VITAL SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONTINUED
(Unaudited)
6.
Other Comprehensive Income
Other
comprehensive income for the period ended March 31, 2008 and 2007 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Six months ended
March 31,
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,970
|
|
$
|
8,601
|
|
$
|
17,969
|
|
$
|
15,896
|
|
Foreign currency translation
|
|
|
1,032
|
|
|
(165
|
)
|
|
881
|
|
|
989
|
|
Available for sale securities fair value
adjustment
|
|
|
(965
|
)
|
|
|
|
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
10,037
|
|
$
|
8,436
|
|
$
|
17,885
|
|
$
|
16,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
Stock-Based Compensation
In
accordance with SFAS No. 123R, the Companys net income for the three and
six months ended March 31, 2008 and March 31, 2007 includes $351,000 and
$389,000, and $702,000 and $857,000, respectively, of compensation expense in
addition to $15,000, $43,000, $65,000 and $49,000, respectively, of income tax
benefits related to the Companys stock options. The stock based compensation
expense is included as a component of both selling, general and administrative
and research and development expenses. The stock based compensation expense for
selling, general, and administrative and research and development for the six
months ended March 31, 2008 was $512,000 and $190,000, respectively, and
$626,000 and $231,000, respectively, for the six months ended March 31, 2007.
8.
Income Taxes
In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition of tax benefits, classification on the balance sheet, interest
and penalties, accounting in interim periods, disclosure, and transition. The
Company adopted FIN 48 effective October 1, 2007. As a result of implementing
FIN 48 as of October 1, 2007, the Company recognized a $2,194,000 liability for
unrecognized tax benefits, of which $2,019,000 is classified as a long-term
liability and $175,000 as a short-term liability, $532,000 was accounted for as
a reduction to retained earnings and $800,000 was accounted for as a deferred
tax asset and $862,000 was reclassified from a SFAS No. 5 tax accrual. During the six-month period ended March 31, 2008, the Company increased its liability for
unrecognized tax benefits by $102,000 with $107,000 accounted for as a deferred tax asset and $5,000 as a reduction in the Companys income tax provision during the period.
Of
the Companys unrecognized tax benefits of approximately $2,194,000,
$1,394,000, if recognized, would result in a reduction of the Companys income
tax provision. The difference between the total amount of unrecognized tax
benefits and the amount that would impact the income tax provision consists of
items that are offset by deferred tax assets, and the federal tax benefits will
change significantly within the next twelve months. In accordance with FIN 48,
the Company classifies interest as a component of interest expense and
penalties as a component of income tax expense. The total amount of estimated
accrued interest and penalties are $181,000 and $0, respectively as of October
1, 2007. The total amount of estimated accrued interest and penalties are
$215,000 and $0, respectively as of December 31, 2007 and $247,000 and $0,
respectively as of March 31, 2008.
The
Company files Federal income tax returns, as well as multiple state, local and
foreign jurisdiction tax returns. In fiscal 2007, the Company settled an audit
of its Federal income tax return through the year ended September 30, 2004.
Accordingly, tax years ended September 30, 2005 and later remain subject to
examination by the IRS. In most instances, state, local and foreign income tax
returns remain subject to examination for tax years ended September 30, 2004 or
later.
7
VITAL
SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONTINUED
(Unaudited)
In
connection with a finalization of an Internal Revenue Service examination of
the Companys 2003 and 2004 Federal income tax returns, the Company decreased
its tax provision in the first quarter of fiscal 2007 by $419,000.
9.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board released SFAS 157,
Fair Value Measurements, which takes effect for the first fiscal year
beginning after November 15, 2007. This statement defines fair value and
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements;
however, the application of this statement is expected to change current
practice. The Company is currently in the process of evaluating the materiality
of the impact of SFAS 157 on the Companys Condensed Consolidated Financial
Statements.
In
February 2007, the Financial Accounting Standards Board released SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities, which takes
effect for the first fiscal year beginning after November 15, 2007. Under SFAS
159, entities are provided with an option to report selected financial assets
and liabilities at fair value. The standard permits an entity to elect the fair
value option on an instrument-by-instrument basis. In addition, SFAS 159
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. The Company is currently in the
process of evaluating the materiality of the impact of SFAS 159 on the
Companys Condensed Consolidated Financial Statements.
In
December 2007, the Financial Accounting Standards Board released SFAS 141R,
Business Combinations that is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The pronouncement resulted from
a joint project between the FASB and the International Accounting Standards
Board and continues the movement toward the greater use of fair values in
financial reporting. SFAS 141R is expected to significantly change how future business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods.
In
December 2007, the Financial Accounting Standards Board released SFAS 160
Non-controlling Interests in Consolidated Financial Statements that is
effective for annual periods beginning after December 15, 2008. The
pronouncement resulted from a joint project between the FASB and the
International Accounting Standards Board and continues the movement toward the greater
use of fair values in financial reporting. Upon adoption of SFAS 160, the
Company will re-classify non-controlling interests as a component of equity.
The
Company does not believe that any other recently issued but not yet effective
accounting standards will have a material effect on the Companys consolidated
financial position or results of operations.
10.
Revenues
Included
in the Companys revenues in the anesthesia and respiratory/critical care
segments are sales made to distributors. For the three month and six month
periods ended March 31, 2008, these sales accounted for approximately 26.1% and
26.9%, respectively, of the net sales of the Company and for the three and six
month periods ended March 31, 2007, these sales accounted for approximately
28.9% and 29.9%, respectively. The Company estimates and records the applicable
rebates that have been or are expected to be granted or made for products sold
through distributors during the period. These rebate amounts are estimated to
be $18.6 million and $36.6 million for the three months and six months ended
March 31, 2008 and are deducted from the gross sales to arrive at the Companys
reportable net sales for each period.
8
VITAL
SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONTINUED
(Unaudited)
11.
Goodwill and Intangible Assets
In
accordance with Statement of Financial Standards No. 142, Goodwill and Other
Intangible Assets, goodwill and intangible assets that have indefinite useful
lives are no longer amortized but rather are to be tested for impairment
annually or more frequently if impairment indicators arise. The Company
completed this impairment test during the three-month period ended March 31,
2008 and found no impairment. If the Company is required to record impairment
charges in the future, it could have a material adverse impact on the Companys
results of operations and financial condition.
A
summary of goodwill is shown in the following table:
|
|
|
|
|
|
|
|
(In
thousands of dollars)
|
|
March 31,
2008
|
|
September 30, 2007
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
81,984
|
|
$
|
79,272
|
|
Goodwill resulting from an ownership
increase in SSA
|
|
|
|
|
|
682
|
|
Goodwill resulting from investment in China
Joint Venture (a)
|
|
|
1,335
|
|
|
|
|
Goodwill acquired (reclassification to
intangible assets of): Enginivity
|
|
|
(555
|
)
|
|
5,655
|
|
Goodwill acquired: Do You Snore, LLC &
Advanced Sleep Technologies of Georgia, Inc and Southern Medical Equipment,
Inc
|
|
|
510
|
|
|
7,758
|
|
Goodwill acquired: Southern Sleep
Technologies, LLC and Southern Home Respiratory Care, LLC
|
|
|
|
|
|
1,798
|
|
Impairment of Stelex goodwill
|
|
|
|
|
|
(13,181
|
)
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
83,274
|
|
$
|
81,984
|
|
|
|
|
|
|
|
|
|
Other
intangible assets consist of the following and are included in other assets on
the balance sheet:
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
March 31,
2008
|
|
September 30,
2007
|
|
|
|
|
|
|
|
Trademark, provider numbers, and customer lists:
|
|
|
|
|
|
|
|
Southern Sleep Technologies, LLC and
Southern Home Respiratory Care, LLC
|
|
$
|
200
|
|
$
|
200
|
|
Trademark, patents/technology, and
non-competition agreements:
|
|
|
|
|
|
|
|
China Joint Venture/ Respironics (a)
|
|
|
1,511
|
|
|
|
|
Enginivity
|
|
|
555
|
|
|
|
|
Omni, Inc acquired October 3, 2007
|
|
|
239
|
|
|
|
|
Amortization
|
|
|
(97
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
2,408
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In January 2008, the Company purchased a 50% interest in Vital Signs KTL, a face mask manufacture located in China for approximately $1.6 million.
The most significant asset acquired was goodwill. The Company consolidated Vital Signs KTL into its financial statements effective January 2008.
|
9
VITAL
SIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
CONTINUED
(Unaudited)
12. Auction Rate Securities
Auction
rate securities (ARS) are securities with long-term nominal maturities that
are normally resold through short-term auctions. The interest rate resets at
these short-term auctions. At March 31, 2008, the Company had $34,575,000
invested in auction rate securities at cost, compared with $85,520,000 at
December 31, 2007 and $86,671,000 at September 30, 2007. In fiscal 2007 and
through the first quarter of fiscal 2008, the Company classified ARS as
short-term investments as the short-term auctions historically provided a
liquid market for these securities. During its second quarter of fiscal 2008,
the Company began to sell its ARS, and all sales occurred at cost. Many
auctions failed during the second quarter, and the Company reclassified these
ARS as long-term available-for-sale securities and recorded the ARS at fair
value with the $965,000 unrealized loss recorded in other comprehensive income.
The Companys intent is to sell the ARS as soon as possible and is evaluating
legal action against the firms that sold it the ARS. All interest payments are
current, and management believes the fair-value adjustments are temporary.
Subsequent to the end of the second quarter of fiscal 2008, $3,725,000 of ARS
sold at cost and were shown as short-term investments at March 31, 2008.
Auction rate securities are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
(In thousands of dollars)
|
|
Cost
|
|
Fair value
|
|
Carrying
value
|
|
Unrealized (loss)
in accumulated
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale auction rate securities
|
|
$
|
3,725
|
|
$
|
3,725
|
|
$
|
3,725
|
|
$
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale auction rate securities
|
|
|
30,850
|
|
|
29,885
|
|
|
29,885
|
|
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,575
|
|
$
|
33,610
|
|
$
|
33,610
|
|
$
|
(965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Item
2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Unaudited)
The following discussion should be read in conjunction with
the Companys condensed consolidated financial statements and notes to those
condensed consolidated financial statements, included elsewhere in this report.
Forward Looking Statements
This
report contains forward-looking statements (as such term is defined in
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) that are based on the Companys managements
beliefs and assumptions and on information currently available to the Company.
These statements may be found throughout this report, particularly under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations. These sections contain discussions of some of the
factors that could cause actual results to differ materially from the results
projected in the Companys forward-looking statements. When used in this
report, the words or phrases will likely result, expects, intends, will
continue, is anticipated, estimates, projects, management believes,
we believe and similar expressions are intended to identify forward-looking
statements within the meaning of the Exchange Act and the Securities Act.
Forward-looking statements include plans and objectives of management for
future operations. These forward-looking statements involve risks and
uncertainties and are based on assumptions that may not be realized. Actual
results and outcomes may differ materially from those discussed or anticipated.
All
forward-looking statements are subject to known and unknown risks and
uncertainties, including those discussed in Item 1A of the Companys Annual
Report on Form 10-K for the year ended September 30, 2007, and in Item 1A of
Part II of this Quarterly Report, that could cause actual results to differ
materially from historical results and those presently anticipated or
projected. No forward-looking statement is a guarantee of future performance.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. You should
read the Companys cautionary statements as being applicable to all related
forward-looking statements whenever they appear in:
|
|
|
|
|
this report and materials
referred to in this report; and
|
|
|
|
|
|
the Companys press
releases.
|
Overview
Vital
Signs, Inc. sells single-patient-use medical products to the anesthesia,
respiratory, critical care, interventional cardiology/radiology, and emergency
markets. In addition, Vital Signs sells therapeutic products for patients
suffering from sleep/ventilation disorders and provides sleep/ventilation
diagnostic testing at sleep laboratories and Company-managed centers. The
Company also manufactures interventional cardiology/radiology products, and
delivers technological services to companies regulated by the United States
Food and Drug Administration (FDA). The Company sells its products in
over 73 countries worldwide. The Company offers one of the broadest
single-patient-use anesthesia and respiratory/critical care product lines in
the industry and has developed numerous innovative products which are now
considered industry standards. The Company sells therapeutic products for
patients suffering from sleep disorders and provides sleep/ventilation
diagnostic testing services at 78 hospital based and 17 free-standing sleep
labs, for a total of 95 sleep labs.
Anesthesia
The
Companys single-patient-use anesthesia products and systems are designed to
deliver oxygen and anesthesia from a gas source, such as an anesthesia machine,
to a patients pulmonary system. These products also remove anesthetic gases,
oxygen, and carbon dioxide from a patient and link a patient with various
monitors. The Companys principal anesthesia products consist of face masks,
breathing circuits, and general anesthesia products. enFlow® , one of the
Companys new single-patient-use products, is a blood fluid warmer that is
placed nearer to the patient than traditional fluid warming products in the
market to assure the IV fluids or blood are properly warmed. During the first
fiscal quarter of 2008, the Company became the first medical manufacturer to
eliminate latex from all of its anesthesia circuits to protect both patients
and health care providers.
11
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Revenues
in the Companys anesthesia segment are driven primarily by the extent to which
its hospital customers perform general surgeries. In addition, because most of
the Companys anesthesia products are single-patient-use products, the Company
benefits when hospitals undertake programs to reduce the frequency of
infections, known as nosocomial infections, which originate or occur within
their settings. Revenues in this segment are negatively impacted by the trend
among hospitals to allow group purchasing organizations to negotiate long-term
contracts with medical device manufacturers on their behalf. Expenses in the
Companys anesthesia segment are driven primarily by the cost of raw materials,
labor costs and freight expenses. For information regarding a recent change in
the supplier of the Companys face masks, see Item 1A of Part II of this
Quarterly Report.
Respiratory/critical care
The
Companys primary respiratory/critical care products are arterial blood gas
(ABG) syringes and kits, manual resuscitators, and single-use blood pressure
cuffs. The Companys Broselow line consists of color-coded products designed to
facilitate and expedite the selection of proper equipment and dosing in
pediatric medicine. The Companys respiratory/critical care segment responds to
the growing needs of hospitals to provide respiratory relief and emergency
care. The Company believes that in recent years there has been an increasing
incidence of respiratory illnesses, such as asthma and emphysema, due in part to
an increasingly susceptible aging population, environmental pollution,
smoking-related illnesses, and communicable diseases with significant
respiratory impact, such as tuberculosis, HIV, and influenza. These trends,
together with concerns regarding the spread of nosocomial infections, drive the
Companys sales of respiratory products. As in the Companys anesthesia
segment, revenues in this segment have been negatively impacted by the
emergence of group purchasing organizations. Expenses in this segment are
driven principally by raw material costs, labor costs, and freight expenses.
Sleep/ventilation
The
Company serves the sleep/ventilation market as both a provider of diagnostic
services and a manufacturer of therapeutic products focused on sleep/ventilation.
Through its Sleep Services of America subsidiary, the Company provides
sleep/ventilation diagnostic testing services in the United States in
free-standing laboratories and centers and, through contracts with hospitals,
in hospital facilities for patients suspected of suffering from obstructive
sleep apnea. The Company has focused its efforts on laboratories and centers
affiliated with hospitals, such as Johns Hopkins and the University of
Maryland. The Companys sleep diagnostic services business is driven by the
growing awareness of the existence and significant consequences of obstructive
sleep apnea. The Companys principal expense in its sleep/ventilation
diagnostic services business is the cost of employing the technicians who
operate the sleep laboratories and centers.
The
Companys Breas Medical AB, or Breas, subsidiary is a Swedish manufacturer
of personal ventilators for obstructive sleep apnea, respiratory distress, and
ventilation. The Companys sleep/ventilation products deliver airflow to
patients undergoing therapy for the treatment of obstructive sleep apnea with
the objective of increasing patient comfort and acceptance of the treatment.
The Companys sleep/ventilation products employ continuous positive airway pressure,
or CPAP, which is a common method for treating obstructive sleep apnea. The
Company has manufactured and distributed CPAP systems for more than a decade in
the international markets. These sales depend principally on the prevalence of
sleep disorders and the acceptance by patients and care-givers in developed
markets of treatment modalities for obstructive sleep apnea. Like the Companys
anesthesia and respiratory/critical care businesses, the Companys Breas
subsidiary faces the challenge of controlling raw material, labor, and freight
costs. To date, the Company has had only limited sales of its sleep/ventilation
products in the United States due to the market dominance of the Companys
competitors in selling sleep products to home care dealers. The Companys
United States strategy is to sell CPAP products primarily through its sleep
centers and to sell its ventilators through either an established ventilator
company or respiratory specialty distributors.
12
Managements Discussion and Analysis of Financial
Condition and Results of OperationsContinued
(Unaudited)
Interventional cardiology/radiology
Through
its Thomas Medical subsidiary, the Company participates in the interventional
cardiology/radiology market. In this business, the Company designs, develops,
and manufactures devices that are used in electrophysiology, cardiology,
radiology, critical care, and anesthesia procedures. While this business
benefits from the overall development of less invasive procedures in
healthcare, it is highly dependent upon the conversion of development concepts
to commercial products by the Companys research and development team. The
Company sells these products primarily through major cardiology/radiology
companies. The customer base is, in turn, subject to stringent regulatory
requirements as well as competitive pressures.
Pharmaceutical technology services
Through
its Pharmaceutical technology services segment, the Company delivers
technological services to FDA regulated companies primarily in the
pharmaceutical sector. In addition, the Company also provides services to
medical device, diagnostic and biotechnology companies. The Company advises
clients by helping them establish and monitor processes designed to satisfy
their regulatory requirements set forth by the FDA and has begun to
develop and sell dedicated software to its clients. The Companys principal
costs in this segment are its employee costs.
Net revenues
The
amount and percentage of the Companys net revenue by business segment follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
March 31, 2008
|
|
Three
months ended
March 31, 2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
19,816
|
|
|
33.6
|
%
|
$
|
18,871
|
|
|
35.8
|
%
|
Respiratory/critical care
|
|
|
12,304
|
|
|
20.9
|
|
|
11,950
|
|
|
22.7
|
|
Sleep/ventilation
|
|
|
16,634
|
|
|
28.2
|
|
|
12,154
|
|
|
23.1
|
|
Interventional
cardiology/radiology (1)
|
|
|
7,229
|
|
|
12.3
|
|
|
6,951
|
|
|
13.2
|
|
Pharmaceutical technology
services (1)
|
|
|
2,951
|
|
|
5.0
|
|
|
2,723
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,934
|
|
|
100.0
|
%
|
$
|
52,649
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
ended
March 31, 2008
|
|
Six months
ended
March 31, 2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
39,259
|
|
|
34.9
|
%
|
$
|
36,577
|
|
|
36.4
|
%
|
Respiratory/critical care
|
|
|
23,205
|
|
|
20.7
|
|
|
23,252
|
|
|
23.3
|
|
Sleep/ventilation
|
|
|
31,356
|
|
|
27.9
|
|
|
22,425
|
|
|
22.3
|
|
Interventional cardiology/radiology
(1)
|
|
|
12,836
|
|
|
11.4
|
|
|
12,839
|
|
|
12.8
|
|
Pharmaceutical technology
services (1)
|
|
|
5,717
|
|
|
5.1
|
|
|
5,273
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112,373
|
|
|
100.0
|
%
|
$
|
100,366
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The historical financial
information presented in this Quarterly Report has been reclassified with
respect to the income from unconsolidated investment in the Companys
sleep/ventilation segment and the reclassification of the Companys
pharmaceutical technology segment to held-and-used.
|
13
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
For
product sales, revenue is recognized when title to the product passes to the
customer. Except for certain domestic distributors, title passes when the
Company ships the product. For sales through certain domestic distributors,
title passes when the product is received by the distributor. For service
revenue in the sleep/ventilation and pharmaceutical technology services segments,
revenue is recognized when the service is performed.
Gross
revenues associated with the Companys anesthesia and respiratory/critical care
products are reduced by the amount of rebates due on sales to distributors.
A
reconciliation of gross to net product sales, as well as a comparison with
service revenues follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
March 31,
|
|
Six months
ended
March 31,
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
68,449
|
|
$
|
64,210
|
|
$
|
131,181
|
|
$
|
122,595
|
|
Rebates
|
|
|
(18,603
|
)
|
|
(17,673
|
)
|
|
(36,582
|
)
|
|
(34,260
|
)
|
Other
deductions (2)
|
|
|
(410
|
)
|
|
(1,237
|
)
|
|
(673
|
)
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
49,436
|
|
|
45,300
|
|
|
93,926
|
|
|
85,978
|
|
Service
revenues
|
|
|
9,498
|
|
|
7,349
|
|
|
18,447
|
|
|
14,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
58,934
|
|
$
|
52,649
|
|
$
|
112,373
|
|
$
|
100,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Other
deductions consist of discounts, returns, and allowances.
|
|
|
|
|
|
|
|
International sales
The
Companys products are sold in over 73 countries worldwide. The table
below sets forth the Companys international sales, by segment, for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
March 31, 2008
|
|
Three
months ended
March 31, 2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
3,218
|
|
|
5.5
|
%
|
$
|
2,486
|
|
|
4.7
|
%
|
Respiratory/critical
care
|
|
|
3,567
|
|
|
6.0
|
|
|
3,486
|
|
|
6.6
|
|
Sleep/ventilation
|
|
|
10,088
|
|
|
17.1
|
|
|
7,528
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,873
|
|
|
28.6
|
%
|
$
|
13,500
|
|
|
25.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
ended
March 31, 2008
|
|
Six months
ended
March 31, 2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
Net
revenue
|
|
Percent of
total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
6,230
|
|
|
5.5
|
%
|
$
|
4,636
|
|
|
4.6
|
%
|
Respiratory/critical
care
|
|
|
6,360
|
|
|
5.7
|
|
|
6,287
|
|
|
6.3
|
|
Sleep/ventilation
|
|
|
18,627
|
|
|
16.6
|
|
|
13,310
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,217
|
|
|
27.8
|
%
|
$
|
24,233
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Foreign currency
exchange risks
The
Companys international business exposes it to foreign currency exchange risks,
with international sales of its sleep/ventilation products by the Companys
Breas subsidiary and with products manufactured in China. Sales of products by
the Companys Breas subsidiary are translated from Swedish kronor to United
States dollars and products sourced in China may be priced in Chinese yuan.
Research and
development
The
focus of the Companys research and development efforts, and the amount of such
expenses that the Company incurs, vary from year to year and quarter to quarter
based on the specific needs of the Companys business. For the three months
ended March 31, 2008 and 2007, the Company incurred $2.5 million and $1.8
million, respectively, of research and development expenses. For the six months
ended March 31, 2008 and 2007, the Company incurred $4.9 million and $3.6
million, respectively, of research and development expenses.
Results of operations
The
following table sets forth, for the periods indicated, certain statement of
income data as a percentage of the Companys net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
Six months ended
March 31,
|
|
|
|
|
|
|
|
As a
percent of net revenue
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
46.1
|
|
|
48.0
|
|
|
47.4
|
|
|
48.6
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
|
56.1
|
%
|
|
52.2
|
%
|
|
54.0
|
%
|
|
50.8
|
%
|
Respiratory/critical care
|
|
|
56.9
|
|
|
53.8
|
|
|
54.9
|
|
|
54.9
|
|
Sleep/ventilation
|
|
|
51.7
|
|
|
52.9
|
|
|
51.9
|
|
|
52.7
|
|
Interventional cardiology/radiology
|
|
|
55.7
|
|
|
55.9
|
|
|
55.3
|
|
|
55.0
|
|
Pharmaceutical technology
|
|
|
34.3
|
|
|
27.8
|
|
|
33.0
|
|
|
25.7
|
|
Total
|
|
|
53.9
|
|
|
52.0
|
|
|
52.6
|
|
|
51.4
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
27.0
|
%
|
|
26.0
|
%
|
|
27.2
|
%
|
|
26.4
|
%
|
Research and development
|
|
|
4.2
|
|
|
3.3
|
|
|
4.4
|
|
|
3.6
|
|
Other expense, net
|
|
|
0.3
|
|
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
Total operating expenses
|
|
|
31.5
|
|
|
29.6
|
|
|
31.7
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income), net
|
|
|
(2.4
|
)%
|
|
(2.3
|
)%
|
|
(2.6
|
)%
|
|
(2.3
|
)%
|
Non-controlling interest in net income of
subsidiary
|
|
|
0.4
|
|
|
0.5
|
|
|
0.4
|
|
|
0.5
|
|
Provision for income taxes
|
|
|
8.8
|
|
|
8.5
|
|
|
8.2
|
|
|
7.7
|
|
Income from continuing operations
|
|
|
16.8
|
|
|
16.4
|
|
|
15.9
|
|
|
15.9
|
|
Net income
|
|
|
16.9
|
|
|
16.3
|
|
|
16.0
|
|
|
15.8
|
|
15
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Results for the Three Months Ended March 31,
2008 Compared with the Three Months Ended March 31, 2007
Net Revenue.
Net
revenues for the three months ended March 31, 2008 increased by 11.9% (an
increase of 10.1% excluding the favorable effect of foreign currency exchange
rates) to $58.9 million, compared with $52.7 million in the comparable period
last year. Of the Companys total revenues, $42.0 million, or 71.4%, were
domestic sales and $16.9 million, or 28.6%, were international sales. Domestic
revenues increased by 7.4% to $42.0 million versus $39.1 million for the second
quarter of fiscal 2007. International revenues increased by 25.0% to $16.9 million
versus $13.5 million for the second quarter of fiscal 2007. International
revenues would have increased by 17.4% excluding favorable foreign currency
exchange rates.
The
following are the net revenues by business segment for the three months ended
March 31, 2008 compared with the three months ended March 31, 2007.
NET REVENUE BY BUSINESS SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
|
|
|
|
|
(In
thousands of dollars)
|
|
2008
|
|
2007
|
|
Percent
change
|
|
|
|
|
|
|
|
|
|
Consolidated
statement of income data:
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
19,816
|
|
$
|
18,871
|
|
|
5.0
|
%
|
Respiratory/critical
care
|
|
|
12,304
|
|
|
11,950
|
|
|
3.0
|
|
Sleep/ventilation
|
|
|
16,634
|
|
|
12,154
|
|
|
36.9
|
|
Interventional
cardiology/radiology
|
|
|
7,229
|
|
|
6,951
|
|
|
4.0
|
|
Pharmaceutical
technology services
|
|
|
2,951
|
|
|
2,723
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,934
|
|
$
|
52,649
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia.
Sales of
anesthesia products increased by 5.0% to $19.8 million for the three months
ended March 31, 2008 from $18.9 million for the three months ended March 31,
2007. The increase is primarily due to sales of Limb-θ, the Companys
patented anesthesia circuit, which increased by 11.1% to $4.0 million and sales
of Infusable®, the Companys patented pressure infusor system which increased
by 11.7% to $2.4 million, in addition to the sales of three new products.
Respiratory/critical care.
Sales
of respiratory/critical care products increased by 3.0% to $12.3 million for
the second quarter of fiscal 2008 from $12.0 million for the three months ended
March 31, 2007. The respiratory/critical care sales increase was primarily
attributable to increases in sales of the Companys blood pressure cuffs and
Broselow pediatric products.
Sleep/ventilation.
Net
revenues in the Companys sleep/ventilation segment increased by 36.9% (an
increase of 27.7% excluding favorable foreign currency exchange) to $16.6
million for the three months ended March 31, 2008 from $12.2 million for the
three months ended March 31, 2007. Including the favorable effect of foreign
currency exchange, revenues for Breas, the Companys Swedish manufacturer of
ventilators and CPAP devices increased by 34.0% to $10.1 million during the
three months ended March 31, 2008 from $7.5 million during the same period in
the prior year. Excluding the effect of foreign currency exchange, Breas
increase was 20.0%. The Breas sales increase was primarily driven by products
such as the iSleep 20i intelligent CPAP and the Vivo 40 bi-level ventilator.
Net revenues at Sleep Services of America (SSA), the Companys domestic
sleep/ventilation diagnostic business, increased by 41.5% to $6.5 million
during the three months ended March 31, 2008 from
16
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
$4.6 million
during the three months ended March 31, 2007, primarily attributable to the
acquisitions of Do You Snore, LLC and Southern Sleep Technologies, LLC in the
second half of 2007.
Interventional cardiology/radiology.
The Companys interventional cardiology/radiology segment revenues increased by
4.0% to $7.2 million for the three months ended March 31, 2008 from
$7.0 million for the three months ended March 31, 2007.
Pharmaceutical technology services
.
Service revenues in the Companys pharmaceutical technology services segment
increased by 8.4% to $3.0 million for three months ended March 31, 2008 from
$2.7 million for three months ended March 31, 2007. This segment was
reclassified as held-and-used at fiscal year end 2007.
Gross profit
The
table below shows gross profit dollars and margins for each of the Companys
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
March 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Gross
profit
|
|
Gross
profit
margin
|
|
Gross
profit
|
|
Gross
profit
margin
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
11,109
|
|
|
56.1
|
%
|
$
|
9,849
|
|
|
52.2
|
%
|
Respiratory/critical care
|
|
|
7,001
|
|
|
56.9
|
|
|
6,436
|
|
|
53.8
|
|
Sleep/ventilation
|
|
|
8,608
|
|
|
51.7
|
|
|
6,427
|
|
|
52.9
|
|
Interventional
cardiology/radiology
|
|
|
4,027
|
|
|
55.7
|
|
|
3,885
|
|
|
55.9
|
|
Pharmaceutical technology
services
|
|
|
1,013
|
|
|
34.3
|
|
|
757
|
|
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,758
|
|
|
53.9
|
%
|
$
|
27,354
|
|
|
52.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
gross profit dollar and margin improvements in the Companys anesthesia and
respiratory/critical care segments are due to higher sales and lower materials
costs for face masks and non-latex breathing bags.
The
gross profit dollar increase in the sleep/ventilation segment resulted from
international sales growth at Breas and at Sleep Services of America due to two
acquisitions completed during the second half of fiscal 2007. The gross profit
margin in domestic sleep/ventilation diagnostic services decreased to 52.4% in
the second quarter of fiscal 2008 due to integration costs for two sleep lab
acquisitions. The gross profit at Breas decreased to 51.3% in the second
quarter of fiscal 2008 due to a less favorable product mix.
The
interventional cardiology/radiology segment gross profit margin decrease
resulted primarily from an unfavorable product mix. The gross profit dollars
increased due to higher sales.
The
gross profit dollar increase in the pharmaceutical technology services segment
resulted from increased sales volume. The gross profit margin increased to
34.3% in fiscal 2008 from 27.8% in fiscal 2007, reflecting increased sales and
better labor utilization.
Operating Expenses
Selling, General and Administrative Expenses.
Selling, general, and administrative (SG&A) expenses increased by 16.5 %
to $15.9 million for the three months ended March 31, 2008 from $13.7 million
for the three months ended March 31, 2007. The increase primarily resulted from
incremental SG&A after adding two sleep/ventilation segment acquisitions
completed in the second half of fiscal 2007.
17
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Research and Development Expenses.
Research and development expenses increased by 42.2% to $2.5 million for the
three months ended March 31, 2008 from $1.8 million for the three months ended
March 31, 2007. The increase consists primarily of new product development
costs at Breas and costs from the Enginivity acquisition.
Other (Income) ExpenseNet.
Other expense included in operating expenses was $160,000 for the three months
ended March 31, 2008 and $136,000 for the three months ended March 31, 2007,
primarily relating to severance payments within the Companys anesthesia and
respiratory/critical care segments.
Other items
Interest Income, net.
Interest income increased by $0.2 million to $1.4 million during the three
months ended March 31, 2008 from $1.2 million for the three months ended March
31, 2007 due to higher cash and short-term investments balances as well as
increased interest rates.
Provision for Income Taxes.
The provision for income tax expense for the three months ended March 31, 2008
and 2007 was $5.2 million and $4.5 million, respectively, reflecting an
effective tax rate of 33.8% for the three month ended March 31, 2008 and 33.5%
for the three months ended March 31, 2007.
Discontinued Operations.
The Company recognized net income from discontinued operations of $84,000 for
the three months ended March 31, 2008, reflecting a litigation settlement at
the former Vital Pharma subsidiary sold in October, 2003, and recognized a net
loss from discontinued operations of $20,000 for the three months ended March
31, 2007.
Results for the Six Months Ended March 31,
2008 Compared with the Six Months Ended March 31, 2007
Net Revenue.
Net
revenues for the six months ended March 31, 2008 increased by 12.0% (an
increase of 10.4% excluding the favorable effect of foreign currency exchange)
to $112.4 million compared with $100.4 million in the same period last year. Of
the Companys total revenues, $81.2 million, or 72.2%, were domestic sales and
$31.2 million, or 27.8%, were international sales. Domestic revenues increased
by 6.6% to $81.2 million for the first six months of fiscal 2008 from
$76.2 million for the first six months of fiscal 2007. International sales
increased by 28.8% to $31.2 million for the first six months of fiscal 2008
from $24.2 million for the first six months of fiscal 2007. International sales
increased by 21.5% excluding favorable foreign currency exchange rates.
The
following are the net revenues by business segment for the six months ended
March 31, 2008 compared with the six months ended March 31, 2007.
NET
REVENUE BY BUSINESS SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
March 31,
|
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
2008
|
|
2007
|
|
Percent
change
|
|
|
|
|
|
|
|
|
|
Consolidated statement of
income data:
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
39,259
|
|
$
|
36,577
|
|
|
7.3
|
%
|
Respiratory/critical care
|
|
|
23,205
|
|
|
23,252
|
|
|
(0.2
|
)
|
Sleep/ventilation
|
|
|
31,356
|
|
|
22,425
|
|
|
39.8
|
|
Interventional
cardiology/radiology
|
|
|
12,836
|
|
|
12,839
|
|
|
|
|
Pharmaceutical technology
services
|
|
|
5,717
|
|
|
5,273
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112,373
|
|
$
|
100,366
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
18
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Anesthesia.
Sales of
anesthesia products increased by 7.3% to $39.3 million for the six months ended
March 31, 2008 from $36.6 million for the six months ended March 31, 2007. This
increase is primarily due to a 13.4% increase in sales of Limb-θ , the
Companys patented anesthesia circuit, to $8.1 million and a 12.5% increase in
sales of Infusable®, the Companys patented pressure infusor system to $4.7
million.
Respiratory/critical care.
Sales
of respiratory/critical care products decreased by 0.2% to $23.2 million for
the six months ended March 31, 2008 from $23.3 million for the six months ended
March 31, 2007.
Sleep/ventilation.
Net
revenues in the Companys sleep/ventilation segment increased by 39.8% (an
increase of 31.2% excluding favorable foreign currency exchange) to $31.4
million for the six months ended March 31, 2008 from $22.4 million for the six
months ended March 31, 2007. Including the favorable effect of foreign exchange
translation, revenues for Breas, the Companys Swedish manufacturer of personal
ventilators and CPAP devices, increased by 40.0% to $18.6 million during the
six months ended March 31, 2008 from $13.3 million during the six months ended
March 31, 2007. Excluding the effect of foreign currency exchange, Breas increase
was 26.0%. The Breas sales increase
was primarily driven by the iSleep 20i intelligent CPAP and the Vivo 40
bi-level ventilator. The net revenues at Sleep Services of America (SSA), the
Companys domestic sleep/ventilation diagnostic business, increased by 39.7% to
$12.7 million during the six months ended March 31, 2008 from $9.1 million
during the six months ended March 31, 2007, primarily attributable to the
acquisitions of Do You Snore, LLC and Southern Sleep Technologies, LLC in the
second half of fiscal 2007.
Interventional cardiology/radiology.
The Companys interventional cardiology/radiology segment revenues were even at
$12.8 million for the six months ended March 31, 2008 and March 31, 2007.
Pharmaceutical technology services
.
Service revenues in the Companys pharmaceutical technology services segment
increased by 8.4% to $5.7 million for six months ended March 31, 2008 from $5.3
million for six months ended March 31, 2007.
Gross profit
The
table below shows gross profit dollars and margins for each of the Companys
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
ended
March 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(In thousands of dollars)
|
|
Gross
profit
|
|
Gross
profit
margin
|
|
Gross
profit
|
|
Gross
profit
margin
|
|
|
|
|
|
|
|
|
|
|
|
Anesthesia
|
|
$
|
21,184
|
|
|
54.0
|
%
|
$
|
18,581
|
|
|
50.8
|
%
|
Respiratory/critical care
|
|
|
12,740
|
|
|
54.9
|
|
|
12,758
|
|
|
54.9
|
|
Sleep/ventilation
|
|
|
16,259
|
|
|
51.9
|
|
|
11,808
|
|
|
52.7
|
|
Interventional
cardiology/radiology
|
|
|
7,093
|
|
|
55.3
|
|
|
7,057
|
|
|
55.0
|
|
Pharmaceutical technology
services
|
|
|
1,885
|
|
|
33.0
|
|
|
1,357
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,161
|
|
|
52.6
|
%
|
$
|
51,561
|
|
|
51.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
gross profit dollar and margin improvement in the Companys anesthesia segment
is due to higher sales and lower materials costs for face masks and non-latex
breathing bags. The respiratory/critical care segment gross margin decreased
slightly due to changes in product mix.
19
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
The
gross profit percent decrease in the sleep/ventilation segment resulted from an
unfavorable product mix of Breas products and from Sleep Services of America
due to two acquisitions completed during the second half of fiscal 2007. The
gross profit margin in domestic sleep/ventilation diagnostic services decreased
to 53.4% in the second quarter of fiscal 2008 due to integration costs of two
sleep lab acquisitions. The gross profit margin at Breas decreased to 50.8% in
fiscal 2008 due to an unfavorable product mix.
The
interventional cardiology/radiology segment gross profit margin increase
resulted primarily from a favorable product mix.
The
gross profit dollar increase in the pharmaceutical technology services segment
resulted from increased sales volume. The gross profit margin increased to
33.0% in fiscal 2008 from 25.7% in fiscal 2007, reflecting increased sales and
better labor utilization.
Operating Expenses
Selling, General, and Administrative
Expenses.
Selling, general, and administrative
expenses increased by 15.4% to $30.6 million for the six months ended March 31,
2008 from $26.5 million for the six months ended March 31, 2007. The increase
primarily reflected incremental SG&A after including two sleep/ventilation
segment acquisitions completed in the second half of fiscal 2007.
Research and Development Expenses.
Research and development expenses increased by 36.1% to $4.9 million for the
six months ended March 31, 2008 from $3.6 million for the six months ended
March 31, 2007. The increase consists primarily of product development costs at
Breas, new product development costs in the USA, and costs from the Enginivity
acquisition for the enFlow® blood and fluid warmer. Development costs were also
incurred for SteeLite and RediTube.
Other (Income) ExpenseNet.
Other expense included in operating expenses was $142,000 for the six months
ended March 31, 2008 and $320,000 for the six months ended March 31, 2007
primarily relating to foreign currency transaction revaluation to the functional
currency of accounts receivable and accounts payable at Breas.
Other items
Interest Income, net.
Interest income increased by $0.6 million to $2.9 million during the six months
ended March 31, 2008 from $2.3 million for the six months ended March 31, 2007
as a result of higher cash and short-term investment balances as well as
increased interest rates.
Provision for Income Taxes.
The provision for income tax expense for the six months ended March 31, 2008
and 2007 was $9.3 million and $7.8 million, respectively, reflecting an
effective tax rate of 33.6% for the six months ended March 31, 2008 and 32.1%
for the six months ended March 31, 2007.
The prior year included a one-time tax benefit of $0.4 million.
Discontinued Operations.
The net income from discontinued operations was $112,000 for the six months
ended March 31, 2008, reflecting a litigation settlement at the former Vital
Pharma subsidiary sold in October, 2003, and a net loss from discontinued
operations was $18,000 for the six months ended March 31, 2007.
Liquidity and Capital Resources
The
Company believes that the funds generated from operating activities, cash and
cash equivalents, and short term investments will be sufficient to satisfy its
operating and capital requirements during the next twelve months.
Cash flows
The
Companys primary liquidity requirements have been to finance business
acquisitions and to support operations. The Company has funded these
requirements primarily through internally generated cash flow.
20
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
During
the six months ended March 31, 2008, cash flow from operating activities
provided cash of $20.7 million. During the same period, investing activities
provided cash of $46.0 million, primarily due to sales of available-for-sale auction rate securities.
Financing activities used $4.0 million, consisting primarily of
dividends paid of $2.7 million and $1.6 million to pay off notes payable
acquired with the Do You Snore acquisition, offset in part by $0.2 million
received from exercises of stock options, and a $0.1 million recognized tax benefit
for stock options.
During
the six months ended March 31, 2007, continuing operating activities provided
$19.4 million net cash. Investing activities used $1.9 million of net cash,
primarily for capital additions. Financing activities used $1.9 million,
consisting of $2.3 million paid for dividends, offset in part by $0.2 million
of cash received from the exercise stock options, and $0.2 million of notes
payable for inventory financing in the sleep/ventilation segment. On May 7,
2007 the Company increased its quarterly dividend from $0.09 per share to $0.10
per share.
Cash, Short Term Investments and Net Working Capital
Cash,
cash equivalents, and short term investments were $117.0 million at March 31,
2008 compared with $135.6 million at September 30, 2007. The decrease
is due to reclassifying $30.9 million of auction rate securities from
short-term to long-term investments, with about half of this amount offset by
positive cash flow during the first half of fiscal 2008.
At
March 31, 2008, the Companys net working capital was $170.8 million compared
with $183.4 million at September 30, 2007. At March 31, 2008, the current
ratio was 10.3 to 1.0, and at September 30, 2007 the current ratio was
11.3 to 1.0.
Debt
The
Company has no committed lines of financing.
Working capital policy and capital expenditures
The
Companys current policy is to retain cash and earnings for use in its
business, pay dividends, business acquisitions, product acquisitions, and
product development, among other things. The Company regularly evaluates and
negotiates with domestic and foreign medical device companies regarding
potential business or product line acquisitions, licensing arrangements, and
strategic alliances. The Companys working capital from September 30, 2007 to
March 31, 2008, was impacted by reclassifying $ 29.9 million of auction rate
securities from short term investments to long-term investments.
Auction rate securities
At March
31, 2008, the Company had $34.6 million invested in auction rate securities
(ARS) at cost, compared with $85.5 million at December 31, 2007 and $86.7
million at September 30, 2007. In fiscal 2007 and through the fiscal first
quarter of 2008, the Company classified ARS as short-term investments as the
short-term auctions historically provided a liquid market for these securities.
During its second quarter of fiscal 2008, the Company began to sell its ARS,
and all sales occurred at cost. Many auctions failed during the second quarter,
and the Company reclassified these ARS as long-term available-for-sale
securities and recorded the ARS at fair value with the $1.0 million unrealized
loss recorded in other comprehensive income. The Companys intent is to sell
the ARS as soon as possible, and is also evaluating legal action against the
firms that sold it the ARS. All interest payments are current and management
believes the fair-value adjustments are temporary. Subsequent to the end of the
fiscal second quarter, $3.7 million of ARS sold at cost and were shown as
short-term investments at March 31, 2008. (See Note 12.)
21
Managements Discussion and Analysis of
Financial Condition and Results of OperationsContinued
(Unaudited)
Other
At
March 31, 2008 and 2007, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, that would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, the Company
does not engage in trading activities involving non-exchange traded contracts.
As such, the Company is not materially exposed to any financing, liquidity,
market, or credit risk that could arise if the Company had engaged in such
relationships. The Company does not have material relationships or transactions
with persons or entities that derive benefits from their dependent relationship
with the Company or its related parties.
On
May 6, 2008, the Companys Board of Directors approved a quarterly dividend of
$0.11 per share payable on May 28, 2008 to shareholders of record at the close
of business on May 21, 2008. Shareholders with settlement dates after the May
21, 2008 record date will not receive this dividend, even if they entered into
agreements to purchase their shares before May 21, 2008. For example, an
investor who purchases shares before May 21, 2008 with a settlement date after
May 21, 2008 will not receive the dividend.
Critical accounting estimates
The
preparation of the Companys condensed consolidated financial statements in
conformity with generally accepted accounting principles requires the Company
to make estimates and judgments that affect its reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. See Managements Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and
Estimates in the Companys Annual Report on Form 10-K for the year ended
September 30, 2007 for a discussion of the estimates and judgments necessary in
the Companys accounting for revenue recognition, allowances for rebates and
doubtful accounts, allowances for inventory, valuation of long-lived and
intangible assets, and legal contingencies.
As
of October 1, 2007 the Company adopted FIN 48 which resulted in a $2,194,000
liability for uncertain tax benefit. (See Note 8)
Recent accounting pronouncements
The
recent accounting pronouncements are discussed in Note 9 of the Notes to Condensed
Consolidated Financial Statements.
22
I
tem 3.
Quantitative and
Qualitative Disclosure About Market Risks
The
Company is exposed to market risks, including the impact of material price
changes and changes in the market value of its investments and, to a lesser
extent, interest rate changes and foreign currency fluctuations. In the normal
course of business, the Company seeks to limit the impact of market risks on
earnings and cash flows.
The
impact of interest rate changes is not material to the Companys financial
condition. The Company does not enter into interest rate transactions for
speculative purposes.
For
the first six months of fiscal 2008, the Companys international net revenue
represented approximately 27.8% of its total net revenues. The Companys Breas subsidiary,
located in Sweden, represented 59.7% of its total international net revenues
during the first six months of fiscal 2008. The Company does not enter into any
derivative transactions, including foreign currency transactions, for
speculative purposes. The Company has not entered into any derivative
instrument transactions, such as foreign exchange forward or option contracts,
as of March 31, 2008.
The
Companys primary risk involving price changes relates to raw materials used in
its operations. The Company is exposed to changes in the prices of resins for
the manufacture of its products. The Company does not enter into commodity
futures or derivative instrument transactions. Except with respect to its
historical practice of maintaining a single source of supply for face masks,
the Company seeks to maintain commercial relations with multiple suppliers and
when prices for raw materials rise, attempts to source alternative supplies.
Auction
rate securities (ARS) are securities with long-term nominal maturities that
normally are resold through short-term auctions. The interest rate resets at
these short-term auctions. At March 31, 2008, the Company had $34.6 million
invested in auction rate securities at cost (subsequent to the end of the
fiscal second quarter, $3.7 million of ARS were sold at cost). During its
second quarter of fiscal 2008, the Company began to sell its ARS, and all sales
occurred at cost. Several auctions failed during the second quarter, and the
Company reclassified these ARS as long-term available-for-sale securities and
recorded the ARS at fair value with the $1.0 million unrealized loss recorded
in other comprehensive income. The Companys intent is to sell the ARS as soon
as possible and is also evaluating legal action against the firms that sold it
the ARS. All interest payments are current, and management believes the
fair-value adjustments are temporary. The risks of ARS include a lack of
liquidity, risk of credit-rating downgrade, and fluctuations in fair market
value.
I
tem 4.
Controls and
Procedures
(a)
Disclosure controls and procedures.
As of
the end of the most recently completed fiscal quarter covered by this report,
the Company carried out an evaluation, with the participation of its
management, including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its disclosure controls and procedures
pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation,
the Companys Chief Executive Officer and Chief Financial Officer concluded
that its disclosure controls and procedures are effective in ensuring that
information required to be disclosed by Vital Signs in the reports that the
Company files or submit under the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms.
(b)
Changes in internal controls over financial
reporting.
There have been no changes in the Companys internal
controls over financial reporting that occurred during the last fiscal quarter
to which this report relates that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
23
P
ART II OTHER INFORMATION
I
tem 1A.
Risk Factors
On
February 2, 2007, the Company announced that it had given notice to Respironics
Inc., the Companys supplier of anesthesia face masks, that the Company would
not be renewing its current manufacturing agreement when it expired in the
summer of 2007. The Company also announced that it had entered into a new face
mask supply agreement with a Chinese medical device manufacturer at a cost
below the renewal terms offered by Respironics. Further, the Company announced
that it had reached a binding agreement to form a joint venture with the new
manufacturer, subject to required Chinese government approval. The supply of
face masks from Respironics continued until January 2008 as a new agreement was
reached with Respironics in the summer of 2007 in which the Company paid $1.5
million for a non-compete, equipment, patents, know-how, and a six month
extension of the previous contract. As a result of these developments, the
Company has revised its risk factor relating to its purchase of face masks. The
following risk factor supersedes the risk factor description of the Companys
relationship with Respironics set forth in the Companys Annual Report on Form
10-K for the year ended September 30, 2007.
The Company is
dependent on a single supplier for one of its key products.
During
the period extending from 1980 until the third quarter of fiscal 2007, the
Company had purchased its anesthesia face masks from a single source,
Respironics, Inc., which maintained a site in the Peoples Republic of China at
which it manufactured face masks for the Companys anesthesia segment. The
Company did not renew its current manufacturing agreement with Respironics when
it expired in the summer of 2007. However, the Company and Respironics agreed
to maintain the supply and purchase of products through the first quarter of
fiscal 2008. In order to assure itself of an adequate supply of face masks, the
Company entered into a face mask supply agreement with a Chinese medical device
manufacturer. Simultaneously with the execution of the supply agreement, the
Company entered into a joint venture agreement with that supplier. The joint
venture agreement required certain approvals of the Chinese government, the
last of which was a business license issued in January 2008, allowing the joint
venture and the business to operate according to the terms of the joint venture
agreement. The joint venture agreement enables the Company to invest in this
new relationship, if necessary, to assure that the Companys new supplier can
meet its demands for the quantities of anesthesia face masks that the Company
will require. If the Company is unable to obtain its anesthesia face masks in
the quantities it requires, the Companys business and revenue could be
materially adversely affected. If the supply of the Companys anesthesia face
masks is interrupted or ceases for any reason, the Company could experience
disruption in its business. In the event of such an interruption or cessation,
the Company may not be able to obtain anesthesia face masks in a sufficient
quantity or at a cost-effective price, which could have a material adverse
effect on its business, financial condition and results of operations.
24
I
tem
6.
Exhibits
|
|
|
Exhibits
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
25
S
IGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
VITAL SIGNS,
INC.
|
|
|
|
By:
|
/s/ Mark D. Mishler
|
|
|
|
|
|
Mark D. Mishler
|
|
|
Chief Financial and Accounting Officer
|
|
|
|
Date: May 9,
2008
|
|
|
26
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