Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MGCD > SEC Filings for MGCD > Form 10-Q on 13-Sep-2013All Recent SEC Filings

Show all filings for MGC DIAGNOSTICS CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MGC DIAGNOSTICS CORP


13-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company, through its Medical Graphics Corporation subsidiary, designs and markets non-invasive cardiorespiratory diagnostic systems that are sold under the MGC Diagnostics and MedGraphics brand and trade names. These cardiorespiratory diagnostic systems have a wide range of applications within cardiorespiratory healthcare. Revenues consist of equipment, supplies and accessories sales as well as service revenues. Equipment, supplies and accessories sales reflect sales of non-invasive cardiorespiratory diagnostic equipment and aftermarket sales of peripherals and supplies. Service revenues consist of revenues from extended service contracts and non-warranty service visits.

Total revenues for the fiscal third quarter of 2013 were $7.9 million, an increase of 15% from $6.9 million in 2012. Operating expenses for the fiscal third quarter of 2013 were $3.7 million, a decrease of 7% from the same period in 2012. Net income for the three months ended July 31, 2013 was $652,000, or $0.16 per basic and diluted share, compared to a net loss of $(133,000), or $(0.03) per basic and diluted share, for the same period in 2012.

Results of Operations



The following table contains selected information from our historical
consolidated statements of comprehensive income (loss), expressed as a
percentage of revenue:



                                       Three Months ended July 31,             Nine Months ended July 31,
                                        2013                2012                2013                2012
Revenues                                    100.0 %             100.0 %             100.0 %             100.0 %
Cost of revenues                             44.6                46.3                44.8                45.7
Gross margin                                 55.4                53.7                55.2                54.3
Operating Expenses
Selling and marketing expenses               27.1                30.9                28.3                29.4
General and administrative
expenses                                     12.3                13.2                16.0                15.8
Research and development
expenses                                      7.5                11.9                 8.3                13.0
Amortization of intangibles                   0.1                 1.6                 0.1                 1.7
Total operating expenses                     47.0                57.6                52.7                59.9
Operating income (loss)                       8.4                (3.9 )               2.5                (5.6 )
Interest income                                 -                   -                   -                 0.1
Provision for taxes                          (0.2 )              (0.1 )              (0.2 )              (0.1 )
Income (loss) from continuing
operations                                    8.2                (4.0 )               2.3                (5.6 )
Income from discontinued
operations                                      -                 2.1                   -                 1.4
Net income (loss)                             8.2 %              (1.9 )%              2.3 %              (4.2 )%

Seasonality

The Company experiences some seasonality in its revenues, with the first and fourth quarter of its fiscal year historically being its lowest and highest revenue quarters, respectively. The Company experiences additional variability in each quarter due to a number of factors, including customer budget cycles, product introductions, Company sales incentive programs, general economic conditions and the timing of customer orders.

Table of Contents

Quarterly Comparisons of Operations

The following paragraphs discuss the Company's performance for the fiscal three-month periods ended July 31, 2013 and 2012.

Revenues

Total revenues from continuing operations for the three months ended July 31, 2013 increased 15% compared to the same period in fiscal 2012. Domestic revenue for the three months ended July 31, 2013 increased by 12%, primarily related to strong pulmonary equipment sales. International revenue increased by 29% from prior year period levels, primarily from the stronger performance in the Canadian and Latin American regions.

Gross Margin

Gross margin percentage for the three months ended July 31, 2013 was 55.4%, increased from 53.7% in the same period in 2012. Volume increases from revenue growth drove most of this increase, with additional support due to product mix, higher average selling prices for domestic pulmonary equipment and higher service margins. Gross margin for equipment, supplies and accessories was 52.3% for the quarter, compared to 51.8% in the prior year's quarter. Gross margin for services increased to 70.8% for the quarter, compared to 65.3% for the prior year's quarter primarily as a result of improved pricing and service mix. We expect that combined gross margin levels will continue in the mid-50% range for the remaining fiscal 2013 quarter.

Selling and Marketing

Selling and marketing expenses increased by 1% to $2.2 million for the three months ended July 31, 2013 from $2.1 million for the comparable period of fiscal 2012. Expenses as a percent of revenues decreased to 27.1%, compared to 30.9% for the same period last year. Expenses increased primarily due to increased selling commissions and group purchasing organization fees of $166,000, attributable to the 15% increase in revenues, increased travel, trade shows and meetings expenses of $39,000, and increased costs of new sales management tools of $26,000, offset by net personnel cost and incentive compensation decreases of $199,000.

General and Administrative

General and administrative expenses for the three months ended July 31, 2013 increased by 7%, or $60,000, to $1.0 million compared to $0.9 million in 2012. Expenses as a percent of revenues decreased to 12.3%, compared to 13.2% for the same period last year. Much of the increase is due to the current year cost accruals versus prior year cost reversals resulting in increases of $40,000 and $23,000 related to consultant stock-based incentive accruals and travel costs, respectively.

Research and Development

Research and development expenses for the three months ended July 31, 2013 decreased by 28%, or $234,000, to $0.6 million compared to $0.8 million in the comparable period in fiscal 2012. Expenses as a percent of revenues decreased to 7.5%, compared to 12.0% for the same period last year. The decrease resulted primarily from $249,000 of reduced net personnel and consulting expenses and stock-based compensation costs, as consultants were replaced by full-time, internal personnel and executive personnel costs were reduced. These savings were partially offset by a $31,000 net increase in project-related costs from the Company's expansion of its investment in new product hardware and software development. Internal software development costs capitalized totaled $153,000 and $216,000 in the three months ended July 31, 2013 and 2012, respectively.

Table of Contents

Amortization of Intangibles

Amortization of patent and developed technology costs was $5,000 and $112,000 for the three months ended July 31, 2013 and 2012, respectively. The developed technology costs, which were attributed to "fresh-start" accounting in connection with the Company's 2002 emergence from bankruptcy, were fully amortized as of October 31, 2012. Ongoing amortization relates to patent assets.

The Company began amortizing capitalized software development costs as its Breeze WebReview software was released to the market in mid-December 2012. The amortization of software development assets is included in the cost of equipment revenues due to the direct relationship to equipment units sold.

Nine Month Comparisons of Operations

The following paragraphs discuss the Company's performance for the fiscal nine-month periods ended July 31, 2013 and 2012.

Revenues

Total revenues from continuing operations for the nine months ended July 31, 2013 increased 19% compared to the same period in fiscal 2012. Domestic revenue for the nine months ended July 31, 2013 increased by 17.6%, primarily related to strong pulmonary equipment sales. International revenue increased by 24.3% from prior year period levels, including contributions from all regions.

Gross Margin

Gross margin percentage for the nine months ended July 31, 2013 increased to 55.2% from 54.3% for the same 2012 period. Volume increases from revenue growth drove most of this increase, with a favorable effect from product and pricing mix attributed to the growth of the Company's domestic pulmonary equipment business, as well as higher service margins. Gross margin for equipment, supplies and accessories was 52.1% for the first nine months, compared to 51.9% for the first nine months of the prior year. Gross margin for services increased to 70.7% for the first nine months, compared to 65.9% for the first nine months of the prior year, due primarily to improved pricing and service mix.

Selling and Marketing

Selling and marketing expenses increased by 15% to $6.4 million for the nine months ended July 31, 2013 from $5.6 million for the comparable period of fiscal 2012. Expenses as a percent of revenues decreased to 28.3%, compared to 29.4% for the same period last year. Expenses increased primarily due to increased selling commissions and group purchasing organization fees of $529,000, increased travel, trade show and sales meeting expenses of $126,000, telemarketing cost increases of $113,000 and increased costs of new sales management tools of $84,000.

General and Administrative

General and administrative expenses for the nine months ended July 31, 2013 increased by 21%, or $617,000, to $3.6 million compared to $3.0 million in 2012. Expenses as a percent of revenues increased to 16.0%, compared to 15.8% for the same period last year. Much of the increase is due to the current year cost accruals versus prior year cost reversals. Management incentive accruals increased $166,000, compared to no expense for management incentives for the same period last year. Stock-based performance awards for management and non-employee consultants increased by $137,000 for fiscal 2013. Bad debt provisions increased $71,000, primarily related to foreign distributor receivables. The current year expense increase also included $267,000 related to corporate development initiatives.

Table of Contents

Research and Development

Research and development expenses for the nine months ended July 31, 2013 decreased by 24%, or $577,000, to $1.9 million compared to $2.5 million in the comparable period in fiscal 2012. Expenses as a percent of revenues decreased to 8.3%, compared to 13.0% for the same period last year. The decrease resulted primarily from $732,000 of reduced net personnel and consulting expenses and stock-based compensation costs, as consultants were replaced by full-time, internal personnel and executive personnel costs were reduced. These savings were partially offset by a $162,000 net increase in project-related costs from the Company's expansion of its investment in new product hardware and software development. Internal software development costs capitalized totaled $619,000 and $576,000 in the nine months ended July 31, 2013 and 2012, respectively. For the nine months ending July 31, 2013, the Company has invested approximately $1.3 million in new research and project development initiatives to ensure that its future product pipeline remains robust.

Amortization of Intangibles

Amortization of patent and developed technology costs was $16,000 and $329,000 for the nine months ended July 31, 2013 and 2012, respectively. The developed technology costs, which were attributed to "fresh-start" accounting in connection with the Company's 2002 emergence from bankruptcy, were fully amortized as of October 31, 2012. Ongoing amortization relates to patent assets.

As noted above, the Company began amortizing capitalized software development costs as its Breeze WebReview software was released to the market in mid-December 2012. The amortization of software development assets is included in the cost of equipment revenues due to the direct relationship to equipment units sold.

Provision for Taxes

Under the application of fresh-start accounting, as amended by Accounting Standards Codification ("ASC") 805 Business Combination effective September 15, 2009, when the valuation allowance relating to pre-emergence bankruptcy net operating loss and other deferred tax assets is reversed, tax benefits will be recorded as a reduction to income tax expense. For additional information, see Note 8 to the consolidated financial statements, "Income Taxes."

The Company recorded $17,000 and $7,000 of income tax expense for the three-month periods ended July 31, 2013 and 2012 and $31,000 and $21,000 of income tax expense for the nine-month periods ended July 31, 2013 and 2012, respectively. The income tax expense includes state income tax expenses and minimum fees and increases in reserves for uncertain tax positions, as well as anticipated federal alternative minimum taxes in fiscal 2013 periods.

Liquidity and Capital Resources

The Company has financed its liquidity needs over the last several years through revenue generated by the operations of its wholly-owned Medical Graphics Corporation subsidiary.

The Company had cash and cash equivalents of $8.8 million and working capital of $13.6 million as of July 31, 2013. During the nine months ended July 31, 2013, the Company generated $1,292,000 in cash from operating activities, with $1,054,000 generated before changes in working capital items. Accounts receivable increased $1,017,000, while days sales outstanding ("DSO"), which measures how quickly receivables are collected, increased by 14 days to 76 days from October 31, 2012 to July 31, 2013. As a result of extended terms for several large first-half sales transactions, days sales outstanding are expected to remain modestly above historic levels for the remainder of the year. Inventory decreased by $17,000, as days of inventory on hand decreased to 99 days as of July 31, 2013, 13 days less than at July 31, 2012. The most significant increase for cash provided by operating activities was the expansion of deferred revenues by $1,950,000 over the nine months, due to increased sales of extended service agreements and multiple-deliverable agreements entered into during the period. The accounts payables balance decreased by $584,000. Employee compensation accruals as of July 31, 2013 were $232,000 lower than October 31, 2012 levels, reflecting the net of payments of accrued separation and accruals of employee incentive compensation costs since year end.

Table of Contents

During the nine months ended July 31, 2013, the Company used $883,000 in cash to purchase property, equipment and intangible assets. The Company has no material commitments for capital expenditures for remainder of fiscal year 2013. In conjunction with the home office facilities lease extension during fiscal 2012, the landlord agreed to fund renovations of leasehold improvements. That work began in the first quarter of fiscal year 2013, with leasehold improvements and construction in progress as of July 31, 2013 increasing $210,000 which was recorded as a noncash asset addition, with related offsets included in other current liabilities and long-term deferred income and other of $70,000 and $140,000, respectively. The Company's 2013 operating plans include costs of advancing the migration of the Company's software platform for its products to a next-generation software platform, including expensed development efforts and capitalized costs for the production software. In fiscal 2012, the Company sold $721,000 of high grade investment securities, invested primarily in United States Treasury instruments and fully insured bank certificates of deposit.

Cash was generated in fiscal 2013 and 2012 through July 31, of the respective years within financing activities, mostly related to share issuances under employee stock benefit programs (including share purchases within option plans and the employee stock purchase plan), offset by amounts paid for share withholding to support statutory minimum income tax withholding requirements. Current and former employees and directors have exercised stock purchase options or participated in the Employee Stock Purchase Plan and this activity provided $614,000 of additional cash in the 2013 fiscal period.

In the fiscal 2013 second quarter, the Company declared and paid $1,805,000 in a special one-time dividend. Approximately $51,000 remains to be paid concurrent with the expected vesting of outstanding restricted share awards, as well as CEO and consultant performance share arrangements.

During 2011, the Board of Directors authorized the repurchase of up to $3 million of Company common stock. In the nine-month periods ended July 31, 2013 and 2012, the Company used $0 and $66,000, respectively, for stock repurchases. As of July 31, 2013, $2,735,000 of the share repurchase authorization remains available. The current program expires on October 31, 2013.

The Company believes that it will meet its liquidity and capital resource needs the next twelve months through its cash flows resulting from operations, as well as current cash and cash equivalents. In addition, the Company has implemented a market-focused strategic plan leveraging the strength of its MGC Diagnostics/MedGraphics brand and improving its worldwide selling and distribution capability. Pursuant to this plan, the Company has held discussions with various potential strategic product and technology partners and may use some of its cash and capital resources in the acquisition of new technologies or businesses.

The Company's Board of Directors will continue to review and assess the Company's capital position and working capital and capital resource needs. If the Board determines that the Company's capital exceeds the amount necessary to enable it to meet its working capital and liquidity needs, as well as to retain a reasonable cushion for contingencies and strategic opportunities, then Company will consider various options for increasing shareholder value, including, but not limited to, purchasing its own shares in the open market and in privately negotiated transactions and or paying cash dividends.

Table of Contents

Forward Looking Statements.

The discussion above contains forward-looking statements about our future financial results and business prospects that by their nature involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "believe," "estimate," "expect," "project," "intend," "plan," "will," "target," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects.

Our actual results may differ materially depending on a variety of factors including:

national and worldwide economic and capital market conditions, including the continuing uncertainty in the European market;

continuing cost-containment efforts in our hospital, clinic and office markets;

our ability to remain as a qualified provider for group purchasing organizations (GPOs), thereby ensuring continued access to customers and markets, increasing our sales potential to expanded numbers of companies that are members of these groups;

the fact that we may incur lower margins and higher selling expenses in our expanded GPO sales;

any changes in medical reimbursement that may result from national healthcare reform;

the effect that the 2.3% medical devise tax that went into effect on January 1, 2013 continues to have on our revenues or operating results;

our ability to develop new and improved cardiorespiratory diagnostic products and services and sell these products and services into existing and new markets;

the success of our MGC Diagnostics rebranding and repositioning efforts;

our ability to complete our software development initiatives and migrate our software platform to next-generation technology;

our ability to maintain our cost structure at a level that is appropriate to our near to mid-term revenue expectations that will enable us to increase revenues and profitability as opportunities develop;

our ability to expand our international revenue through our distribution partners;

our ability to defend our existing intellectual property and obtain protection for intellectual property we develop in the future;

our ability to develop and maintain an effective system of internal controls and procedures and disclosure controls and procedures;

our dependence on third-party vendors;

the ability of our senior management to develop and implement a successful strategic plan; and

our ability to successfully indentify cardiorespiratory products and services for acquisition, complete the acquisition of these products and services and profitably integrate them into our operations.

Additional information with respect to the risks and uncertainties faced by the Company may be found in, and the above discussion is qualified in its entirety by, the other risk factors that are described from time to time in the Company's Securities and Exchange Commission reports, including the Annual Report on Form 10-K for the year ended October 31, 2012.

  Add MGCD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MGCD - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.