010 62.5 %
OEM (1) 16,469 38.2 % 13,536 33.8 %
Other (2) 612 1.4 % 1,478 3.7 %
Total $ 43,154 $ 40,024
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(1) Revenues from OEM represent sales of electrosurgery generators, disposable ultrasonic tips and related accessories, disposable bipolar forceps and related accessories, and royalties along with certain laser probes to Stryker, Codman and Iridex Corporation ("Iridex"). In addition, deferred revenues of $322,000 and $1.2 million from Codman and Alcon are included in this category for the three and nine months ended April 30, 2012, respectively.
(2) Revenues from Other represent direct neurosurgery revenues and other miscellaneous revenues.
The decrease in sales for the third quarter of fiscal 2012 compared with the third quarter of fiscal 2011 was primarily due to the decrease of $807,000 in ophthalmic sales and a $160,000 decrease in our other sales, partially offset by an $865,000 increase in OEM sales (including $322,000 of deferred revenue recognized).
RESULTS OF OPERATIONS
(Dollars in Thousands, except for per share amounts)
Three Months Three Months Increase
Ended April 30, Ended April (Decrease)
2012 30, 2011
Net Sales $ 14,568 $ 14,670 (0.7 %)
Gross Profit 7,822 8,596 (9.0 %)
Gross Profit Margin % 53.7 % 58.6 % (8.4 %)
Commercial Expenses
Research and Development 921 882 4.4 %
Sales and Marketing 2,868 2,771 3.5 %
General and Administrative 2,628 2,427 8.3 %
Operating Income 1,405 2,516 (44.2 %)
Operating Margin 9.6 % 17.2 % (44.2 %)
EBITDA (1) 1,898 2,915 (34.9 %)
Income from Continuing Operations 1,006 1,676 (40.0 %)
Net Income 1,006 1,643 (38.8 %)
Earnings per share from Continuing Operations $ 0.04 $ 0.07 (42.9 %)
Earnings per share $ 0.04 $ 0.07 (42.9 %)
Operating return on average equity (1) 1.9 % 3.5 % (45.7 %)
Operating return on average assets (1) 1.3 % 2.3 % (43.5 %)
Nine Months Nine Months Increase
Ended April 30, Ended April (Decrease)
2012 30, 2011
Net Sales $ 43,154 $ 40,024 7.8 %
Gross Profit 24,710 23,345 5.8 %
Gross Profit Margin % 57.3 % 58.3 % (1.7 %)
Commercial Expenses
Research and Development 2,634 2,587 1.8 %
Sales and Marketing 8,851 8,528 3.8 %
General and Administrative 7,690 6,854 12.2 %
Operating Income 5,535 5,376 3.0 %
Operating Margin 12.8 % 13.4 % (4.5 %)
EBITDA (1) 6,939 6,577 5.5 %
Income from Continuing Operations 4,026 3,622 11.2 %
Net Income 3,644 3,596 1.3 %
Earnings per share from Continuing Operations $ 0.16 $ 0.14 14.3 %
Earnings per share $ 0.14 $ 0.14 -- %
Operating return on average equity (1) 7.6 % 7.8 % (2.6 %)
Operating return on average assets (1) 5.2 % 5.1 % 2.0 %
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(1) EBITDA, operating return on average equity and operating return on average assets are not financial measures recognized by U.S. generally accepted accounting principles ("GAAP"). EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. Operating return on equity is defined as income from continuing operations divided by average equity. Operating return on assets is defined as income from continuing operations plus interest expense divided by average assets. See disclosure following regarding the use of non-GAAP financial measures.
Reconciliation of Non-GAAP Financial Measures
Three Months Three Months
Ended April 30, Ended April
EBITDA Reconciliation 2012 30, 2011
Income from Continuing Operations $ 1,006 $ 1,676
Interest 10 37
Income taxes 396 825
Depreciation 325 230
Amortization 161 147
EBITDA $ 1,898 $ 2,915
Nine Months Nine Months
Ended April 30, Ended April
EBITDA Reconciliation 2012 30, 2011
Income from Continuing Operations $ 4,026 $ 3,622
Interest 43 182
Income taxes 1,490 1,544
Depreciation 895 739
Amortization 485 490
EBITDA $ 6,939 $ 6,577
Three Months Three Months
Ended April 30, Ended April
Operating Return on Average Equity Calculation 2012 30, 2011
Income from Continuing Operations $ 1,006 $ 1,676
Average Equity
April 30, 2012 54,951
January 31, 2012 53,497
April 30, 2011 48,627
January 31, 2011 46,621
Average Equity 54,224 47,624
Operating Return on Average Equity 1.9 % 3.5 %
Nine Months Nine Months
Ended April 30, Ended April
Operating Return on Average Equity Calculation 2012 30, 2011
Income from Continuing Operations $ 4,026 $ 3,622
Average Equity
April 30, 2012 54,951
January 31, 2012 53,497
October 31, 2011 51,516
July 31, 2011 50,664
April 30, 2011 48,627
January 31, 2011 46,621
October 31, 2010 45,167
July 31, 2010 44,226
Average Equity 52,657 46,160
Operating Return on Average Equity 7.6 % 7.8 %
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Three Months Three Months
Ended April 30, Ended April
Operating Return on Average Assets Calculation 2012 30, 2011
Income from Continuing Operations $ 1,006 $ 1,676
Interest 10 37
Net Income + Interest $ 1,016 $ 1,713
Average Assets
April 30, 2012 77,706
January 31, 2012 76,940
April 30, 2011 74,181
January 31, 2011 75,270
Average Assets 77,323 74,726
Operating Return on Average Assets 1.3 % 2.3 %
Nine Months Nine Months
Ended April 30, Ended April
Operating Return on Average Assets Calculation 2012 30, 2011
Income from Continuing Operations $ 4,026 $ 3,622
Interest 43 182
Net Income + Interest $ 4,069 $ 3,804
Average Assets
April 30, 2012 77,706
January 31, 2012 76,940
October 31, 2011 75,671
July 31, 2011 81,310
April 30, 2011 74,181
January 31, 2011 75,270
October 31, 2010 74,143
July 31, 2010 73,095
Average Assets 77,907 74,172
Operating Return on Average Assets 5.2 % 5.1 %
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We measure our performance primarily through our operating profit. In addition to our consolidated financial statements presented in accordance with GAAP, management uses certain non-GAAP measures, including EBITDA, operating return on average equity and operating return on average assets, to measure our operating performance. We provide a definition of the components of these measurements and a reconciliation to the most directly comparable GAAP financial measure.
These non-GAAP measures are presented to enhance an understanding of our operating results and are not intended to represent cash flow or results of operations. The use of these non-GAAP measures provides an indication of our ability to service debt and measure operating performance. We believe these non-GAAP measures are useful in evaluating our operating performance compared to other companies in our industry. We believe these metrics are beneficial to investors, potential investors and other key stakeholders, including creditors who use this measure in their evaluation of our performance.
EBITDA, however, does have certain material limitations primarily due to the exclusion of certain amounts that are material to our results of operations, such as interest expense, income tax expense, depreciation and amortization. Due to these limitations, EBITDA should not be considered a measure of discretionary cash available to us to invest in our business and should be utilized in conjunction with other information contained in our unaudited condensed consolidated financial statements prepared in accordance with GAAP.
Results Overview
Product categories as a percentage of total sales were as follows:
Three Months Three Months Nine Months Nine Months
Ended April Ended April Ended April Ended April
30, 2012 30, 2011 30, 2012 30, 2011
Ophthalmic 57.7 % 62.8 % 60.4 % 62.5 %
OEM 40.8 % 34.7 % 38.2 % 33.8 %
Other 1.5 % 2.5 % 1.4 % 3.7 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
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International revenues represent $3.7 million, or 25.5 percent, of our total revenues for the three months ended April 30, 2012, as compared to $4.7 million, or 32.2 percent, for the three months ended April 30, 2011. International revenues represent $11.6 million, or 26.8 percent, of our total revenues for the nine months ended April 30, 2012, as compared to $12.1 million, or 30.3 percent, for the nine months ended April 30, 2011. Many of the products we sell to our marketing partners and OEM customers are shipped to their non-U.S. customers in various countries around the world, but are included in our domestic revenues.
Our Business Strategy
The Company's key strategy is to enhance shareholder value through profitable revenue growth in ophthalmology and neurosurgery markets. This is accomplished through the identification and development of reusable and disposable devices in conjunction with leading surgeons and marketing partners. We are committed to establishing a strong operational infrastructure and financial foundation within which growth opportunities can be prudently evaluated, financed and implemented. We will remain vigilant and sensitive to new challenges which may arise from changes in the definition and delivery of appropriate healthcare in our fields of interest. In fiscal 2012, our strategic priorities are to drive accelerating growth in ophthalmology business, manage our neurosurgery and OEM businesses for stable growth and strong cash flows, deliver improved profitability through our lean initiatives and demonstrate solid financial performance.
Drive Accelerating Growth in our Ophthalmology Business
We are focused on expanding our product platform into larger and faster-growing segments of the vitreoretinal device market. Thus, we have focused our internal research and development efforts on developing innovative technologies that will enable Synergetics to enhance its value to the vitreoretinal community. We are also seeking business development opportunities to augment and complement our existing ophthalmic franchise. In addition, we are implementing several focused initiatives to capitalize on our recent new product introductions such as the VersaPACKTM, the VersaVITTM, and the Ultimate Vit EnhancerTM and capitalize on the current competitive environment. Finally, we are improving our sales force productivity. In the U.S., we are focused on enhancing our compensation programs to target the appropriate mix of product and rigorous development of our sales force capabilities through enhanced training and customer relationship management. In the international markets, we are working to optimize our sales capabilities and distribution infrastructure.
Manage our Neurosurgery and OEM Business for Stable Growth and Strong Cash Flows
We have multi-year contracts established with our two largest OEM customers, Codman and Stryker. These relationships provide high visibility within the neurosurgery markets and allow us to achieve attractive operating margins. We provide best-in-class technologies with our electrosurgical generator and disposable bipolar forceps being distributed by Codman and our lesion generator and ultrasonic aspirator disposables being distributed by Stryker. We are working with both of these OEM customers to provide product line iterations to maintain their technological advantages. We also work with other select potential OEM customers to develop relationships which would continue to enhance our OEM platform growth and profitability that complement our strategic focus. Mobius Therapeutics, LLC ("Mobius"), a St. Louis-based ophthalmic pharmaceutical company, received final approval from U.S. Food and Drug Administration for its platform product, MitosolŽ, which will be used in glaucoma surgery. Synergetics is packaging this product for Mobius.
Deliver Improved Profitability through our Lean Initiatives
We have been developing comprehensive company-wide initiatives aimed at creating a more efficient operating platform. The lean mindset now permeates our corporate culture, including manufacturing, human resources, finance and administration. In addition, the implementation of our new Enterprise Resource Planning ("ERP") system in August 2011 went smoothly and improvements throughout the organization are expected to emerge as we optimize the ERP system.
Demonstrate Solid Financial Performance
In the short and long-term, we expect to continue to deliver a growing revenue stream and earnings objectives. We also will enhance our working capital usages by employing both our new lean philosophy and our new ERP system to drive more cash flow from the business. We will prudently manage our capital structure to allow for additional growth opportunities and optimal cash deployment.
Demand Trends
The Company's sales increased 7.8 percent during the first nine months of fiscal . . .
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