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AHPI > SEC Filings for AHPI > Form 10-K on 27-Sep-2013All Recent SEC Filings

Show all filings for ALLIED HEALTHCARE PRODUCTS INC

Form 10-K for ALLIED HEALTHCARE PRODUCTS INC


27-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The Company manufactures and markets respiratory products, including respiratory care products, medical gas equipment and emergency medical products. Set forth below is certain information with respect to amounts and percentages of net sales attributable to respiratory care products, medical gas equipment and emergency medical products for the fiscal years ended June 30, 2013, 2012, and 2011.

Year ended June 30,               Dollars in thousands
                                          2013
                                Net             % of Total
                               Sales            Net Sales
Respiratory care products    $  8,944                  23.2 %
Medical gas equipment          21,871                  56.7 %
Emergency medical products      7,737                  20.1 %
Total                        $ 38,552                 100.0 %




                                   Dollars in thousands
Year ended June 30,                        2012
                                 Net              % of Total
                                Sales             Net Sales
Respiratory care products    $    10,082                 23.2 %
Medical gas equipment             24,804                 57.1 %
Emergency medical products         8,560                 19.7 %
Total                        $    43,446                100.0 %




                                   Dollars in thousands
Year ended June 30,                        2011
                                 Net              % of Total
                                Sales             Net Sales
Respiratory care products    $    10,797                 23.1 %
Medical gas equipment             24,950                 53.3 %
Emergency medical products        11,036                 23.6 %
Total                        $    46,783                100.0 %

The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by the various income and expense categories reflected in the Company's Statement of Operations.

Year ended June 30,                             2013         2012         2011

Net sales                                        100.0 %      100.0 %      100.0 %
Cost of sales                                     78.6         77.1         76.5
Gross profit                                      21.4         22.9         23.5

Selling, general and administrative expenses      27.8         24.4         22.6
Income (loss) from operations                     (6.4 )       (1.5 )        0.9
Other, net                                        (1.3 )        0.0         (0.2 )
Income (loss) before provision for
(benefit from) income taxes                       (5.1 )       (1.5 )        0.7
Provision for (benefit from) income taxes         (1.9 )       (0.5 )        0.3
Net income (loss)                                 (3.2 )%      (1.0 )%       0.4 %

Critical Accounting Policies

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, income taxes, and contingencies and litigation. Estimates and judgments are based on historical experience and on various other factors that may be reasonable under the circumstances. Actual results may differ from these estimates. The following areas are considered to be the Company's most significant accounting policies:

Revenue recognition:

Revenue is recognized for all sales, including sales to agents and distributors, at the time products are shipped and title has transferred, provided that a purchase order has been received or a contract executed, there are not uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is reasonably assured. Sales discounts, returns and allowances are included in net sales, and the provision for doubtful accounts is included in selling, general and administrative expenses. Additionally, it is the Company's practice to include revenues generated from freight billed to customers in net sales with corresponding freight expense included in cost of sales in the Statement of Operations. The Company reports sales taxes on sales transactions on a net basis in the Statement of Operations, and therefore does not include sales taxes in revenues or costs.

The sales price is fixed by the Company's acceptance of the buyer's firm purchase order. The sales price is not contingent, or subject to additional discounts. The Company's standard shipment terms are "F.O.B. shipping point" as stated in the Company's Terms and Conditions of Sale. The customer is responsible for obtaining insurance for and bears the risk of loss for product in-transit. Additionally, sales to customers do not include the right to return merchandise without the prior consent of the Company. In those cases where returns are accepted, product must be current and restocking fees must be paid by the respective customer. A provision has been made for estimated sales returns and allowances. These estimates are based on historical analysis of credit memo data and returns.

The Company does not provide installation services for its products. Most products shipped are ready for immediate use by the customer. The Company's in-wall medical system components, central station pumps and compressors, and headwalls do require installation by the customer. These products are typically purchased by a third-party contractor who is ultimately responsible for installation services. Accordingly, the customer purchase order or contract does not require customer acceptance of the installation prior to completion of the sale transaction and revenue recognition. The Company's standard payment terms are net 30 days from the date of shipment, and payment is specifically not subject to customer inspection or acceptance, as stated in the Company's Terms and Conditions of Sale. The buyer becomes obligated to pay the Company at the time of shipment. The Company requires credit applications from its customers and performs credit reviews to determine the creditworthiness of new customers. The Company requires letters of credit, where warranted, for international transactions. The Company also protects its legal rights under mechanics lien laws when selling to contractors.

The Company does offer limited warranties on its products. The standard warranty period is one year. The Company's cost of providing warranty service for its products for the years ended June 30, 2013, June 30, 2012, and June 30, 2011 was $150,944, $152,625, and $125,369, respectively. The related liability for warranty service amounted to $130,000 and $139,906 at June 30, 2013 and 2012, respectively.

Inventory reserve for obsolete and excess inventory:

Inventory is recorded net of a reserve for obsolete and excess inventory which is determined based on an analysis of inventory items with no usage in the preceding year and for inventory items for which there is greater than two years' usage on hand. This analysis considers those identified inventory items to determine, in management's best estimate, if parts can be used beyond one year, if there are alternate uses or at what values such parts may be disposed for. At June 30, 2013 and 2012, inventory is recorded net of a reserve for obsolete and excess inventory of $1.3 million.

Income taxes:

The Company accounts for income taxes under the FASB Accounting Standards Codification ("ASC") Topic 740: "Income Taxes." Under ASC 740, the deferred tax provision is determined using the liability method, whereby deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and income tax bases of assets and liabilities using presently enacted tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Management uses a more likely than not criterion in its assessment and considers all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. In assessing the need for a valuation allowance the Company first considers the reversals of existing temporary deferred tax liabilities and available tax planning strategies. To the extent these items are not sufficient to cause the realization of deferred tax assets, the Company would then consider the availability of future taxable income only to the extent such income is considered likely to occur based on the Company's earnings history, current income trends and projections.

The Company currently relies on reversals of existing temporary deferred tax liabilities and tax planning strategies to support the value of existing deferred tax assets. As of June 30, 2013 using currently available strategies there remains approximately $700,000 of future taxable income which would be generated through the strategies and available to offset future net operating losses and other deferred tax assets. To the extent future losses for the fiscal year 2014 exceed this amount the Company would not be able to continue to recognize the tax benefit of future losses.

Accounts receivable net of allowances:

Accounts receivable are recorded net of an allowance for doubtful accounts, which is determined based on an analysis of past due accounts including accounts placed with collection agencies, and an allowance for returns and credits, which is based on historical analysis of credit memo data and returns. The Company maintains an allowance for doubtful accounts to reflect the uncollectibility of accounts receivable based on past collection history and specific risks indentified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company determines that the receivable will not be collected and/or when the account has been referred to a third party collection agency. At June 30, 2013 and 2012, accounts receivable is recorded net of allowances of $170,000.

Valuation of Long-Lived Assets:

The impairment of long-lived assets is assessed when changes in circumstances (such as, but not limited to, a decrease in market value of an asset, current and historical operating losses or a change in business strategy) indicate that their carrying value may not be recoverable. This assessment is based on management's expectations and judgments regarding future business and economic conditions, future market values and disposal costs. Actual results and events could differ significantly from management's estimates. Based upon our most recent analysis, we believe that no impairment exists at June 30, 2013. There can be no assurance that future impairment tests will not result in a charge to net earnings (loss).

Self-insurance:

The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. As of June 30, 2013 and 2012, the Company had approximately $200,000 and $190,000, respectively, of accrued liabilities related to health care claims. In order to establish the self-insurance reserves, the Company utilized actuarial estimates of expected claims based on analyses of historical data.

Share Based Compensation:

Allied calculates share based compensation using the Black-Sholes-Merton ("Black-Scholes") option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. For the twelve-month periods ended June 30, 2013, 2012, and 2011, Allied recorded approximately $44,000, $44,000 and $20,000, respectively, in share-based employee compensation. This compensation cost is included in the general and administrative expenses in the accompanying Statements of Operations.

Significant Factors Affecting Past and Future Operating Results

Agreement with Abbott Laboratories:

On August 27, 2004, the Company entered into an agreement with Abbott Laboratories ("Abbott") pursuant to which Allied agreed to cease production of its product BaralymeŽ, and to effect the withdrawal of BaralymeŽ product held by distributors. The agreement permits Allied to pursue the development of a new carbon dioxide absorbent product. BaralymeŽ, a carbon dioxide absorbent product, has been used safely and effectively in connection with inhalation anesthetics since its introduction in the 1920s. In recent years, the number of inhalation anesthetics has increased, giving rise to concerns regarding the use of BaralymeŽ in conjunction with these newer inhalation anesthetics if BaralymeŽ has been allowed, contrary to recommended practice, to become desiccated. The agreement also provides that, for a period of eight years, Allied will not manufacture, distribute, promote, market, sell, commercialize or donate any BaralymeŽ product or similar product based upon potassium hydroxide and will not develop or license any new carbon dioxide absorbent product containing potassium hydroxide.

In consideration of the foregoing, Abbott agreed to pay Allied an aggregate of $5,250,000 of which $1,530,000 was paid on September 30, 2004 and the remainder payable in four equal annual installments of $930,000 due on July 1, 2005 through July 1, 2008. The last installment due on July 1, 2008 was received by Allied on June 19, 2008.

The payments received from Abbott were recognized into income, as net sales, over the eight-year term of the agreement. Allied has no further obligations under this agreement which would require the Company to repay these amounts or otherwise impact this accounting treatment. During the fiscal years ended June 30, 2013, 2012, and 2011, Allied recognized $114,700, $688,200 and $688,200, respectively into income as net sales in each year.

A reconciliation of deferred revenue resulting from the agreement with Abbott, with the amounts received under the agreement, and amounts recognized as net sales for fiscal years 2013 and 2012 is as follows:

                            Twelve Months ended
                                 June 30,
                            2013           2012

Beginning balance        $  114,700     $  802,900

Revenue recognized
as net sales               (114,700 )     (688,200 )

                                  0        114,700
Less - Current portion
of deferred revenue               0       (114,700 )
                         $        0     $        0

In 2004, Allied's sales of BaralymeŽ were approximately $2.0 million and contributed approximately $0.6 million in pre-tax earnings and cash flow from operations. The majority of the $5,250,000 Allied received from Abbott was recognized into income over the eight-year term of the agreement. The net cash flow realized by Allied under the agreement with Abbott is substantially equivalent to the net cash flow Allied would have expected to realize from continued manufacture and sales of BaralymeŽ during the initial five years of the period. As discussed below, the agreement with Abbott expired in August 2012 and the Company will not recognize further income from the agreement after such expiration. In 2013 there was $573,500 less income recognized than in 2012 and in 2014 there will be $114,700 less income recognized than in 2013.

Medical Device Tax:

Beginning January 1, 2013, the Healthcare Reform Acts impose a tax to be paid by medical device manufacturers equal to 2.3% of the sale price of medical devices. Many of our products are subject to this tax. For the six-month period that the law was in place during the year ended June 30, 2013, the Company recorded an expense of approximately $153,000.

Fiscal 2013 Compared to Fiscal 2012

The Company had a loss of $2.0 million before taxes for fiscal 2013, compared to a loss of $0.7 million before taxes for fiscal 2012. It recorded an income tax benefit of $0.7 million in fiscal 2013, compared to an income tax benefit of $0.2 million in fiscal 2012. The Company has relied on the use of available tax planning strategies to support the value of its deferred tax assets and the tax benefits attributable to the net operating losses that have been generated to date. As of June 30, 2013 using currently available strategies there remains approximately $700,000 of future taxable income which would be generated through the strategies and available to offset future net operating losses and other deferred tax assets. To the extent future losses for the fiscal year 2014 exceed this amount the Company would not be able to continue to recognize the tax benefit of future losses.

Net sales for fiscal 2013 of $38.6 million were $4.8 million or 11.1% less than net sales of $43.4 million in fiscal 2012. Domestically, sales decreased by $4.6 million dollars. Domestic sales for fiscal 2013 include approximately $0.1 million for the recognition into sales of payments resulting from the agreement with Abbott, as discussed below. For 2012, domestic sales included approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott. Internationally, sales decreased by $0.2 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates.

Orders for the Company's products for the year ended June 30, 2013 of $37.5 million were $4.0 million or 9.6% lower than orders for the year ended June 30, 2012 of $41.5 million. Customer purchase order releases for the year ended June 30, 2013 of $37.4 million were $3.7 million or 9.0% lower than customer purchase order releases of $41.1 million from the prior fiscal year.

Respiratory care product sales, which include homecare products in 2013, were $8.9 million, which is $1.2 million, or 11.9% lower than sales of $10.1 million in the prior year. A portion of this decrease, $0.6 million, is attributable to the end of recognition of payments from the agreement with Abbott Laboratories pursuant to which the Company received payments in exchange for its ceasing production and distribution of BaralymeŽ. As previously disclosed, recognition of these payments ended in August of 2012. Sales for the year ended June 30, 2013 included $0.1 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories, in comparison to $0.7 million in 2012. There will be no recognition of income into sales from the agreement with Abbott in 2014.

Allied continues to sell CarbolimeŽ, a carbon dioxide absorbent with a different formulation than BaralymeŽ, as well as LitholymeŽ, a new premium carbon dioxide absorbent. For the year ended June 30, 2013 the Company had carbon dioxide absorbent sales of CarbolimeŽ and LitholymeŽ of $2.4 million dollars, compared with $1.7 million for the year ended June 30, 2012. Sales increased as a result of the continued market acceptance of LitholymeŽ and additional product configurations for both CarbolimeŽ and LitholymeŽ.

Medical gas equipment sales, which include construction products, of $21.9 million in fiscal 2013 were approximately $2.9 million, or 11.7% lower than prior year levels of $24.8 million. Internationally, sales of medical gas equipment in fiscal 2013 were approximately $0.5 million lower than in the prior year. Domestically, sales of medical gas equipment in fiscal 2013 were $2.4 million lower than in the prior year, primarily related to the sale of construction products. The Company believes it has implemented improvements to the sales management process to improve sales performance and increase market share of medical gas equipment sales, including increased training and consolidation of the domestic sales force in St. Louis, Missouri.

Emergency medical product sales in fiscal 2013 of $7.7 million were $0.9 million or 10.5% lower than fiscal 2012 sales of $8.6 million. International sales of emergency medical products increased by $0.4 million from the prior year while domestic sales decreased by $1.3 million. The Company believes that domestic demand for these products, which are normally largely consumed by local agencies, continues to be impacted by economic conditions. In addition, the Company believes the sales of the Company's mass casualty products included in emergency medical products decreased as a result of decreased mass casualty equipment purchases by governments.

International sales, which are included in the product lines discussed above, decreased $0.2 million, or 2.1%, to $9.4 million in fiscal 2013 compared to sales of $9.6 million in fiscal 2012. As discussed above, the Company's international shipments are dependent on hospital construction projects and the expansion of medical care in those regions. In fiscal 2013, international shipments of medical gas equipment, including construction products, decreased by $0.5 million dollars, and sales of respiratory care products decreased by approximately $0.1 million. These decreases were partially offset by a $0.4 million increase in the sale of emergency products. The decrease in international sales was concentrated in Venezuela. The Company believes this decrease in sales to Venezuela was a result of the change in the political leadership of that country.

Gross profit in fiscal 2013 was $8.2 million, or 21.2% of sales, compared to a gross profit of $10.0 million, or 23.0% of sales in fiscal 2012. Gross profit was negatively impacted by the decrease in sales and production during the period. Lower sales and production result in lower utilization of fixed overhead expenses. Gross profit during this period was favorably impacted compared to the prior year by an approximately $0.3 million improvement in margins from improved production at its Stuyvesant Falls facility. These improvements are the result of higher sales and production levels for the products produced at that plant and improved operating efficiency. Gross margins were also favorably impacted by approximately $0.4 million in cost improvements from lower commodity costs, purchasing improvements, and improvements in operating efficiencies. The Company continues to review the cost of production and seek opportunities to lower those costs. Gross profit for 2013 was also negatively impacted by approximately $153,000 as a result of the Medical Device Excise Tax (MDET). Under the Patient Protection and Affordable Care Act, beginning on January 1, 2013, this tax is imposed on all U.S. sales of certain medical devices at the rate of 2.3% of the sale price of covered products.

The Company invested $1.4 million in capital expenditures in fiscal 2013 compared to $2.2 million in fiscal 2012 for manufacturing equipment, plant maintenance, and computer systems, which continue to decrease production costs and improve efficiencies for several product lines. The Company continues to control cost and actively pursue methods to reduce its costs through automation and process changes.

Selling, General, and Administrative ("SG&A") expenses for fiscal 2013 were $10.7 million compared to SG&A expenses of $10.6 million in fiscal 2012. Personnel cost, primarily salaries and fringe benefits, increased by approximately $0.4 million. Business travel expense increased by approximately $0.2 million as a result of relocating the majority of the sales force to St. Louis from regional locations. These increases were offset by a decrease in legal expense of approximately $0.2 million resulting from of the completion of the Armstrong Medical litigation in prior year, a decrease of $0.1 million in recruiting expense, and a decrease approximately $0.2 million in other spending.

Other income and expenses for the year ended June 30, 2013 include approximately $516,000 of income realized by the Company as a result of the demutualization of the Company's product liability insurer. Interest income in fiscal 2013 was approximately $12,000 compared to interest income of $27,000 in fiscal 2012.

Net loss in fiscal 2013 was $1.3 million or $0.16 per basic and diluted earnings per share, and increase from a net loss of $0.4 million, or $0.05 per basic and diluted earnings per share in fiscal 2012. In 2013, the weighted number of shares used in the calculation of basic and diluted earnings per share was 8,070,645. In 2012, the weighted number of shares used in the calculation of basic and diluted earnings per share was 8,124,386.

Fiscal 2012 Compared to Fiscal 2011

The Company had a loss of $0.7 million before taxes for fiscal 2012, compared to income of $0.4 million before taxes for fiscal 2011. The Company recorded an income tax benefit of $0.2 million in fiscal 2012, compared to an income tax provision of $0.2 million in fiscal 2011.

Net sales for fiscal 2012 of $43.4 million were $3.4 million or 7.3% less than net sales of $46.8 million in fiscal 2011. Domestically, sales decreased by $3.8 million dollars. Internationally, sales increased by $0.4 million. International business is dependent upon hospital construction projects, and the development of medical facilities in those regions in which the Company operates. Domestic sales for fiscal 2012 include approximately $0.7 million for the recognition into sales of payments resultingfrom the agreement with Abbott, as discussed below. For 2011, domestic sales included approximately $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott as well.

The Company believes that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities was cut during this period to meet budgets and conserve cash. In addition, the Company believes that uncertainties surrounding the implementation of comprehensive healthcare legislation had some negative impact on sales. Orders for the Company's products for the year ended June 30, 2012 of $41.5 million were $3.3 million or 7.4% lower than orders for the year ended June 30, 2011 of $44.8 million. Customer purchase order releases for the year ended June 30, 2012 of $41.1 million were $3.9 million or 8.7% lower than customer purchase order releases of $45.0 million from the prior fiscal year.

Respiratory care product sales, which include homecare products in 2012 were $10.1 million, which is $0.7 million, or 6.5% lower than sales of $10.8 million in the prior year As in 2011, sales for the year ended June 30, 2012 included $0.7 million for the recognition into sales of payments resulting from the agreement with Abbott Laboratories to cease production and distribution of BaralymeŽ.

In fiscal year 2012, Allied continued to sell CarbolimeŽ, a carbon dioxide absorbent with a different formulation than BaralymeŽ, as well as LitholymeŽ, a new premium carbon dioxide absorbent. For the year ended June 30, 2012 the Company had carbon dioxide absorbent sales of CarbolimeŽ and LitholymeŽ of $1.7 million dollars, compared with $1.7 million for the year ended June 30, 2011.

Medical gas equipment sales, which include construction products, of $24.8 million in fiscal 2012 were approximately $0.2 million, or 0.8% lower than prior year levels of $25.0 million. Internationally, sales of medical gas equipment in fiscal 2012 were approximately $1.0 million higher than in the prior year. Domestically, sales of medical gas equipment in fiscal 2012 were $1.2 million lower than in the prior year. The Company believes that the timing of orders by distributors between years contributed to this decrease in sales. In addition, prior year sales included significant sales from large hospital projects which did not repeat in 2012.

Emergency medical product sales in fiscal 2012 of $8.6 million were $2.4 million or 21.8% lower than fiscal 2011 sales of $11.0 million. International sales of emergency medical products decreased by $0.6 million from the prior year while domestic sales decreased by $1.9 million. The Company believes that the decrease in domestic emergency sales in fiscal 2012 was primarily the result of a drop in . . .

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