Continuing Operations
Operating
profit for the current period declined by $633,000 due to increased operating
expenses of $4,042,000, including $1,067,000 in costs incurred in connection
with the planned merger with Bracco, partially offset by increased sales.
Net sales for
the six months ended December 1, 2007 increased 13%, or $8,993,000, as compared
to the six months ended December 2, 2006, due to higher sales volumes, price
increases and foreign currency exchange fluctuations, which increased the
translated amounts of foreign subsidiaries sales to U.S. dollars for financial
reporting purposes by $1,953,000. Price increases accounted for approximately
2.7% of net sales for the current period, as a significant portion of our
domestic products are sold under fixed pricing, long-term group purchasing
organization contracts. On a product line basis, the net sales increase
resulted primarily from increased sales of healthcare decontaminants of
$5,594,000, CT injector systems of $3,392,000, contract manufacturing products
of $1,392,000, partially offset by decreased sales of CT imaging contrast
products of $1,147,000 and X-ray fluoroscopy products of $427,000.
Net sales in
international markets, including direct exports from the U.S., increased 14%,
or $3,031,000, for the current period from the comparable prior year period due
to higher sales volumes, foreign currency exchange fluctuations, which
increased the translated amounts of foreign subsidiaries sales to U.S. dollars
for financial reporting purposes by $1,268,000, and price increases, which
accounted for approximately 1.7% of net sales in international markets for the
current period. On a product line basis, the net sales increase resulted from
increased sales of CT injector systems of $1,251,000, contract manufacturing
products of $964,000, virtual colonoscopy products of $533,000 and X-ray
fluoroscopy products of $435,000.
The following
table sets forth net sales by product category for the six months ended
December 1, 2007 and December 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
CT Imaging
Contrast
|
|
$
|
17,271
|
|
|
22.5
|
|
$
|
18,418
|
|
|
27.2
|
|
CT Injector
Systems
|
|
|
16,893
|
|
|
22.1
|
|
|
13,501
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CT
Imaging
|
|
|
34,164
|
|
|
44.6
|
|
|
31,919
|
|
|
47.2
|
|
X-Ray
Fluoroscopy
|
|
|
21,610
|
|
|
28.2
|
|
|
22,037
|
|
|
32.6
|
|
Healthcare
Decontaminants
|
|
|
6,440
|
|
|
8.4
|
|
|
846
|
|
|
1.3
|
|
Contract
Manufacturing
|
|
|
4,798
|
|
|
6.3
|
|
|
3,406
|
|
|
5.0
|
|
Virtual
Colonoscopy
|
|
|
2,869
|
|
|
3.7
|
|
|
2,588
|
|
|
3.8
|
|
Accessory
Medical Devices
|
|
|
2,574
|
|
|
3.4
|
|
|
2,679
|
|
|
4.0
|
|
Gastroenterology
|
|
|
2,301
|
|
|
3.0
|
|
|
2,197
|
|
|
3.2
|
|
Other
|
|
|
1,848
|
|
|
2.4
|
|
|
1,939
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,604
|
|
|
100.0
|
|
$
|
67,611
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit,
expressed as a percentage of net sales, decreased to 43% for the current period
from 44% for the comparable period of the prior year due to increased costs for
finished products purchased from our Canadian subsidiary, which resulted from
the continued weakening of the U.S. dollar against the Canadian dollar,
partially offset by sales price increases.
-33-
SG&A
expenses were $24,899,000 for the six months ended December 1, 2007 compared to
$22,578,000 for the six months ended December 2, 2006. This increase of
$2,321,000, or 10%, was due to costs of $724,000 associated with an increase in
the size of our North American sales force, unfavorable foreign currency
exchange fluctuations, which increased the translated amounts of foreign
subsidiaries SG&A expenses to U.S. dollars for financial reporting
purposes by $586,000, legal fees of $523,000 incurred in the defense of the
Tyco lawsuit, which is continuing, and severance costs of $216,000.
R&D
expenditures for the current period increased 22% to $3,589,000, or 5% of net
sales, from $2,935,000, or 4% of net sales, for the comparable period of the
prior year due to increased general regulatory costs of $429,000, resulting
from our adding personnel to support planned increases in international product
registrations, and increased costs of $308,000 for CT imaging and X-ray
fluoroscopy projects. Of the R&D expenditures for the current period,
approximately 57% related to CT imaging and X-ray fluoroscopy projects, 32% to
general regulatory costs, 5% to gastroenterology projects, 1% to virtual
colonoscopy projects, 1% to healthcare decontaminant projects and 4% to other
projects.
Other income
(expense) totaled $1,159,000 of income for the current period compared to
income of $1,068,000 for the comparable period of last year. This improvement
is due primarily to gains of $669,000 from sales of non-core equity securities
and increased interest income of $136,000, partially offset by unfavorable
changes in foreign currency exchange gains and losses of $749,000, resulting
from the weakening of the U.S. dollar.
For the six
months ended December 1, 2007, our effective tax rate of 30% differed from the
Federal statutory tax rate of 34% due primarily to tax-exempt income, partially
offset by non-deductible expenses. For the six months ended December 2, 2006,
our effective tax rate of 34% equaled the Federal statutory tax rate as the
effects of non-deductible expenses offset tax-exempt income.
Discontinued Operation
We have
consolidated the financial statements of Toho and reported its results as a
discontinued operation. Summarized results of operations for Toho as reported
in loss from discontinued operation in the accompanying consolidated statement
of earnings for the six months ended December 2, 2006 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Net sales
from unaffiliated customers
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
Total net
sales
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes
|
|
|
$
|
(374
|
)
|
|
Income tax
benefit
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operation
|
|
|
$
|
(235
|
)
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
For the
quarter ended December 1, 2007, operations and capital expenditures were funded
by working capital and proceeds from the exercise of stock options. Our policy
has generally been to fund operations and capital requirements without
incurring significant debt. At December 1, 2007 and
-34-
June 2, 2007,
we had no outstanding indebtedness for borrowed money. We have available
$2,000,000 under a bank line of credit, of which no amounts were outstanding at
December 1, 2007.
Our
contractual obligations and their effect on liquidity and cash flows as of
December 1, 2007 are set forth in the table below. We have no variable interest
entities or other off-balance sheet arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period as of December 1, 2007
|
|
|
|
|
|
|
|
Total
|
|
Less
than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
(1)
|
|
|
$
|
6,255
|
|
|
|
$
|
2,075
|
|
|
|
$
|
3,231
|
|
|
|
$
|
341
|
|
|
|
$
|
608
|
|
|
Purchase
obligations
(1)
|
|
|
|
5,090
|
|
|
|
|
5,066
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
contract
(1)
|
|
|
|
720
|
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities reflected on the consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
(2)
|
|
|
|
2,759
|
|
|
|
|
107
|
|
|
|
|
238
|
|
|
|
|
264
|
|
|
|
|
2,150
|
|
|
License
arrangements
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
severance benefits
|
|
|
|
116
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
14,976
|
|
|
|
$
|
8,120
|
|
|
|
$
|
3,493
|
|
|
|
$
|
605
|
|
|
|
$
|
2,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
non-cancelable operating leases, purchase obligations, and employment
contract are not reflected on the consolidated balance sheet under accounting
principles generally accepted in the United States of America. The purchase
obligations consist of finished product and component parts.
|
|
|
(2)
|
Deferred
compensation costs covering active employees are assumed payable after five
years, although certain circumstances, such as termination, would require
earlier payment.
|
At December 1,
2007, approximately $44,558,000, or 31%, of our assets consisted of cash and
cash equivalents and short-term debt and equity securities. The current ratio
was 6.09 to 1, with net working capital of $91,795,000, at December 1, 2007,
compared to the current ratio of 6.07 to 1, with net working capital of
$87,044,000, at June 2, 2007. We believe that our cash reserves, cash provided
from operations and existing bank line of credit will provide sufficient
liquidity to meet our cash requirements for the next 12 months.
In March 2003,
the Board of Directors authorized the repurchase of up to 300,000 shares of our
common stock at an aggregate purchase price of up to $3,000,000. During the
quarter and six months ended December 1, 2007, no shares were repurchased under
this program. In aggregate, we have repurchased 74,234 shares of common stock
for approximately $716,000 under this program.
Critical Accounting Policies
Our
significant accounting policies are summarized in Note A to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for our fiscal
year ended June 2, 2007. While all these significant accounting policies affect
the reporting of our financial condition and results of operations, we view
certain of these policies as critical. Policies determined to be critical are
those policies that have the most
-35-
significant
impact on our financial statements and require us to use a greater degree of
judgment and/or estimates. Actual results may differ from those estimates.
We believe
that given current facts and circumstances, it is unlikely that applying any
other reasonable judgment or estimate methodologies would cause a material
effect on our consolidated results of operations, financial position or liquidity
for the periods presented in this report. The accounting policies identified as
critical are as follows:
Revenue Recognition
We recognize
revenues in accordance with generally accepted accounting principles as
outlined in Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements, which requires that four basic criteria be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) the price is fixed or determinable; (3) collectibility is reasonably
assured; and (4) product delivery has occurred or services have been rendered. Decisions
relative to criterion (3) regarding collectibility are based upon our
judgments, as discussed under Accounts Receivable below. Should conditions
change in the future and cause us to determine this criterion is not met, our
results of operations may be affected. We recognize revenue on the date the
product is shipped or when the product is delivered, depending on when title
passes to the customer. Shipping and credit terms are negotiated on a
customer-by-customer basis. Products are shipped primarily to distributors at
agreed upon list prices. The distributor then resells the products primarily to
hospitals and, depending upon contracts between us, the distributor and the
hospital, the distributor may be entitled to a rebate. We deduct all rebates
from sales and have a provision for rebates based on historical information for
all rebates that have not yet been submitted to us by the distributors.
Changes in our
rebate allowance for the six months ended December 1, 2007 and December 2, 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Beginning balance
|
|
|
$
|
2,082
|
|
|
|
$
|
1,866
|
|
|
Provision
for rebates
|
|
|
|
15,410
|
|
|
|
|
12,956
|
|
|
Rebate
credits issued
|
|
|
|
(15,200
|
)
|
|
|
|
(12,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
|
$
|
2,292
|
|
|
|
$
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The rebate
allowance is comprised of three components:
|
|
|
actual
rebate requests received from distributors prior to the closing of our
financial statements;
|
|
|
|
an estimate,
compiled by distributor, of rebate requests not yet received based on
historical submissions, adjusted for any material changes in purchasing
patterns or market conditions; and
|
|
|
|
an estimate
of distributors inventory-on-hand available for future sale pursuant to
group purchasing organization (GPO) contracts. We do not know the specific
inventory levels held by our distributors. However, based on discussions with
our customers, who uniformly attempt to maintain just-in-time purchasing
programs, and our knowledge of their ordering patterns, we estimate a
one-week wholesale inventory level. Since most
|
-36-
|
|
|
of our
product sales are subject to GPO contracts, most distributor
inventory-on-hand will be subject to rebate. This portion of the rebate
estimate is derived by first determining the total quantity of each product
sold by us during the last week of the fiscal period multiplied by two
factors, (a) and (b), where (a) is the percentage of the product rebated
during the prior six-month period based on historical sales and (b) is the
average rebate paid on the product during that period.
|
All product
returns must be pre-approved by us and may be subject to a 20% restocking
charge. To be accepted, a returned product must be unadulterated, undamaged and
have at least 12 months remaining on its stated expiration date.
We record
revenue on warranties and extended warranties on a straight-line basis over the
term of the related warranty contracts, which generally cover one year.
Deferred revenues related to warranties and extended warranties were $1,065,000
and $1,003,000 at December 1, 2007 and June 2, 2007, respectively. Service
costs are expensed as incurred.
Accounts Receivable
Accounts
receivable are generally due within 30 to 90 days and are stated at amounts due
from customers, net of an allowance for doubtful accounts. We perform ongoing
credit evaluations and adjust credit limits based upon payment histories and
customers current creditworthiness, as determined by a review of their current
credit information. We continuously monitor aging reports, collections and
payments from customers, and maintain a provision for estimated credit losses
based upon historical experience and any specific customer collection issues we
identify. While such credit losses have historically been within expectations
and the provisions established, we cannot guarantee the same credit loss rates
will be experienced in the future. We write off accounts receivable when they
become uncollectible. Concentration risk exists relative to our accounts
receivable, as 28% and 35% of our total accounts receivable balances at
December 1, 2007 and June 2, 2007, respectively, were concentrated in one
distributor. While the accounts receivable related to this distributor are
significant, we do not believe the credit risk to be significant given the
distributors consistent payment history.
Changes in our
allowance for doubtful accounts for the six months ended December 1, 2007 and
December 2, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Beginning
balance
|
|
$
|
928
|
|
$
|
888
|
|
Provision for
(reduction in) doubtful
accounts
|
|
|
(18
|
)
|
|
46
|
|
Write-offs
|
|
|
(28
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
882
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
Income Taxes
In preparing
our financial statements, income tax expense is calculated for each
jurisdiction in which we operate. This involves estimating actual current taxes
due plus assessing temporary differences arising from differing treatment for
tax and accounting purposes that are recorded as deferred tax assets and
liabilities. Deferred tax assets are periodically evaluated to determine their
recoverability, based primarily on our ability to generate
-37-
future taxable
income. Where their recovery is not likely, we establish a valuation allowance
and record a corresponding additional tax expense in our statement of earnings.
If actual results differ from our estimates due to changes in assumptions, the
provision for income taxes could be materially affected.
As of June 3,
2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an
interpretation of FASB Statement No. 109. The interpretation requires that we
determine whether it is more likely than not that a tax position will be
sustained upon examination by the appropriate taxing authority. If a tax
position meets the more likely than not recognition criterion, FIN 48 requires
that the tax position be measured at the largest amount of benefit greater than
50 percent likely of being realized upon ultimate settlement. The adoption of
FIN 48 has not had a material effect on our financial condition or results of
operations.
Inventories
We value
inventories at the lower of cost (on the first-in, first-out method) or market.
On a quarterly basis, we review inventory quantities on hand and analyze the
provision for excess and obsolete inventory based primarily on product
expiration dating and our estimated sales forecast, which is based on sales
history and anticipated future demand. Our estimates of future product demand
may not be accurate and we may understate or overstate the provision required
for excess and obsolete inventory. Accordingly, any significant unanticipated
changes in demand could have a significant impact on the value of our inventory
and results of operations. At December 1, 2007 and June 2, 2007, our reserve
for excess and obsolete inventory was $1,103,000 and $1,243,000, respectively.
Effects of Recently Issued Accounting
Pronouncements
In June 2006,
the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainties in
income taxes recognized in an enterprises financial statements. The
interpretation requires that we determine whether it is more likely than not
that a tax position will be sustained upon examination by the appropriate
taxing authority. If a tax position meets the more likely than not recognition
criterion, FIN 48 requires that the tax position be measured at the largest
amount of benefit greater than 50 percent likely of being realized upon
ultimate settlement. This accounting standard is effective for fiscal years
beginning after December 15, 2006. We adopted FIN 48 as of June 3, 2007. The
adoption of FIN 48 has not had a material effect on our financial condition or
results of operations.
In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The standard applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value but does not expand
the use of fair value in any new circumstances. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We do not believe the adoption
of SFAS No. 157 will have a material impact on our financial condition or
results of operations.
In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to choose to measure many
-38-
financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of SFAS No. 159 is to
provide opportunities to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We do not believe the adoption of SFAS No. 159 will have a
material impact on our financial condition or results of operations.