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 9,284 shares of common stock for the quarter ended March 31, 2013 and none for the quarter ended March 31, 2014 were excluded from the computation of weighted average diluted shares outstanding because their effect would have been anti-dilutive.
As of March 31, 2014, 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 March 31, 2014 (in thousands):
At March 31, 2014, the length of time until maturity of these securities ranged from 1.5 to 60 months.
Our effective tax rate for the first quarter of 2014 was 34.5 percent, compared with 31.9 percent for the first quarter of 2013. The lower first quarter 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. Credits from tax incentives for research and development expenditures in the full year 2012 and first quarter of 2013 were included in the calculation of income taxes for the first quarter of 2013. The law has not been extended to 2014, and the absence of the federal research and development tax credits for 2014 resulted in an increase in effective tax rate in the first quarter of 2014.
From time to time, new accounting standards updates applicable to us are issued by the Financial Accounting Standards Board, or FASB, which we will adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards updates that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Overview
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 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 serve niche markets with meaningful sales potential. 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:
● Focusing on customer needs;
● Expanding existing product lines and developing new products;
● Maintaining a culture of controlling cost; and
● Preserving and fostering a collaborative, entrepreneurial management structure.
For the three months ended March 31, 2014, we reported revenues of $36.4 million, operating income of $10.7 million and net income of $7.2 million, up 9 percent, 14 percent and 9 percent, respectively, from the three months ended March 31, 2013.
Results for the three months ended March 31, 2014
Consolidated net income totaled $7.2 million, or $3.63 per basic and $3.61 per diluted share, in the first quarter of 2014. This is compared with consolidated net income of $6.6 million, or $3.28 per basic and diluted share, in the first quarter of 2013. The income per basic share computations are based on weighted average basic shares outstanding of 1,982,000 in the 2014 period and 2,020,000 in the 2013 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,997,000 in the 2014 period and 2,024,000 in the 2013 period.
Consolidated revenues of $36.4 million for the first quarter of 2014 were 9 percent higher than revenues of $33.5 million for the first quarter of 2013. This increase was primarily attributable to higher sales volumes.
Revenues by product line were as follows (in thousands):
| | | Three Months ended March 31, |
| | | 2014 | | 2013 |
| | | | | | | |
| Fluid Delivery | | $ | 15,237 | | | $ | 12,713 | |
| Cardiovascular | | | 11,029 | | | | 10,151 | |
| Ophthalmology | | | 5,184 | | | | 5,795 | |
| Other | | | 4,969 | | | | 4,834 | |
Total | | $ | 36,419 | | | $ | 33,493 | |
Cost of goods sold of $19.0 million for the first quarter of 2014 was $1.2 million higher than in the comparable 2013 period. The primary contributors to the increase in our cost of goods sold were increased sales, increased manufacturing support personnel costs and increased repairs partially offset by improved manufacturing efficiencies and the impact of continued cost improvement initiatives. Our cost of goods sold in the first quarter of 2014 was 52.3 percent of revenues compared with 53.1 percent of revenues in the first quarter of 2013.
Gross profit of $17.4 million in the first quarter of 2014 was $1.7 million, or 11 percent, higher than in the comparable 2013 period. Our gross profit percentage in the first quarter of 2014 was 47.7 percent of revenues compared with 46.9 percent of revenues in the first quarter of 2013. The increase in gross profit percentage in the 2014 period compared to the 2013 period was primarily attributable to a favorable product mix, improved manufacturing efficiencies and continued cost improvements partially offset by increased manufacturing support personnel costs and increased repairs.
Our first quarter 2014 operating expenses of $6.7 million were $379,000 higher than the operating expenses for the first quarter of 2013. This increase was comprised of a $45,000 increase in Research and Development, or R&D, expenses and a $334,000 increase in General and Administrative, or G&A, expenses. The increase in R&D costs was primarily attributable to increased outside services. The increase in G&A expenses for the first quarter of 2014 was primarily attributable to increased compensation, outside services and amortization. There was no change in Selling expenses for the 2014 period as compared to the 2013 period.
Operating income in the first quarter of 2014 increased $1.3 million to $10.7 million, a 14 percent increase from our operating income in the quarter ended March 31, 2013. Operating income was 29 percent of revenues in the first quarter of 2014 compared to 28 percent of revenues in the first quarter of 2013. The major contributor to the increase in operating income for the first quarter of 2014 was the previously mentioned increase in revenues.
Income tax expense for the first quarter of 2014 was $3.8 million compared to income tax expense of $3.1 million for the same period in the prior year. The effective tax rate for the first quarter of 2014 was 34.5 percent, compared with 31.9 percent for the first quarter of 2013. The lower first quarter 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. Credits from tax incentives for research and development expenditures in the full year 2012 and first quarter of 2013 were included in the calculation of income taxes for the first quarter of 2013. The law has not been extended to 2014, and the absence of the federal research and development tax credits for 2014 resulted in an increase in effective tax rate in the first quarter of 2014. We expect the effective tax rate for the remainder of 2014 to be approximately 34.0 percent.
Liquidity and Capital Resources
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 March 31, 2014 or at December 31, 2013. The credit facility contains various restrictive covenants, none of which is expected to impact our liquidity or capital resources. At March 31, 2014, we were in compliance with all financial covenants.
At March 31, 2014, we had a total of $55.0 million in cash and cash equivalents, short-term investments and long-term investments, a decrease of $2.0 million from December 31, 2013. The principal contributor to this decrease was the purchase of treasury stock under our stock repurchase program.
Cash flows from operating activities generated $7.4 million for the three months ended March 31, 2014 as compared to $8.1 million for the three months ended March 31, 2013. The decrease in the 2014 period was primarily attributable to increased cash requirements for working capital items, specifically accounts payable and accrued liabilities for the 2014 period partially offset by increased operational results as compared to the 2013 period. During the first quarter of 2014, we expended $9.4 million for the purchase of investments, $3.5 million for the addition of property and equipment, $4.7 million for treasury stock under our stock repurchase program and $1.3 million for dividends.
At March 31, 2014, we had working capital of $78.3 million, including $17.2 million in cash and cash equivalents and $25.4 million in short-term investments. The $2.6 million decrease in working capital during the first quarter of 2014 was primarily attributable to increases in accrued income and other taxes and decreases in cash and cash equivalents partially offset by increases in short-term investments and accounts receivable. The increase in accrued income and other taxes is primarily attributable to current year tax liabilities. The net decrease in cash and short-term investments was primarily attributable to the purchase of treasury stock. The increase in accounts receivable is primarily attributable to increased revenues for the first quarter of 2014.
