JUNE 30, 2014
(Unaudited)
Note 1.
|
Basis of Presentation
|
The accompanying unaudited interim condensed consolidated financial statements of Medical Action Industries Inc. (“we”, “us”, “our”, or “ourselves”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2014 Annual Report on Form 10-K.
A summary of our significant accounting policies is identified in Note 1 “Organization and Summary of Significant Accounting Policies” of our 2014 Annual Report on Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the notes contained in the 2014 Annual Report on Form 10-K when reviewing interim financial results. There have been no changes to our significant accounting policies or to the assumptions and estimates involved in applying these policies. The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. All dollar amounts presented in our notes to condensed consolidated financial statements are presented in thousands, except share and per share data.
Note 2.
|
Summary of Significant Accounting Policies
|
The preparation of consolidated annual and quarterly financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We have made a number of estimates and assumptions in the preparation of these condensed consolidated financial statements. We can give no assurance that actual results will not differ from those estimates. Some of the more significant estimates include allowances for trade rebates and doubtful accounts, realizability of inventories, goodwill and other intangible assets, depreciation and amortization of long-lived assets, valuation of deferred tax assets, pensions and other postretirement benefits and environmental and litigation matters. There have been no material changes to our critical accounting policies and estimates from the information provided in Note 1 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended March 31, 2014.
Note 3.
|
Recently Issued Accounting Pronouncements
|
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, which amends the guidance in Accounting Standard Codification (“ASC”) 205,
Presentation of Financial Statements
as it relates to reporting discontinued operations. The revised guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the revised definition of a discontinued operation. This amended guidance is to be applied prospectively and is effective for reporting periods (interim and annual) beginning after December 15, 2014, for public companies, with early adoption permitted. The implementation of the amended accounting guidance is not expected to have a material impact on our consolidated financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition guidance in ASC 605,
Revenue Recognition
. The new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This amended guidance is effective retrospectively for reporting periods (interim and annual) beginning after December 15, 2016. We are currently assessing the potential impact of this ASU on our consolidated financial position and results of operations.
Note 4.
|
Discontinued Operations
|
On March 12, 2014, the Company entered into a purchase agreement with an affiliate of Inteplast Group, Ltd. for the sale of the Company’s wholly owned subsidiary, Medegen Medical Products, LLC, and certain other assets which comprised the Company’s Patient Care business unit. The Company retained the cash, accounts receivable and all liabilities associated with the business unit except for an environmental liability. On June 2, 2014, the Company completed the sale of its Patient Care business unit for gross proceeds of $78,628, subject to customary post-closing adjustments, and recorded a preliminary pre-tax gain of $18,873 ($11,220 net of tax) from the sale. As of June 30, 2014, the Company has recorded a post closing adjustment of $1,639 as a receivable due from buyer related to the determination of the ending inventory balance. Such determination is subject to review and acceptance by the buyer. Any disputes with respect to the final inventory balance would be subject to arbitration in accordance with the purchase agreement.
As of June 30, 2014, the Company has also recorded a payable of $3,309 to the buyer for trade rebates related to sales of the Patient Care business unit prior to June 2, 2014. Included in accounts receivable at June 30, 2014 is $2,635 of advanced rebates expected to be refunded to the Company by certain distributors as a result of the sale of the Patient Care business unit.
The results of operations of the Patient Care business unit for the three months ended June 30, 2014 and 2013 are presented as discontinued operations in the accompanying condensed consolidated statements of operations.
The components of the assets and liabilities classified as held for sale are as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Asset held for sale:
|
|
|
|
|
|
|
Inventories, net
|
|
|
-
|
|
|
$
|
18,369
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
17,431
|
|
Goodwill
|
|
|
-
|
|
|
|
10,877
|
|
Other intangible assets, net
|
|
|
-
|
|
|
|
10,236
|
|
Other assets, net
|
|
|
-
|
|
|
|
4,200
|
|
Total assets held for sale, current
|
|
$
|
-
|
|
|
$
|
61,113
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
-
|
|
|
|
4,200
|
|
Total liabilities held for sale, current
|
|
$
|
-
|
|
|
$
|
4,200
|
|
The following table summarizes the results of the Company’s discontinued operations;
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Net sales
|
|
$
|
24,048
|
|
|
$
|
35,715
|
|
Cost of goods sold
|
|
|
20,242
|
|
|
|
31,378
|
|
Selling, general and administrative expenses
|
|
|
2,567
|
|
|
|
4,043
|
|
Income from discontinued operations before gain on sale of business and income taxes
|
|
$
|
1,239
|
|
|
$
|
294
|
|
Gain on sale of business
|
|
|
18,873
|
|
|
|
-
|
|
Income taxes
|
|
|
8,155
|
|
|
|
105
|
|
Net income from discontinued operations
|
|
$
|
11,957
|
|
|
$
|
189
|
|
Inventories, which are stated at the lower of cost (determined by means of the first in, first out method) or market, consist of the following:
|
|
|
|
|
|
|
Finished goods, net
|
|
$
|
13,914
|
|
|
$
|
15,582
|
|
Raw materials, net
|
|
|
14,186
|
|
|
|
10,367
|
|
Work in progress, net
|
|
|
7,327
|
|
|
|
6,769
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
35,427
|
|
|
$
|
32,718
|
|
On a continuing basis, inventory quantities on hand are reviewed and an analysis of the provision for slow moving, excess and obsolete inventory is performed based primarily on our sales history and anticipated future demand. The reserve for slow moving, excess and obsolete inventory amounted to approximately $1,031 at June 30, 2014 and $953 at March 31, 2014.
The gross amount and net book value of the assets under the capital lease are as follows:
|
|
|
|
|
|
|
Capital lease, gross
|
|
$
|
11,409
|
|
|
$
|
11,409
|
|
Less: Accumulated amortization
|
|
|
(2,353
|
)
|
|
|
(2,200
|
)
|
Capital lease, net
|
|
$
|
9,056
|
|
|
$
|
9,209
|
|
The amortization expense associated with the capital lease is as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cost of sales
|
|
$
|
35
|
|
|
$
|
35
|
|
Selling, general and administration
|
|
|
118
|
|
|
|
119
|
|
Capital lease, net
|
|
$
|
153
|
|
|
$
|
154
|
|
As of June 30, 2014, the capital lease requires monthly payments of $129 with increases of 2% per annum. The lease contains provisions for an option to buy in January 2016 and expires in March 2029. The effective rate on the capital lease obligation is 9.9%. We recorded interest expense associated with the lease obligation of $332 and $336 for the three months ended June 30, 2014 and 2013, respectively.
The following is a schedule by years of the future minimum lease payments under the capital lease as of June 30, 2014:
|
|
Capital Lease
Payments
|
|
Balance of Fiscal 2015
|
|
$
|
1,162
|
|
2016
|
|
|
1,580
|
|
2017
|
|
|
1,611
|
|
2018
|
|
|
1,643
|
|
2019
|
|
|
1,676
|
|
Thereafter
|
|
|
18,723
|
|
Total minimum lease payments
|
|
|
26,395
|
|
Less: Amounts representing interest
|
|
|
(12,979
|
)
|
Present value of minimum lease payments
|
|
|
13,416
|
|
Less: Current portion of capital lease obligation
|
|
|
(240
|
)
|
Long-term portion of capital lease obligation
|
|
$
|
13,176
|
|
Note 7.
|
Related Party Transactions
|
A current member of our board of directors is currently a minority shareholder of Custom Healthcare Systems (“CHS”), an assembler and packager of Class 1 medical products. CHS is a supplier to our AVID facility located in Toano, Virginia for small kits and trays. They also purchase sterile instruments from our facility located in Arden, North Carolina.
The amounts sold to and purchased from CHS are as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Sold to CHS
|
|
$
|
245
|
|
|
$
|
213
|
|
Purchased from CHS
|
|
|
461
|
|
|
|
437
|
|
The following table represents the amounts due from and due to CHS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from CHS
|
|
$
|
283
|
|
|
$
|
330
|
|
Due to CHS
|
|
|
32
|
|
|
|
14
|
|
Note 8.
|
Other Intangible Assets
|
The book values, accumulated amortization and original useful life by asset class of the Company’s other intangible assets as of June 30, 2014 and March 31, 2014 are as follows:
|
|
|
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
|
|
Weighted
Average
Remaining
Amortization
Period
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Trademarks/Tradenames not subject to amortization
|
|
|
N/A
|
|
|
$
|
569
|
|
|
$
|
-
|
|
|
$
|
569
|
|
|
$
|
569
|
|
|
$
|
-
|
|
|
$
|
569
|
|
Trademarks subject to amortization (5 years)
|
|
|
1.4
|
|
|
|
2,100
|
|
|
|
(1,610
|
)
|
|
|
490
|
|
|
|
2,100
|
|
|
|
(1,505
|
)
|
|
|
595
|
|
Customer Relationships (20 years)
|
|
|
16.4
|
|
|
|
27,500
|
|
|
|
(5,291
|
)
|
|
|
22,209
|
|
|
|
27,500
|
|
|
|
(4,927
|
)
|
|
|
22,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
30,169
|
|
|
$
|
(6,901
|
)
|
|
$
|
23,268
|
|
|
$
|
30,169
|
|
|
$
|
(6,432
|
)
|
|
$
|
23,737
|
|
We recorded amortization expense related to the above amortizable intangible assets of $469 for both three month periods ended June 30, 2014 and 2013, respectively. The estimated aggregate amortization expense for each of the succeeding years ending June 30, 2019 is as follows:
Fiscal Year
|
|
Amount
|
|
2015
|
|
$
|
1,795
|
|
2016
|
|
|
1,445
|
|
2017
|
|
|
1,375
|
|
2018
|
|
|
1,375
|
|
2019
|
|
|
1,375
|
|
|
|
$
|
7,365
|
|
Note 9.
|
Credit Facilities and Long-Term Debt
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
Revolving credit loan
|
|
$
|
-
|
|
|
$
|
29,976
|
|
Term loan
|
|
|
-
|
|
|
|
10,136
|
|
|
|
|
|
|
|
|
|
|
Total outstanding
|
|
$
|
-
|
|
|
$
|
40,112
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
-
|
|
|
|
40,112
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
On May 17, 2013, the Company entered into a credit agreement (the “New Credit Agreement”), among the Company, as borrower and Wells Fargo Bank, National Association, as administrative agent and lender. The New Credit Agreement provides for a maximum borrowing capacity of $65,000 consisting of the following loans: (1) a $11,505 secured term loan (the “Term Loan”) fully drawn by the Company on May 17, 2013, (2) $5,000 in unsecured delayed draw term loans (collectively, the “Delayed Draw Term Loans”) and (3) up to $53,495 in revolving loans (collectively, the “Revolving Loans”), which may be reduced by the amount of any outstanding Delayed Draw Term Loans drawn by the Company. The proceeds from the New Credit Agreement were used to repay a prior credit agreement.
The Revolving Loans will be used to finance the working capital needs and general corporate purposes of the Company and for permitted acquisitions. The Term Loan and Revolving Loan mature on May 17, 2018. The commitments with respect to the Delayed Draw Term Loans terminate on May 17, 2015 and any Delayed Draw Term Loans drawn by the Company also mature on May 17, 2015. The Term Loan amortizes in consecutive monthly installments, each in the principal amount of $137, commencing June 1, 2013. Any Delayed Draw Term Loan drawn by the Company will amortize in consecutive monthly installments, each in the principal amount equal to the result of (1) the original principal amount of such Delayed Draw Term Loan divided by (2) the number of months remaining from the date the Delayed Draw Term Loan was drawn until May 17, 2015. Any undrawn commitments under the Delayed Draw Term Loans will be reduced by $208 on each calendar month, commencing June 1, 2013.
In the event the outstanding principal amount of the Term Loan exceeds the sum of (1) a specified percentage of the value of real property (calculated at least twice during the term of the New Credit Agreement) and (2) a specified percentage of the value of equipment (calculated at least once per calendar year), we will be required to prepay the excess. The Revolving Loans are subject to a borrowing base such that the total outstanding Revolving Loans may not exceed specified percentages of the value of eligible receivables and finished goods, raw materials, work-in-process and in-transit inventory, all calculated at least monthly. In the event the outstanding principal amount of Revolving Loans under the New Credit Agreement exceeds this borrowing base, the Company will be required to prepay the excess.
Term Loans outstanding under the New Credit Agreement bear interest at a rate per annum equal to, at the election of the Company, (1) LIBOR Rate (as defined in the New Credit Agreement) plus a margin ranging from 2.50% to 3.00%, depending on the Average Access Availability (as defined in the New Credit Agreement) at the time of calculation, or (2) Base Rate (as defined in the New Credit Agreement) plus a margin ranging from 1.50% to 2.00%, depending on the Average Access Availability at the time of calculation. Revolving Loans outstanding under the New Credit Agreement will bear interest at a rate per annum equal to, at the election of the Company, (i) LIBOR Rate plus a margin ranging from 2.00% to 2.50%, depending on the Average Access Availability at the time of calculation, or (ii) Base Rate plus a margin ranging from 1.00% to 1.50%, depending on the Average Access Availability at the time of calculation. Additionally, the Company is required to pay an unused line fee at a rate per annum ranging from 0.375% to 0.50% on the daily unused amount of the Revolving Loan commitments of the Lender during the period for which the payment is made, payable monthly in arrears. If drawn, Delayed Draw Term Loans outstanding under the New Credit Agreement will bear interest at a rate per annum equal to, at the election of the Company, (1) LIBOR Rate plus a margin ranging from 4.25% to 4.75%, depending on the Average Access Availability at the time of calculation, or (2) Base Rate plus a margin ranging from 3.25% to 3.75%, depending on the Average Access Availability at the time of calculation.
During fiscal 2015, the average interest rate on the Term Loan under the New Credit Agreement approximated 2.24% and the average interest rate on the Revolving Loans under the New Credit Agreement approximated 2.67%.
Borrowings under the New Credit Agreement are collateralized by substantially all the assets of, and are fully guaranteed by, the Company and its subsidiaries. The New Credit Agreement contains certain restrictive covenants, including, among others, covenants limiting our ability to incur indebtedness, grant liens, guarantee obligations, sell assets, make loans and investments, enter into merger and acquisition transactions, and declare or make dividends. The Company committed to certain post-closing conditions, including providing monthly financial statements, annual updates of financial projections, and the filing of a mortgage on the Company’s Brentwood, New York corporate headquarters. If the Company’s Excess Availability (as defined in the New Credit Agreement) falls below a specified amount, the Company will become subject to financial covenants relating to a minimum fixed charge coverage ratio of 1.00 to 1.00, measured on a month-end basis. If the Company draws a Delayed Draw Term Loan, the Company will be required to comply with a maximum leverage financial ratio covenant ranging from 3:00 to 1:00 to 3.25 to 1:00, measured on a month-end basis.
On June 2, 2014, the Company entered into the First Amendment to Credit Agreement and Guaranty and Security Agreement (the “Amendment”), among the Company, as borrower, and Wells Fargo Bank, National Association, as administrative agent and lender (the “Lender”).
The Amendment amended the terms of the New Credit Agreement that the Company entered into with the Lender on May 17, 2013, as follows: (a) the Lender’s maximum total loan commitments under the Credit Agreement were reduced from $65,000 to $55,000, (b) provided no Event of Default (as defined in the Credit Agreement) occurs and is continuing, the unused line fee (the “Unused Line Fee”) that the Company is required to pay the Lender, has been capped at 0.375% of the daily unused amount of the revolving loan commitments of the Lender during the period for which the payment is made, through and including December 31, 2014, and (c) solely for purposes of calculating the Unused Line Fee, the aggregate amount of the Lender’s revolving loan commitments was deemed to be the lesser of $30,000 and the actual aggregate amount of the Lender’s revolving loan commitments.
As a result of the sale of the Patient Care business unit on June 2, 2014, the Company repaid all amounts outstanding on both the Revolving and Term loans under the New Credit Agreement.
During the three months ending June 30, 2014 the Company charged $197, related to unamortized financing costs related to the Term Loan, to interest expense. The remaining unamortized financing costs associated with the Revolving Loans and will be amortized financing costs over the remaining life of the New Credit Agreement using the straight-line interest method.
Note 10.
|
Stock – Based Compensation Plans
|
We have various stock-based compensation plans and recognized stock-based compensation (exclusive of deferred tax benefits) for awards granted under our stock-based compensation plans in the following line items in the Condensed Consolidated Statements of Operations:
|
|
Three Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cost of sales
|
|
$
|
4
|
|
|
$
|
2
|
|
Selling, general and administrative expenses
|
|
|
175
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income tax benefits
|
|
$
|
179
|
|
|
$
|
185
|
|
No stock options were granted during the three months ended June 30, 2014.
We granted 407,500 stock options to employees during the three months ended June 30, 2013, which vest 25% during fiscal 2015, 25% during fiscal 2016 and 50% during fiscal 2017. The options expire 10 years from the date of grant and have a weighted average exercise price equal to $8.39, have a weighted average remaining contractual term of 8.9 years and weighted average grant date fair value of $4.56 per share determined based upon a Black-Scholes option valuation model.
The fair value of stock options on the date of grant, and the weighted average assumptions used to estimate the fair value of the stock options granted during the respective periods using the Black-Scholes option valuation model were as follows:
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Dividend yield
|
|
n/a
|
|
|
n/a
|
|
Weighted-average expected volatility
|
|
n/a
|
|
|
62.5%
|
|
Risk-free interest rate
|
|
n/a
|
|
|
0.9%
|
|
Expected life of options (in years)
|
|
n/a
|
|
|
5.37
|
|
Fair value of options granted
|
|
n/a
|
|
|
$4.56
|
|
The following is a summary of the changes in outstanding options for all of our plans during the three months ended June 30, 2014:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Remaining
Weighted
Average
Contract Life
(Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at April 1, 2014
|
|
|
1,692,750
|
|
|
$
|
10.12
|
|
|
|
6.2
|
|
|
$
|
982
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(16,500
|
)
|
|
$
|
12.28
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
1,676,250
|
|
|
$
|
10.10
|
|
|
|
6.0
|
|
|
$
|
7,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2014
|
|
|
1,014,500
|
|
|
$
|
12.13
|
|
|
|
4.2
|
|
|
$
|
2,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest as of June 30, 2014
|
|
|
1,606,983
|
|
|
$
|
10.22
|
|
|
|
5.8
|
|
|
$
|
6,761
|
|
No options were exercised during the three months ended June 30, 2014. As of June 30, 2014, there was approximately $2,531 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under our plans and that cost is expected to be recognized over a period of 1.9 years.
The following is a summary of the changes in non-vested stock options for the three months ended June 30, 2014:
|
|
Shares
|
|
|
Average Grant
Date Fair Value
|
|
Outstanding at April 1, 2014
|
|
|
747,250
|
|
|
$
|
4.13
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
(82,188
|
)
|
|
$
|
6.61
|
|
Forfeited
|
|
|
(3,000
|
)
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
662,062
|
|
|
$
|
3.82
|
|
Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. The restricted stock issued vests based upon the recipients continued service over time (five-year vesting period). We estimate the fair value of restricted stock based on our closing stock price on the date of grant.
The following is a summary of restricted stock activity in our 1994 Stock Incentive Plan for the three months ended June 30, 2014:
|
|
Shares
|
|
|
Weighted
Average Grant
Price
|
|
Outstanding at April 1, 2014
|
|
|
3,750
|
|
|
$
|
12.58
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
(1,875
|
)
|
|
$
|
12.58
|
|
Forfeited
|
|
|
(1,875
|
)
|
|
$
|
12.58
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Expected to vest as of June 30, 2014
|
|
|
-
|
|
|
$
|
-
|
|
The Company’s provision for income taxes consists of federal, state and local taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. The Company’s annual effective tax rate for fiscal 2015 excluding discrete items is estimated to be 40.4% based upon the Company’s anticipated earnings.
For the three months ended June 30, 2014, the Company recorded a provision for income taxes of $11, which consisted of federal, state and local taxes, including a discrete item of $10 related to the accrual of interest for uncertain tax positions under ASC 740 – Income taxes (“ASC 740”). For the three months ended June 30, 2013, the Company recorded a tax provision of $70.
Note 12.
|
Earnings (Loss) Per Share
|
Basic earnings (loss) per share are based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings (loss) per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average prices during the periods. Excluded from the calculation of earnings (loss) per share are options to purchase 1,361,310 shares for the three months ended June 30, 2014 and 1,312,231 shares for the three months ended June 30, 2013, as their inclusion would not have been dilutive.
The following is a reconciliation of the numerator and denominator of the basic and diluted net earnings (loss) per share computations for the three months ended June 30, 2014 and 2013, respectively.
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Numerator :
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(11
|
)
|
|
$
|
90
|
|
Income from discontinued operations, net of income taxes (Footnote 4)
|
|
|
11,957
|
|
|
|
189
|
|
Net income for basic and dilutive earnings per share
|
|
$
|
11,946
|
|
|
$
|
279
|
|
Denominator :
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share - weighted average shares outstanding (in thousands)
|
|
|
16,391
|
|
|
|
16,391
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee and director stock options
|
|
|
80
|
|
|
|
74
|
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding (in thousands)
|
|
|
16,471
|
|
|
|
16,465
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
0.73
|
|
|
$
|
0.01
|
|
Net income
|
|
$
|
0.73
|
|
|
$
|
0.02
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
0.73
|
|
|
$
|
0.01
|
|
Net income
|
|
$
|
0.73
|
|
|
$
|
0.02
|
|
Note 13.
|
Accounts Payable and Accrued Expenses
|
Accrued expenses consist of the following:
|
|
2014
|
|
|
2014
|
|
Accrued accounts payable
|
|
$
|
6,364
|
|
|
$
|
6,219
|
|
Accrued liabilities related to sale of the Patient Care business unit (footnote 4)
|
|
|
3,309
|
|
|
|
-
|
|
Other accrued liabilities
|
|
|
2,417
|
|
|
|
2,915
|
|
Employee compensation and benefits
|
|
|
1,912
|
|
|
|
3,025
|
|
Accrued distributor fees
|
|
|
1,781
|
|
|
|
2,011
|
|
Group purchasing organization fees
|
|
|
1,774
|
|
|
|
1,977
|
|
Accrued bonuses
|
|
|
1,271
|
|
|
|
4,109
|
|
Professional fees
|
|
|
941
|
|
|
|
767
|
|
Freight and duty
|
|
|
267
|
|
|
|
901
|
|
Total accrued expenses
|
|
$
|
20,036
|
|
|
$
|
21,924
|
|
Note 14.
|
Fair Value of Financial Instruments
|
Due to their maturities and/or variable interest rates, certain financial instruments have fair values that approximate their carrying values. These instruments include cash and cash equivalents, accounts receivable, trade payables and our outstanding debt under the Company’s term loan and revolving credit facility. The book value and the fair value of the Company’s capital lease obligation amounted to $13,416 and $15,479, respectively as of June 30, 2014. The fair value was determined based on the Company’s current incremental borrowing rate and is considered a Level 3 input.
Note 15.
|
Business Concentrations and Major Customers
|
We manufacture and distribute disposable medical products principally to medical product distributors and hospitals located throughout the United States. We perform credit evaluations of its customers’ financial condition and do not require collateral. Receivables are generally due within 30 – 90 days. Credit losses relating to customers have historically been minimal and within management’s expectations.
Sales to Owens & Minor, Inc. and Cardinal Health Inc., (the “Distributors”) accounted for approximately 45.2% and 19.6% of net sales, respectively for three months ended June 30, 2014. Although the Distributors may be deemed in a technical sense to be major purchasers of our products, they typically serve as a distributor between the end user and ourselves and do not make significant purchases for their own account. We, therefore, do not believe it is appropriate to categorize the Distributors as customers for the purpose of evaluating concentrations.
A significant portion of our raw materials are purchased from China, which gives rise to risk from changes in foreign currency exchange rates between the Chinese Yuan and the U.S. Dollar. To mitigate our exposure to this risk, we attempt to denominate our transactions in foreign locations in U.S. Dollars. While all of such purchases are denominated in U.S. Dollars, to the extent that the U.S. Dollar decreases in value relative to the Chinese Yuan, our cost of sales may increase and our gross profit may decrease. We do not currently hold or issue foreign exchange contracts or other derivative instruments to hedge these exposures.
The Company is a party to a product liability lawsuit arising out of the conduct of its ordinary course of business. A global settlement of claims has been approved by the court and management expects a settlement agreement to be executed by the plaintiffs. While execution of the settlement agreement by the plaintiffs cannot be predicted with certainty, the ultimate liability under such product liability lawsuit is covered by the Company’s insurance and management does not expect that the court approved amount of the settlement or any other ultimate liability, if any, arising out of such product liability lawsuit, will have a material adverse effect on the financial position or results of operations of the Company.
On June 24, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with a wholly owned subsidiary of Owens & Minor, Inc. (“Owens & Minor”) and Mongoose Merger Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Owens & Minor, under which Owens & Minor will acquire all outstanding shares of the Company (the “Merger”). Owens & Minor and the Company currently expect to complete the Merger in the fourth quarter of 2014, subject to receipt of the required stockholder and regulatory approvals and to the satisfaction or waiver of the other conditions to the transactions contemplated by the Merger Agreement.
Two putative stockholder class action lawsuits challenging the Merger have been filed, both in Suffolk County Supreme Court in New York and have been consolidated under the caption
In re Medical Action Industries Inc. Shareholders Litigation
(the “Shareholder Lawsuit”). The Shareholder Lawsuit names the Company, certain of the Company’s current directors and officers, Owens & Minor and Merger Sub as defendants. The Shareholder Lawsuit has been brought by purported stockholders of the Company, both individually and on behalf of a putative class consisting of public stockholders of the Company. The Shareholder Lawsuit generally alleges, among other things, that certain of the directors and officers of the Company breached their fiduciary duties to stockholders of the Company by agreeing to a transaction with inadequate consideration and unfair terms pursuant to an inadequate process. The Shareholder Lawsuit seeks, in general, and among other things, (i) injunctive relief enjoining the transactions contemplated by the Merger Agreement, (ii) in the event the Merger is consummated, rescission or an award of rescissory damages, (iii) an award of plaintiffs’ costs, including reasonable attorneys’ and experts’ fees, (iv) an accounting by the defendants to plaintiffs for all damages caused by the defendants and (v) such further relief as the court deems just and proper.
The Shareholder Lawsuit is at a preliminary stage. The Company and the other defendants believe that the Shareholders Lawsuit is without merit and intend to defend against it vigorously.
In the opinion of management, the ultimate outcome of this matter will not have a material adverse effect on the Company’s financial position or results of operations.