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AHPI > SEC Filings for AHPI > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for ALLIED HEALTHCARE PRODUCTS INC | Request a Trial to NEW EDGAR Online Pro



Quarterly Report

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

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Allied had net sales of $8.7 million for the three months ended September 30, 2013, down $0.6 million from net sales of $9.3 million in the prior year same quarter. Domestic sales were down 6.2% while international sales, which represented 22.8% of first quarter sales, were down 6.3% from the prior year same quarter.

Sales for the three months ended September 30, 2013 and 2012 included $-, and $114,700, respectively, for the recognition of income from payments resulting from the agreement with Abbott Laboratories to cease the production and distribution of Baralyme®. Income from the agreement was recognized at $57,350 per month until the expiration of the agreement in August 2012. Allied continues to sell Carbolime®, a carbon dioxide absorbent with a different formulation than Baralyme®, as well as Litholyme®, a new premium carbon dioxide absorbent. The Company ceased the sale of Baralyme® on August 27, 2004.

Orders for the Company's products for the three months ended September 30, 2013 of $8.8 million were $0.8 million or 8.3% lower than orders for the prior year same quarter of $9.6 million. Domestic orders are down 2.9% over the prior year same quarter while international orders, which represented 24.2% of first quarter orders, were 20.8% lower than orders for the prior year same quarter. The Company continues to believe that the purchase of equipment and durable goods and the purchase of equipment by hospitals and municipalities have been cut to meet budgets and conserve cash due to the slow recovery of the economy since the recession in 2008. Orders and sales remain below pre-recession levels. The Company also believes domestic markets are further negatively impacted by uncertainty from the implementation of the Affordable Care Act. The Company believes that the decrease in international orders and sales reflects fluctuation in international demand and order levels, and a reduction in governmental medical expenditures in several countries including Venezuela. The Company does not believe this decrease indicates a drop in market share.

Gross profit for the three months ended September 30, 2013 was $1.8 million, or 20.7% of net sales, compared to $2.0 million, or 21.5% of net sales, for the three months ended September 30, 2012. Gross profit, as a percentage of sales, was negatively impacted by the $114,700 reduction in payments resulting from the Abbott agreement recognized in sales and income. In addition, lower sales have led to lower utilization of fixed expenses in the Company's manufacturing operations. Gross profit for the three months ended September 30, 2013 was also negatively impacted by approximately $72,000 as a result of the Medical Device Excise Tax. Under the U.S. Affordable Care Act, beginning on January 1, 2013, the excise tax is imposed on all U.S. sales of certain medical devices. The tax is 2.3% of the selling price of the taxable product, subject to certain exceptions.

Selling, general and administrative expenses for the three months ended September 30, 2013 were $2.6 million unchanged from the same quarter a year ago. Legal expenses were approximately $36,000 higher than in the prior year and recruiting expenses were approximately $16,000 higher than in the prior year. These increases have been offset by a decrease in other expense accounts including a $30,000 decrease in audit expenses, and an approximately $29,000 decrease in outside engineering consulting charges.

Loss from operations was $861,636 for the three months ended September 30, 2013 compared to loss from operations of $659,600 for the three months ended September 30, 2012.

Allied had a loss before benefit from income taxes in the first quarter of fiscal 2014 of $868,469 compared to a loss before benefit from income taxes in the first quarter of fiscal 2013 of $662,955. The Company recorded a tax benefit of $277,910 for the three months ended September 30, 2013 compared to a tax benefit of $251,923 for the three months ended September 30, 2012. As previously disclosed in the Company's annual report on Form 10-K for the 2013 fiscal year, the Company's deferred tax assets has been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies. In the quarter ended September 30, 2013 the Company's cumulative losses have exceeded the value of the deferred tax assets and a valuation allowance of approximately $31,000 has been established. To the extent that the Company's losses continue in future quarters, the tax benefit of those losses would be reduced by a valuation allowance.

Net loss for the first quarter of fiscal 2014 was $590,559 or $0.07 per basic and diluted share compared to net loss of $411,032 or $0.05 per basic and diluted share for the first quarter of fiscal 2013. The weighted average number of common shares outstanding, used in the calculation of basic and diluted earnings per share for the first quarters of fiscal 2014 and 2013 were 8,027,147 and 8,124,386, respectively.

Liquidity and Capital Resources

The Company believes that available resources, including availability under a credit facility described below, are sufficient to meet operating requirements in the coming year.

The Company's working capital was $12.9 million at September 30, 2013 compared to $13.7 million at June 30, 2013. The decrease in working capital was primarily a result of accounts receivable which decreased by $0.6 million largely due to a decrease in sales. Accounts receivable as measured in days of sales outstanding ("DSO") was 40 DSO at September 30, 2013; up from 39 DSO at June 30, 2013. Accounts Payable increased by approximately $0.4 million, and Accrued Liabilities increased by approximately $0.3 million, primarily as a result of the timing of payrolls. In addition cash and cash equivalents decreased by $0.6 million. At September 30, 2013 these decreases in working capital were offset by an increase in inventory of $0.9 million and an increase in other current assets of $0.2 million. The increase in other current assets is a result of prepayment of the Company's insurance premiums for the fiscal year.

The Company is party to a Loan and Security Agreement, dated November 17, 2009, with Enterprise Bank & Trust (the "Credit Agreement") pursuant to which the Company has a secured revolving credit facility with borrowing availability of up to $5,000,000 (the "Credit Facility"). The Company's obligations under the Credit Facility are secured by certain assets of the Company pursuant to the terms and subject to the conditions set forth in the Credit Agreement. See Note
5 - Financing to the Company's unaudited financial statements for more information concerning the Credit Facility.

Advances under the Credit Facility will be made pursuant to a Revolving Credit Note executed by the Company in favor of Enterprise Bank & Trust. Such advances will bear interest at a rate equal to the 30-day LIBOR rate plus 3.50%. Advances may be prepaid in whole or in part without premium or penalty. The 30-day LIBOR rate was 0.18% on September 30, 2013.

At September 30, 2013 the Company had no aggregate indebtedness, including capital lease obligations, short-term debt and long term debt.

In the event that economic conditions were to severely worsen for a protracted period of time, we believe that we will have borrowing capacity under credit facilities that will provide sufficient financial flexibility. The Company would have options available, including postponing capital expenditures, to ensure liquidity in addition to increased borrowing.

Inflation has not had a material effect on the Company's business or results of operations during the first quarter of fiscal 2014.

Litigation and Contingencies

The Company becomes, from time to time, a party to personal injury litigation arising out of incidents involving the use of its products. The Company believes that any potential judgments resulting from these claims over its self-insured retention will be covered by the Company's product liability insurance. The Company is also currently a defendant in a patent infringement claim brought by Dräger Medical GmbH and its affiliates related to certain models of the Company's Litholyme and Carbolyme single-use carbon dioxide absorption cartridges. See Part II, Item 1 - Legal Proceedings, below, for more information concerning litigation.

Critical Accounting Policies

The impact and any associated risks related to the Company's critical accounting policies on business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect the Company's reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company's Annual Report on Form 10-K for the year ended June 30, 2013.

Recently Issued Accounting Guidance

See Note 1 - Summary of Significant Accounting and Reporting Policies for more information on recent accounting pronouncements and their impact, if any, on the Company's financial statements. Management believes there have been no material changes to our critical accounting policies.

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