Incremental shares from stock options and restricted stock units were included in the calculation of weighted average diluted shares outstanding using the treasury stock method. Dilutive securities representing 6,7111,545 and 6,5475,901 shares of common stock for the quarters ended JuneSeptember 30, 20122013 and 2013,2012, respectively, were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.

(4)           Investments

As of JuneSeptember 30, 2013, we held certain investments that are required to be measured for disclosure purposes at fair value on a recurring basis. These investments are considered Level 2 investments and are all considered to be held-to-maturity securities. We consider as current assets those investments which will mature in the next 12 months. The remaining investments are considered non-current assets. The amortized cost and fair value of our investments, and the related gross unrealized gains and losses, were as follows as of JuneSeptember 30, 2013 (in thousands):

(6)           Recent Accounting Pronouncements

We develop and manufacture products primarily for medical applications. We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics and other treatment centers. Our medical products primarily serve the fluid delivery, cardiovascular, and ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in dialysis andcategory includes valves and inflation devices used in marine and aviation safety products.

Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of product quality, price, engineering, customer service and delivery time.

Our strategy is to provide a broad selection of products in the areas of our expertise. Research and development efforts are focused on improving current products and developing highly-engineered products that meet customer needs and have the potential for broad market applications and significant sales.in niche markets. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce indebtedness, to fund capital expenditures, to repurchase stock and to pay dividends.

Our strategic objective is to further enhance our position in our served markets by:

Consolidated net income totaled $6.5$7.7 million, or $3.23$3.82 per basic and $3.22$3.81 per diluted share, in the secondthird quarter of 2013. This is compared with consolidated net income of $6.1$7.3 million, or $3.03$3.60 per basic and $3.02$3.59 per diluted share, in the secondthird quarter of 2012. The income per basic share computations are based on weighted average basic shares outstanding of 2,015,0002,007,000 in the 2013 period and 2,016,0002,014,000 in the 2012 period.

 

Consolidated revenues of $32.6$34.0 million for the secondthird quarter of 2013 were 611 percent higher than revenues of $30.7$30.6 million for the secondthird quarter of 2012. This increase was primarily attributable to higher sales volumes.

Revenues by product line were as follows (in thousands):

Cost of goods sold of $17.0 million for the secondthird quarter of 2013 was $955,000$1.3 million higher than in the comparable 2012 period. Our cost of goods sold in the secondthird quarter of 2013 was 52.149.9 percent of revenues compared with 52.251.4 percent of revenues in the secondthird quarter of 2012.

Gross profit of $15.6$17.0 million in the secondthird quarter of 2013 was $961,000,$2.1 million, or 714 percent, higher than in the comparable 2012 period. Our gross profit percentage in the secondthird quarter of 2013 was 47.950.1 percent of revenues compared with 47.848.6 percent of revenues in the secondthird quarter of 2012. The increase in gross profit percentage in the 2013 period compared to the 2012 period was primarily relatedprincipally attributable to a favorable product sales mix, improved manufacturing capacity utilization, and the impact of continued cost improvement initiatives partially offset by increased compensation, manufacturing supplies and depreciation.

Our secondthird quarter 2013 operating expenses of $6.1$6.3 million were $433,000$1.1 million higher than the operating expenses for the secondthird quarter of 2012. This increase was comprised of a $108,000$394,000 increase in Research and Development, or R&D, expenses, a $16,000$229,000 increase in Selling expenses and a $309,000$487,000 increase in General and Administrative, or G&A, expenses. The increase in R&D costs was primarily relatedprincipally attributable to increased supplies, outside services and compensation. The increase in Selling expenses for the secondthird quarter of 2013 was primarily relatedprincipally attributable to increased outside services partially offset by reducedpromotion and advertising, increased commissions compensation and other miscellaneousincreased travel-related expenses. The increase in G&A expenses for the secondthird quarter of 2013 was principally attributable to increased compensation and outside services.

Operating income in the secondthird quarter of 2013 increased $528,000$1.0 million to $9.5$10.7 million, a 6an 11 percent increase from our operating income in the quarter ended JuneSeptember 30, 2012. Operating income was 2931 percent of revenues in both the secondthird quarter of 2013 and 32 percent in the secondthird quarter of 2012. The primary contributor to the increase in operating income for the third quarter of 2013 was the previously mentioned increase in revenues.

Income tax expense for the secondthird quarter of 2013 was $3.3$3.4 million compared to income tax expense of $3.2$2.8 million for the same period in the prior year. The effective tax rate for the secondthird quarter of 2013 was 33.930.4 percent, compared with 34.628.0 percent for the secondthird quarter of 2012. The lower secondthird quarter 2013 effective rate benefited from the extension of the federal research tax credit provisions included in the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. The lower effective tax rate for the third quarter of 2012 was principally attributable to a favorable adjustment to an uncertain tax position related to income tax credits claimed for R&D following the conclusion, in September 2012, of an Internal Revenue Service examination of our United States federal income tax returns for 2006, 2007 and 2008. We expect the effective tax rate for the remainder of 2013 to be approximately 34.0 percent.

Consolidated net income totaled $13.1$20.8 million, or $6.51$10.33 per basic and $6.50$10.31 per diluted share, in the first sixnine months of 2013. This is compared with consolidated net income of $11.5$18.7 million, or $5.70$9.30 per basic and $5.67$9.24 per diluted share, in the first sixnine months of 2012. The income per basic share computations are based on weighted average basic shares outstanding of 2,017,0002,014,000 in the 2013 period and 2,015,000 in the 2012 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 2,021,0002,019,000 in the 2013 period and 2,023,0002,028,000 in the 2012 period.

Consolidated revenues of $66.1$100.1 million for the first sixnine months of 2013 were 1011 percent higher than revenues of $59.9$90.6 million for the first sixnine months of 2012. This increase was primarily attributable to higher sales volumes.

Revenues by product line were as follows (in thousands):

Cost of goods sold of $34.8$51.8 million for the first sixnine months of 2013 was $3.3$4.6 million higher than in the comparable 2012 period. Our cost of goods sold in the first sixnine months of 2013 was 52.651.7 percent of revenues compared with 52.452.1 percent of revenues in the first sixnine months of 2012.

Gross profit of $31.3$48.4 million in the first sixnine months of 2013 was $2.8$5.0 million, or 1011 percent, higher than in the comparable 2012 period. Our gross profit percentage in the first sixnine months of 2013 was 47.448.3 percent of revenues compared with 47.647.9 percent of revenues in the first sixnine months of 2012. The decreaseincrease in gross profit percentage in the 2013 period compared to the 2012 period was primarily relatedprincipally attributable to increased depreciation,a favorable product sales mix, improved manufacturing capacity utilization, and the impact of continued cost improvement initiatives partially offset by increased compensation and lower manufacturing efficiencies partially offset by a favorable product mix and continued cost improvements.depreciation.

Our first sixnine months 2013 operating expenses of $12.5$18.8 million were $856,000$2.0 million higher than the operating expenses for the first sixnine months of 2012. This increase was comprised of a $265,000$660,000 increase in R&D expenses, a $159,000$388,000 increase in Selling expenses and a $432,000$919,000 increase in G&A expenses. The increase in R&D costs was primarily relatedprincipally attributable to increased outside services, compensation, supplies and depreciation.

Operating income in the first sixnine months of 2013 increased $2.0$3.0 million to $18.9$29.6 million, a 12an 11 percent increase from our operating income in the sixnine months ended JuneSeptember 30, 2012. Operating income was 30 percent of revenues in the first nine months of 2013 compared to 29 percent of revenues in the first six months of 2013 compared to 28 percent of revenues in the first sixnine months of 2012. The majorprimary contributor to the increase in operating income for the first sixnine months of 2013 was the previously mentioned increase in revenues.

Income tax expense for the first sixnine months of 2013 was $6.5$9.8 million compared to income tax expense of $6.1$8.9 million for the same period in the prior year. The effective tax rate for the first sixnine months of 2013 was 32.932.0 percent, compared with 34.732.2 percent for the first sixnine months of 2012. The lower first six months 2013 effective rate benefited from the retroactive extension of the federal research tax credit provisions included in the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. Benefits from tax incentives for 2012 research and development expenditures were included in the calculation of income taxes for the first six months of 2013. We expect theThe effective tax rate for the remainder2012 period benefited from a favorable adjustment to an uncertain tax position related to income tax credits claimed for R&D following the conclusion, in September 2012, of 2013 to be approximately 34.0 percent.an Internal Revenue Service examination of our United States federal income tax returns for 2006, 2007 and 2008.

We have a $40.0 million revolving credit facility with a money center bank that can be utilized for the funding of operations and for major capital projects or acquisitions, subject to certain limitations and restrictions. Borrowings under the credit facility bear interest that is payable monthly at 30-day, 60-day or 90-day LIBOR, as selected by us, plus one percent. From time to time prior to October 1, 2016 and assuming an event of default is not then existing, we can convert outstanding advances under the revolving line of credit to term loans with a term of up to two years. We had no outstanding borrowings under our credit facility at JuneSeptember 30, 2013 or at December 31, 2012. The credit facility contains various restrictive covenants, none of which is expected to impact our liquidity or capital resources. At JuneSeptember 30, 2013, we were in compliance with all financial covenants. We believe that the bank providing the credit facility is highly-rated and that the entire $40.0 million under the credit facility is currently available to us. If that bank were unable to provide such funds, we believe that such inability would not impact our ability to fund operations.

At JuneSeptember 30, 2013, we had a total of $53.0$59.3 million in cash and cash equivalents, short-term investments and long-term investments, an increase of $8.4$14.7 million from December 31, 2012, which was principally attributable to increased operational results.

Cash flows from operating activities generated $16.5$27.4 million for the sixnine months ended JuneSeptember 30, 2013 as compared to $10.9$23.4 million for the sixnine months ended JuneSeptember 30, 2012. The increase in the 2013 period was primarily attributable to increasedimproved operational results as compared to the 2012 period and decreased cash requirements for working capital items, specifically accounts payable and accrued liabilities for the 2013 period. During the first sixnine months of 2013, we expended $2.7$4.7 million for the addition of property and equipment, $2.9$4.1 million for treasury stock and $2.3$3.5 million for dividends. During that same period, maturities of investments generated $3.6$7.6 million.

We believe that our $53.0$59.3 million in cash, cash equivalents, short-term investments and long-term investments, along with cash flows from operations and available borrowings of up to $40.0 million under our credit facility will be sufficient to fund our cash requirements for at least the foreseeable future. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary. Additionally, we believe that our cash and cash equivalents, short-term investments and long-term investments, as a whole, will continue to increase during the remainder of 2013.

Statements in this Management’s Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q that are forward looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our effective tax rate for the remainder of 2013, our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow and borrowings under the credit facility, the impact that the inability of the bank providing the credit facility to provide funds thereunder would have on our ability to fund operations, our access to equity and debt financing, and the increase in cash, cash equivalents, and investments in the remainder of 2013. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, the following: changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; our ability to protect our intellectual property; changes in the prices of raw materials; changes in product mix; intellectual property and product  liability claims and product recalls; the ability to attract and retain qualified personnel; and the loss of, or any material reduction in sales to, any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause us to alter our marketing, capital expenditures or other budgets, which in turn may affect our results of operations and financial condition.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of JuneSeptember 30, 2013. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting for the quarter ended JuneSeptember 30, 2013 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

OTHER INFORMATION

There were no material changes to the risk factors disclosed in our 2012 Form 10-K.

 

The table below sets forth information with respect to our purchases of our common stock during each of the three months in the period ended JuneSeptember 30, 2013.

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.