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AHPI > SEC Filings for AHPI > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for ALLIED HEALTHCARE PRODUCTS INC

Form 10-Q for ALLIED HEALTHCARE PRODUCTS INC


13-Feb-2014

Quarterly Report


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

Results of Operations

Three months ended December 31, 2013 compared to three months ended December 31, 2012

Allied had net sales of $8.7 million for the three months ended December 31, 2013, down $1.2 million from net sales of $9.9 million in the prior year same quarter. Domestic sales were down 6.4% while international sales, which represented 26.9% of second quarter sales, were down 23.9% from the prior year same quarter.

Orders for the Company's products for the three months ended December 31, 2013 of $9.2 million were $0.1 million or 1.1% lower than orders for the prior year same quarter of $9.3 million. Domestic orders are down 1.3% over the prior year same quarter while international orders, which represented 26.8% of second quarter orders, were 0.7% 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 and uncertainty regarding the impact of the Affordable Care Act. Orders and sales remain below pre-recession levels. The decrease in orders for the three months ended December 31, 2013 from the prior year was primarily due to continued weakness in the Emergency market. Emergency services are funded largely by local governments which have been operating under severe budget constraints.

Gross profit for the three months ended December 31, 2013 was $1.9 million, or 22.2% of net sales, compared to $2.1 million, or 21.2% of net sales, for the three months ended December 31, 2012. The $0.2 million reduction in gross profit is primarily attributable to the decrease in sales. In addition, gross profit for the three months ended December 31, 2013 was also negatively impacted by approximately $67,000 as a result of the Medical Device Excise Tax imposed by the 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 December 31, 2013 were $2.8 million compared to selling, general and administrative expenses of $2.9 million for the three months ended December 31, 2012. Legal expenses are approximately $255,000 higher than in the prior year and recruiting expenses are approximately $24,000 higher than in the prior year. These increases have been offset by decreases in other expense accounts including a $173,000 decrease in salaries and benefits, $46,000 reduction in outside consultants, and a $43,000 reduction in telephone expenses resulting from a change in telephone service provider.

Loss from operations was $891,631 for the three months ended December 31, 2013 compared to loss from operations of $751,132 for the three months ended December 31, 2012.

Allied had a loss before benefit from income taxes in the second quarter of fiscal 2014 of $898,916 compared to loss before benefit from income taxes in the second quarter of fiscal 2013 of $755,956. The Company recorded a tax benefit of $0 for the three months ended December 31, 2013 compared to a tax benefit of $287,263 for the three months ended December 31, 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 have 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 exceeded the value of the deferred tax assets and the Company began recording a valuation allowance for losses in excess of the supportable values. In the quarter ended December 31, 2013 a valuation allowance of approximately $324,000 was recorded. To the extent that the Company's losses continue in future quarters, the tax benefit of those losses will be reduced by a valuation allowance.

Net loss for the second quarter of fiscal 2014 was $898,916 or $0.11 per basic and diluted share compared to net loss of $468,693 or $0.06 per basic and diluted share for the second 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 second quarters of fiscal 2014 and 2013 were 8,027,147 and 8,100,593, respectively.

Six months ended December 31, 2013 compared to six months ended December 31, 2012

Allied had net sales of $17.5 million for the six months ended December 31, 2013, down $1.7 million, or 8.9% from net sales of $19.2 million in the prior year same period resulting from lower order levels and a decrease in customer orders released for shipment. Domestic sales were down 6.3% from the prior year same period while international sales were down 16.7% from the prior year same period. International business represented 24.9% of sales for the first six months of fiscal 2014.

Sales for the six months ended December 31, 2013 and 2012 included $0 and $114,700 respectively for the recognition of income of 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 six months ended December 31, 2013 of $18.0 million were $0.9 million or 4.8% lower than orders for the prior year same period of $18.9 million. Domestic orders are down 2.1% over the prior year same period while international orders, which represented 25.5% of orders for the first six months of fiscal 2014, were 11.2% lower than orders for the prior year same period. The drop in domestic orders is primarily in the Hospital and Emergency markets. Ambulance services are funded by local governments which have been operating under severe budget constraints. The Company believes that this has negatively impacted orders and sales to this market over the past several years, and in the first six months of 2014. The Company also believes that as a result of the Affordable Healthcare Act, hospitals have tightened purchases further. 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 and Russia. The Company does not believe this decrease indicates a drop in market share.

Gross profit for the six months ended December 31, 2013 was $3.7 million, or 21.1% of net sales, compared to $4.1 million, or 21.4% of net sales, for the six months ended December 31, 2012. The decrease in gross profit is primarily the result of lower sales levels, and the decrease in income recognized from the agreement with Abbott Laboratories in the prior year. 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. Gross profit for the six months ended December 31, 2013 was also negatively impacted by approximately $138,000 as a result of the Medical Device Excise Tax imposed by the Affordable Care Act, beginning on January 1, 2013. The tax is 2.3% of the selling price of the taxable product, subject to certain exceptions.

Selling, general and administrative expenses for the six months ended December 31, 2013 were $5.5 million compared to selling, general and administrative expenses of $5.5 million for the six months ended December 31, 2012. Legal expenses are approximately $291,000 higher than in the prior year and recruiting expenses are approximately $41,000 higher than in the prior year. These increases have been offset by decreases in other expense accounts including a $173,000 decrease in salaries and benefits, $75,000 reduction in outside services and a $58,000 reduction in telephone expenses as a result of a change in telephone service providers.

Loss from operations was $1.8 million for the six months ended December 31, 2013 compared to loss from operations of $1.4 million for the six months ended December 31, 2012. Allied had loss before benefit from income taxes in the first six months of fiscal 2014 of $1.8 million, compared to loss before benefit from income taxes in the first six months of fiscal 2013 of $1.4 million. The Company recorded a tax benefit of $277,910 for the six months ended December 31, 2013 compared to a tax benefit of $539,186 for the six months ended December 31, 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 have been based on the reversal of existing temporary deferred tax liabilities and tax planning strategies. In the six months ended December 31, 2013 the Company's cumulative losses have exceeded the value of the deferred tax assets and a valuation allowance of approximately $355,000 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 six months ended December 31, 2013 was $1,489,474 or $0.19 per basic and diluted share compared to net loss of $879,725 or $0.11 per basic and diluted share for the first six months 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 six months of fiscal 2014 and 2013 were 8,027,147 and 8,112,490, respectively

Liquidity and Capital Resources

The Company believes that available resources, including availability under a credit facility described below, are sufficient to meet short term operating requirements.

The Company's working capital was $12.3 million at December 31, 2013 compared to $13.7 million at June 30, 2013. The decrease in working capital was primarily a result of cash and cash equivalents decreasing by $1.4 million largely due to the decrease in sales and resulting net loss. Accounts receivable as measured in days of sales outstanding ("DSO") was 38 DSO at December 31, 2013; down from 39 DSO at June 30, 2013. In addition accounts receivable decreased by $0.7 million as a result of lower sales. At December 31, 2013 these decreases in working capital were offset by an increase in inventory of $1.1 million as a result of the decrease in sales demand 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 consolidated 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 0.17% on December 31, 2013.

At December 31, 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 six months 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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