UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File No. 0-15443
THERAGENICS CORPORATION®
(Exact name of registrant as specified in its charter)
Delaware | 58-1528626 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
5203 Bristol Industrial Way | |
Buford, Georgia | 30518 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (770) 271-0233
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer x | Non Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
As of November 1, 2007 the number of shares of $0.01 par value common stock outstanding was 33,271,372.
THERAGENICS CORPORATION
TABLE OF CONTENTS
Page No. | |
PART I. FINANCIAL INFORMATION | 3 |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 3 |
Condensed Consolidated Balance Sheets – September 30, 2007 and December 31, 2006 | 3 |
Condensed Consolidated Statements of Earnings and Comprehensive Income for the three and nine months ended September 30, 2007 and October 1, 2006 | 5 |
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and October 1, 2006 | 6 |
Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2007 | 8 |
Notes to Condensed Consolidated Financial Statements | 9 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26 |
ITEM 4. CONTROLS AND PROCEDURES | 26 |
PART II. OTHER INFORMATION | 27 |
ITEM 1. LEGAL PROCEEDINGS | 27 |
ITEM 1A. RISK FACTORS | 27 |
ITEM 6. EXHIBITS | 28 |
SIGNATURES | 29 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
ASSETS | September 30, | |||||||
2007 | December 31, | |||||||
(Unaudited) | 2006 | |||||||
CURRENT ASSETS | ||||||||
Cash and short-term investments | $ | 22,682 | $ | 18,258 | ||||
Marketable securities | 22,405 | 14,722 | ||||||
Trade accounts receivable, less allowance of $467 in 2007 and $617 in 2006 | 8,703 | 7,556 | ||||||
Inventories | 7,632 | 7,433 | ||||||
Deferred income tax asset | 5,434 | 7,798 | ||||||
Prepaid expenses and other current assets | 1,208 | 3,478 | ||||||
Asset held for sale | 3,400 | 3,400 | ||||||
TOTAL CURRENT ASSETS | 71,464 | 62,645 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Buildings and improvements | 22,430 | 22,374 | ||||||
Machinery and equipment | 37,173 | 36,732 | ||||||
Office furniture and equipment | 955 | 924 | ||||||
60,558 | 60,030 | |||||||
Less accumulated depreciation | 33,358 | 30,155 | ||||||
27,200 | 29,875 | |||||||
Land | 822 | 822 | ||||||
Construction in progress | 799 | 204 | ||||||
TOTAL PROPERTY AND EQUIPMENT | 28,821 | 30,901 | ||||||
Goodwill | 38,658 | 38,824 | ||||||
Other intangible assets, net | 12,350 | 13,762 | ||||||
Other assets | 93 | 112 | ||||||
51,101 | 52,698 | |||||||
TOTAL ASSETS | $ | 151,386 | $ | 146,244 |
The accompanying notes are an integral part of these statements.
3
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(Amounts in thousands, except per share data)
LIABILITIES & SHAREHOLDERS’ EQUITY | September 30, | |||||||
2007 | December 31, | |||||||
(Unaudited) | 2006 | |||||||
CURRENT LIABILITIES | ||||||||
Trade accounts payable | $ | 1,226 | $ | 1,768 | ||||
Accrued salaries, wages and payroll taxes | 2,038 | 1,512 | ||||||
Income taxes payable | 894 | - | ||||||
Other current liabilities | 671 | 1,101 | ||||||
TOTAL CURRENT LIABILITIES | 4,829 | 4,381 | ||||||
LONG-TERM LIABILITIES | ||||||||
Long-term debt | 7,500 | 7,500 | ||||||
Deferred income taxes | 5,366 | 6,148 | ||||||
Contract termination liability | 1,494 | 1,513 | ||||||
Decommissioning retirement liability | 591 | 561 | ||||||
Other | 303 | — | ||||||
TOTAL LONG-TERM LIABILITIES | 15,254 | 15,722 | ||||||
CONTINGENCIES | — | — | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, authorized 100,000 shares of $0.01 par value, issued and outstanding, 33,269 in 2007 and 33,096 in 2006 | 333 | 331 | ||||||
Additional paid-in capital | 72,763 | 72,103 | ||||||
Retained earnings | 58,264 | 53,789 | ||||||
Accumulated other comprehensive loss | (57 | ) | (82 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 131,303 | 126,141 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 151,386 | $ | 146,244 |
The accompanying notes are an integral part of these statements.
4
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
REVENUE | ||||||||||||||||
Product sales | $ | 15,757 | $ | 13,766 | $ | 46,348 | $ | 38,446 | ||||||||
License fees | 244 | 554 | 679 | 858 | ||||||||||||
16,001 | 14,320 | 47,027 | 39,304 | |||||||||||||
COST OF SALES | 8,207 | 7,263 | 24,180 | 19,798 | ||||||||||||
GROSS PROFIT | 7,794 | 7,057 | 22,847 | 19,506 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Selling, general & administrative | 4,498 | 4,552 | 14,252 | 15,277 | ||||||||||||
Amortization of purchased intangibles | 469 | 471 | 1,406 | 846 | ||||||||||||
Research & development | 430 | 206 | 1,100 | 624 | ||||||||||||
Restructuring expenses | — | — | — | 369 | ||||||||||||
Gain on sale of assets | — | — | — | (201 | ) | |||||||||||
5,397 | 5,229 | 16,758 | 16,915 | |||||||||||||
EARNINGS FROM OPERATIONS | 2,397 | 1,828 | 6,089 | 2,591 | ||||||||||||
OTHER INCOME/(EXPENSE) | ||||||||||||||||
Interest income | 530 | 362 | 1,653 | 1,231 | ||||||||||||
Interest expense | (177 | ) | (114 | ) | (528 | ) | (249 | ) | ||||||||
Other | (1 | ) | (39 | ) | 1 | (58 | ) | |||||||||
352 | 209 | 1,126 | 924 | |||||||||||||
Earnings before income taxes | 2,749 | 2,037 | 7,215 | 3,515 | ||||||||||||
Income tax expense | 986 | 380 | 2,740 | 650 | ||||||||||||
NET EARNINGS | $ | 1,763 | $ | 1,657 | $ | 4,475 | $ | 2,865 | ||||||||
NET EARNINGS PER COMMON SHARE: | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.05 | $ | 0.14 | $ | 0.09 | ||||||||
Diluted | $ | 0.05 | $ | 0.05 | $ | 0.13 | $ | 0.09 | ||||||||
WEIGHTED AVERAGE SHARES | ||||||||||||||||
Basic | 33,118 | 32,752 | 33,101 | 32,293 | ||||||||||||
Diluted | 33,237 | 32,822 | 33,262 | 32,368 | ||||||||||||
Comprehensive income: | ||||||||||||||||
Net earnings | $ | 1,763 | $ | 1,657 | $ | 4,475 | $ | 2,865 | ||||||||
Other comprehensive income/(loss): | ||||||||||||||||
Reclassification adjustment for realized loss included in net earnings | 5 | 39 | 5 | 39 | ||||||||||||
Unrealized gain/(loss) on securities available for sale, net of taxes | 5 | 108 | 20 | (3 | ) | |||||||||||
Total comprehensive income | $ | 1,773 | $ | 1,804 | $ | 4,500 | $ | 2,901 |
The accompanying notes are an integral part of these statements.
5
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months Ended | ||||||||
September 30, | October 1, | |||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings | $ | 4,475 | $ | 2,865 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||
Depreciation and amortization | 4,711 | 3,995 | ||||||
Deferred income taxes | 1,530 | 540 | ||||||
Realized loss on sale of marketable securities | 5 | 39 | ||||||
Provision (credit) for allowances | (70 | ) | 213 | |||||
Share-based compensation | 575 | 302 | ||||||
Contract termination liability | (19 | ) | (16 | ) | ||||
Decommissioning retirement liability | 30 | (123 | ) | |||||
Gain on sale of equipment | — | (201 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (1,037 | ) | (432 | ) | ||||
Inventories | (239 | ) | (685 | ) | ||||
Prepaid expenses and other current assets | 2,270 | (258 | ) | |||||
Other assets | (64 | ) | 27 | |||||
Trade accounts payable | (542 | ) | (311 | ) | ||||
Accrued salaries, wages and payroll taxes | 526 | (359 | ) | |||||
Other current liabilities | (330 | ) | 263 | |||||
Income taxes payable | 997 | — | ||||||
Other | 303 | — | ||||||
Net cash provided by operating activities | 13,121 | 5,859 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases and construction of property and equipment | (1,223 | ) | (563 | ) | ||||
Proceeds from sale of equipment | — | 234 | ||||||
Cash paid for acquisition, net of cash acquired | — | (29,656 | ) | |||||
Purchases of marketable securities | (22,900 | ) | (8,108 | ) | ||||
Maturities of marketable securities | 14,976 | 22,770 | ||||||
Proceeds from sales of marketable securities | 280 | 5,961 | ||||||
Net cash used by investing activities | (8,867 | ) | (9,362 | ) | ||||
The accompanying footnotes are an integral part of these statements.
6
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
(Amounts in thousands)
Nine Months Ended | ||||||||
September 30, | October 1, | |||||||
2007 | 2006 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from long-term debt | — | 7,500 | ||||||
Exercise of stock options and stock purchase plan | 154 | 62 | ||||||
Excess tax benefit from exercise of stock options | 16 | — | ||||||
Net cash provided by financing activities | 170 | 7,562 | ||||||
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS | $ | 4,424 | $ | 4,059 | ||||
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD | 18,258 | 10,073 | ||||||
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD | $ | 22,682 | $ | 14,132 | ||||
SUPPLEMENTARY CASH FLOW DISCLOSURE: | ||||||||
Interest paid | $ | 473 | $ | 248 | ||||
Taxes paid (received), net | $ | (1,648 | ) | 278 | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Common stock issued in acquisition | $ | — | $ | 3,052 | ||||
Common stock received for other receivable | $ | 83 | $ | — | ||||
The accompanying footnotes are an integral part of these statements.
7
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
(Amounts in thousands)
Common Stock | Accumulated | |||||||||||||||||||||||
Number | Par | Additional | Other | |||||||||||||||||||||
of | value | Paid-in | Retained | Comprehensive | ||||||||||||||||||||
Shares | $0.01 | Capital | Earnings | Loss | Total | |||||||||||||||||||
BALANCE, December 31, 2006 | 33,096 | $ | 331 | $ | 72,103 | $ | 53,789 | $ | (82 | ) | $ | 126,141 | ||||||||||||
Exercise of stock options | 30 | — | 126 | — | — | 126 | ||||||||||||||||||
Tax benefit from exercise of stock options | — | — | 16 | — | — | 16 | ||||||||||||||||||
Employee stock purchase plan | 10 | 1 | 27 | — | — | 28 | ||||||||||||||||||
Retirement of common stock received in settlement for other receivable | (21 | ) | — | (83 | ) | — | — | (83 | ) | |||||||||||||||
Issuance of common stock upon vesting of restricted units | 23 | — | — | — | — | — | ||||||||||||||||||
Issuance of restricted shares | 131 | 1 | (1 | ) | — | — | — | |||||||||||||||||
Share based compensation | — | — | 575 | — | — | 575 | ||||||||||||||||||
Reclassification adjustment for realized loss included in net earnings | — | — | — | — | 5 | 5 | ||||||||||||||||||
Unrealized gains on securities available for sale, net of taxes | — | — | — | — | 20 | 20 | ||||||||||||||||||
Net earnings for the period | — | — | — | 4,475 | — | 4,475 | ||||||||||||||||||
BALANCE, September 30, 2007 | 33,269 | $ | 333 | $ | 72,763 | $ | 58,264 | $ | (57 | ) | $ | 131,303 |
The accompanying notes are an integral part of these statements.
8
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The unaudited interim condensed consolidated financial statements included herein reflect the consolidated operations of Theragenics Corporation and its wholly-owned subsidiaries (collectively, “Theragenics” or the “Company”). All material intercompany accounts and transactions have been eliminated in consolidation. These statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the consolidated financial position, consolidated results of operations, consolidated cash flows and changes in shareholders’ equity for the periods presented. All such adjustments are of a normal recurring nature. Pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2006, included in the Form 10-K Annual Report filed by the Company. The December 31, 2006 condensed consolidated balance sheet included herein has been derived from the December 31, 2006 audited consolidated balance sheet included in the aforementioned Form 10-K. The consolidated results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for a full year.
Theragenics is a medical device company serving the cancer treatment and surgical markets, operating in two business segments. In its brachytherapy seed business, the Company produces, markets and sells TheraSeed®, its premier palladium-103 prostate cancer treatment device, I-Seed, its iodine-125 based prostate cancer treatment device, and related products and services. The Company’s surgical products business consists of wound closure and vascular access products. Wound closure includes sutures, needles, and other surgical products with applications in, among other areas, urology, veterinary, cardiology, orthopedics, plastic surgery, and dental. Vascular access includes introducers and guidewires used in the interventional radiology, interventional cardiology, and vascular surgery markets.
NOTE B – RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). The Company adopted FIN 48 on January 1, 2007. See footnote E.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for the Company beginning January 1, 2008. The Company is evaluating SFAS 157 and the potential impact of this statement on the Company’s consolidated financial statements has not been determined.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 11, (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for the Company beginning January 1, 2008. The Company is evaluating the impact of SFAS 159 and the potential impact of this statement on the Company’s consolidated financial statements has not been determined.
9
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE C – ACQUISITION OF GALT MEDICAL
The Company acquired all of the outstanding common stock and other equity interests of Galt Medical Corp. (“Galt”) on August 2, 2006. The acquisition was accounted for under the purchase method of accounting, in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Results of operations of Galt are included in the Company’s financial statements subsequent to the acquisition date.
The total purchase price, including transaction costs, was approximately $32.7 million (net of cash acquired of approximately $2.3 million). The purchase price was paid $29.7 million in cash and the issuance of 978,065 shares of common stock valued at approximately $3.1 million. Galt develops, manufactures and markets disposable medical devices utilized for vascular access, primarily serving the interventional radiology, interventional cardiology and vascular surgery markets. Galt’s current products include guidewires, micro-introducer kits and tear-away introducer sets and kits, and hemostasis valved introducer kits and sets. This transaction further diversifies Theragenics’ medical device and surgical products businesses and leverages the Company’s existing strengths within these markets.
Goodwill of $20.5 million was recorded in connection with the acquisition of Galt in August 2006. During 2007 goodwill was reduced by $166,000 as a result of certain adjustments made to the allocation of the purchase price.
Pro Forma Information
The following unaudited pro forma summary combines the Company’s results with those of Galt as if the acquisition had occurred at the beginning of the calendar year of the period presented. This unaudited pro forma information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had the acquisition been completed as of the beginning of the calendar year presented, and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition (in thousands, except per share data):
Three Months Ended October 1, 2006 | Nine Months Ended October 1, 2006 | |||||||
Revenue | $ | 15,058 | $ | 45,294 | ||||
Net earnings | $ | 1,864 | $ | 3,435 | ||||
Earnings per share | ||||||||
Basic | $ | 0.06 | $ | 0.10 | ||||
Diluted | $ | 0.06 | $ | 0.10 | ||||
Certain pro forma adjustments have been made to reflect the impact of the purchase transaction, primarily consisting of amortization of intangible assets with determinate lives, reductions in interest income as a result of cash used in the acquisition, increases in interest expense resulting from borrowings under the Company’s credit facility, elimination of share based compensation on equity awards that terminated upon a change in control of the acquired company, income taxes to reflect the Company’s effective rate for the period, and increases in weighted average shares outstanding for the common shares issued in the transaction. The pro forma adjustments also include non-recurring charges of $474,000 for amortization of the fair market value adjustments for inventory and backlog for the nine months ended October 1, 2006.
10
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE D - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is replacement cost or net realizable value. The Company estimates reserves for inventory obsolescence based upon management’s judgment of future realization. Inventories were comprised of the following (in thousands):
September 30 2007 | December 31, 2006 | |||||||
Raw materials | $ | 4,341 | $ | 4,409 | ||||
Work in process | 1,423 | 950 | ||||||
Finished goods | 1,626 | 1,608 | ||||||
Spare parts and supplies | 750 | 935 | ||||||
8,140 | 7,902 | |||||||
Allowance for slow moving and obsolete inventory | (508 | ) | (469 | ) | ||||
Total | $ | 7,632 | $ | 7,433 |
NOTE E - INCOME TAXES
The Company’s effective income tax rates for the three and nine months ended September 30, 2007 were approximately 36% and 38%, respectively, and include federal and state income taxes. The year to date effective rate is reflective of the approximate effective rate expected for 2007.
The Company’s effective tax rate for the three and nine months ended October 1, 2006 was approximately 19%. During 2006 the Company had an allowance for a deferred income tax asset that was reduced during the course of the year as it became more likely than not that some portion of the deferred tax asset would be realized. The three and nine months ended October 1, 2006 included a tax benefit of approximately $1.0 million and $1.4 million, respectively, representing a reduction in the allowance for the deferred income tax asset and significantly reduced the effective tax rate for each period. In the fourth quarter of 2006, Management determined that it was more likely than not that substantially all of the remaining deferred tax asset would be recognized and, accordingly, the significant portion of the allowance was released. The balance of the allowance at September 30, 2007 is $241,000, primarily representing certain state net operating loss carryforwards for which the Company believes it is more likely than not that the benefit will not be realized.
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for 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 derecognition, classification, interest expense and penalties, accounting in interim periods, disclosure and transition. The Company has evaluated its tax positions for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2007. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or income tax examinations by tax authorities for years prior to 2003. The Company concluded that there are no significant uncertain tax positions requiring recognition in the financial statements. Accordingly, adoption of FIN 48 did not have a material effect on the Company’s financial statements.
The Company’s policy is to recognize accrued interest expense and penalties associated with uncertain tax positions as a component of income tax expense. Inasmuch as the Company has concluded that there are no significant uncertain tax positions, no amounts of interest or penalties have been accrued.
During 2007, the IRS completed an examination of the Company’s 2004 and 2005 federal income tax return with no significant adjustments. Upon settlement of the 2004 audit, the Company received a refund of federal income tax previously paid of $1.9 million. This refund resulted from the carryback of tax losses that were reported in the Company’s 2004 federal income tax return. The Company also received $309,000 of interest income related to this refund, which was recognized upon settlement of the IRS examination in the second quarter of 2007.
11
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE F - SHARE-BASED COMPENSATION
Stock Options
The following is a summary of activity in stock options outstanding during the first nine months of 2007 (shares and aggregate intrinsic value in thousands):
Shares | Weighted average exercise price | Weighted average remaining contractual life (yrs) | Aggregate intrinsic value | |||||||||||||
Outstanding, beginning of period | 2,016 | $ | 10.30 | |||||||||||||
Granted | 175 | 5.00 | ||||||||||||||
Exercised | (30 | ) | 4.23 | |||||||||||||
Forfeited | (377 | ) | 8.99 | |||||||||||||
Expired | (16 | ) | 11.75 | |||||||||||||
Outstanding, end of period | 1,768 | $ | 10.15 | 3.2 | $ | 53 | ||||||||||
Exercisable at end of period | 1,560 | $ | 10.85 | 2.5 | $ | 41 |
The grant date fair value of the stock options issued in 2007 was $2.68 per share and was estimated using the Black-Scholes options-pricing model using the following assumptions:
Expected dividend yield | 0.0% |
Expected volatility | 49.9% |
Risk-free interest rate | 4.8% |
Expected life | 6 years |
Expected stock price volatility is based on the historical volatility of the Company’s stock price over the most recent period commensurate with the expected option life. When determining the expected life of stock options, the Company classifies options into groups for employees where relatively homogeneous exercise behavior is expected. The vesting period of the options, the length of time similar grants have remained outstanding in the past, and the expected volatility of the stock are also considered. These factors may cause the expected volatility and expected life of options granted to differ from period to period.
The Company recognizes compensation expense for option awards with graded vesting on a straight-line basis over the requisite service period for each separately vesting portion of the award. Compensation cost related to stock options totaled $61,000 and $167,000 for the three and nine months ended September 30, 2007, respectively, and $15,000 and $46,000 for the three and nine months ended October 1, 2006, respectively. As of September 30, 2007 there was approximately $316,000 of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 2.2 years. The total intrinsic value of options exercised was approximately $45,000 for the nine months ended September 30, 2007. No stock options were granted or exercised during the nine months ended October 1, 2006.
12
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
Restricted Stock
A summary of activity in non-vested restricted stock awards during the first nine months of 2007 follows (shares in thousands):
Shares | Weighted average grant date fair value | |||||||
Non-vested at January 1, 2007 | 53 | $ | 3.27 | |||||
Granted | 131 | 4.81 | ||||||
Vested | (20 | ) | 3.66 | |||||
Forfeited | - | - | ||||||
Non-vested at September 30, 2007 | 164 | $ | 4.49 |
Fair value of restricted shares granted to employees and directors is based on the fair value of the underlying common stock at the grant date. The fair value of the restricted shares granted to non-employees is remeasured each period until they are vested based on the fair value of the underlying common stock. Compensation expense related to restricted stock totaled approximately $98,000 and $267,000 for the three and nine months ended September 30, 2007, respectively, and $16,000 and $92,000 for the three and nine months ended October 1, 2006, respectively. As of September 30, 2007, there was approximately $474,000 of unrecognized compensation cost related to the restricted shares, which is expected to be recognized over a weighted average period of 3.0 years. The total fair value of restricted stock vested during 2007 was approximately $94,000 and $72,000 for the nine months ended September 30, 2007 and October 1, 2006, respectively.
Stock Units
There was no activity in stock units during the nine months ended September 30, 2007, and no stock units were vested during the nine months ended September 30, 2007 or the nine months ended October 1, 2006. Compensation expense related to stock units totaled approximately $49,000 and $136,000 for the three and nine months ended September 30, 2007, respectively, and $45,000 and $154,000 for the three and nine months ended October 1, 2006, respectively. As of September 30, 2007, there was approximately $159,000 of unrecognized compensation cost related to the stock units, which is expected to be recognized over a weighted average period of 1.2 years.
Employee Stock Purchase Plan
The Theragenics Corporation Employee Stock Purchase Plan (the “ESPP”) allows eligible employees the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each quarterly offering period. Compensation cost related to the ESPP totaled approximately $2,000 and $5,000 for the three and nine months ended September 30, 2007, respectively and $3,000 and $10,000 for the three and nine months ended October 1, 2006, respectively.
NOTE G - DISTRIBUTION AGREEMENT AND MAJOR CUSTOMERS
Distribution Agreement
The Company’s brachytherapy business sells its TheraSeed® device directly to health care providers and to third party distributors. The Company’s primary non-exclusive distribution agreement is with C. R. Bard (“Bard”) for the distribution of the TheraSeed® device (the “Bard Agreement”). The terms of the Bard Agreement provide for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current terms expire December 31, 2008, and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2007. The Bard Agreement gives Bard the non-exclusive right to distribute the TheraSeed® device in the U.S., Canada, and other international locations for the treatment of prostate cancer and other solid localized cancerous tumors.
13
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
Major Customers
Sales to Bard represented approximately 51% and 54% of total brachytherapy seed product revenue and approximately 26% and 28% of consolidated revenue for both the three months and nine months ended September 30, 2007, respectively. Sales to Bard represented approximately 58% and 61% of total brachytherapy seed product revenue, and approximately 35% and 40% of consolidated revenue, for the three and nine months ended October 1, 2006, respectively.
Accounts receivable from Bard represented approximately 46% of brachytherapy accounts receivable and 28% of consolidated accounts receivable at September 30, 2007. At December 31, 2006, accounts receivable from Bard represented approximately 53% of brachytherapy accounts receivable and 31% of consolidated accounts receivable.
For the three months ended September 30, 2007, one customer totaled 10% of surgical products sales. No single customer equaled or exceeded 10% of surgical products sales for the nine months ended September 30, 2007. For the nine months ended October 1, 2006, two customers each totaled 10% of surgical products sales. For the three months ended October 1, 2006, no customers exceeded 10% of surgical products sales. One customer totaled 12% of surgical products accounts receivable, and another customer totaled 10% of surgical products accounts receivable at September 30, 2007. One customer totaled 11% of surgical products accounts receivable at December 31, 2006.
NOTE H – LICENSE FEES
The Company holds a worldwide exclusive license from the University of Missouri (the “University”) for the use of technology patented by the University, used in the Company’s TheraSphere® product. The Company has granted certain of its geographical rights under the licensing agreement with the University to Nordion International, Inc. Under the Nordion agreement, the Company is entitled to licensing fees for each geographic area in which Nordion receives new drug approval. The 2006 periods include $400,000 of one-time license fee revenue resulting from Nordion’s obtaining CE marking and European registration for TheraSphere® in the third quarter of 2006. The Company is also entitled to a percentage of revenues earned by Nordion as royalties under the agreement. License fee revenue is recognized in the periods to which they relate. Continuing license fees from TheraSphere® product sales are not expected to be material in the near future.
14
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE I - SEGMENT REPORTING
Segment Reporting
Theragenics is a medical device company serving the cancer treatment and surgical markets, operating in two business segments. In its brachytherapy seed business, the Company produces, markets and sells TheraSeed®, its premier palladium-103 prostate cancer treatment device, I-Seed, its iodine-125 based prostate cancer treatment device, and related products and services. The Company’s surgical products business consists of wound closure and vascular access products. Wound closure includes sutures, needles and other surgical products with applications in, among other areas, urology, veterinary, cardiology, orthopedics, plastic surgery and dental. Vascular access includes introducers and guidewires used in the interventional radiology, interventional cardiology and vascular surgery markets. The following tables provide certain information for these segments (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2007 | October 1, 2006 | September 30, 2007 | October 1, 2006 | |||||||||||||
Revenues | ||||||||||||||||
Brachytherapy seed | $ | 8,477 | $ | 9,248 | $ | 25,676 | $ | 26,866 | ||||||||
Surgical products | 7,587 | 5,112 | 21,498 | 12,573 | ||||||||||||
Intersegment eliminations | (63 | ) | (40 | ) | (147 | ) | (135 | ) | ||||||||
$ | 16,001 | $ | 14,320 | $ | 47,027 | $ | 39,304 | |||||||||
Restructuring expenses | ||||||||||||||||
Brachytherapy seed | $ | — | $ | — | $ | — | $ | 369 | ||||||||
Surgical products | — | — | — | — | ||||||||||||
$ | — | $ | — | $ | — | $ | 369 | |||||||||
Gain on sale of assets | ||||||||||||||||
Brachytherapy seed | $ | — | $ | — | $ | — | $ | 199 | ||||||||
Surgical products | — | — | — | 2 | ||||||||||||
$ | — | $ | — | $ | — | $ | 201 | |||||||||
Earnings from operations | ||||||||||||||||
Brachytherapy seed | $ | 1,244 | $ | 1,708 | $ | 3,335 | $ | 1,647 | ||||||||
Surgical products | 1,160 | 140 | 2,766 | 977 | ||||||||||||
Intersegment eliminations | (7 | ) | (20 | ) | (12 | ) | (33 | ) | ||||||||
$ | 2,397 | $ | 1,828 | $ | 6,089 | $ | 2,591 | |||||||||
Capital expenditures | ||||||||||||||||
Brachytherapy seed | $ | 59 | $ | 14 | $ | 391 | $ | 100 | ||||||||
Surgical products | 376 | 361 | 832 | 463 | ||||||||||||
$ | 435 | $ | 375 | $ | 1,223 | $ | 563 | |||||||||
Depreciation and amortization | ||||||||||||||||
Brachytherapy seed | $ | 955 | $ | 1,009 | $ | 2,889 | $ | 3,013 | ||||||||
Surgical products | 617 | 554 | 1,822 | 982 | ||||||||||||
$ | 1,572 | $ | 1,563 | $ | 4,711 | $ | 3,995 |
Earnings from operations by segment do not include interest expense, interest income, other income and expense, or provisions for income taxes. Intersegment eliminations primarily represent surgical products segment sales transactions.
15
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
Supplemental information related to significant assets and liabilities follows (in thousands):
September 30, 2007 | December 31, 2006 | |||||||
Identifiable assets | ||||||||
Brachytherapy seed | $ | 86,822 | $ | 79,136 | ||||
Surgical products | 70,689 | 69,860 | ||||||
Corporate investment in subsidiaries | 61,667 | 61,667 | ||||||
Intersegment eliminations | (67,792 | ) | (64,419 | ) | ||||
$ | 151,386 | $ | 146,244 | |||||
Goodwill | ||||||||
Brachytherapy seed | $ | 2,578 | $ | 2,578 | ||||
Surgical products | 36,080 | 36,246 | ||||||
$ | 38,658 | $ | 38,824 | |||||
Other intangible assets | ||||||||
Brachytherapy seed | $ | 1 | $ | 6 | ||||
Surgical products | 12,349 | 13,756 | ||||||
$ | 12,350 | $ | 13,762 |
Information regarding revenue by geographic regions follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2007 | October 1, 2006 | September 30, 2007 | October 1, 2006 | |||||||||||||
United States | $ | 14,771 | $ | 12,792 | $ | 43,709 | $ | 36,470 | ||||||||
Europe | 856 | 435 | 2,140 | 1,081 | ||||||||||||
Other foreign countries | 130 | 539 | 499 | 895 | ||||||||||||
License fees (Canada) | 244 | 554 | 679 | 858 | ||||||||||||
$ | 16,001 | $ | 14,320 | $ | 47,027 | $ | 39,304 |
Foreign sales are attributed to countries based on the location of the customer. License fees are recognized from the TheraSphere® licensing agreement with Nordion, a Canadian based company. All other foreign sales are related to the surgical products segment. All of the Company’s long-lived assets are located within the United States.
NOTE J - RESTRUCTURING
Restructuring costs of $369,000 were incurred in the nine months ended October 1, 2006. These restructuring costs consisted primarily of site exit and disposal costs associated with the restructuring of the brachytherapy business that was announced and implemented in August 2005. These restructuring activities were completed in the second quarter of 2006. Gain on sale of assets in the nine months ended October 1, 2006 includes $199,000 related to assets sold that were idled in the restructuring.
16
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE K – EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the weighted average shares outstanding. Diluted earnings per share represents net earnings divided by weighted average shares outstanding adjusted for the incremental dilution of outstanding stock options and awards. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution for the periods presented follows (in thousands, except per share data):
Three months ended | Nine months ended | |||||||||||||||
September 30, 2007 | October 1, 2006 | September 30, 2007 | October 1, 2006 | |||||||||||||
Net earnings | $ | 1,763 | $ | 1,657 | $ | 4,475 | $ | 2,865 | ||||||||
Weighted average common shares outstanding | 33,118 | 32,752 | 33,101 | 32,293 | ||||||||||||
Incremental common shares issuable under stock options and awards | 119 | 70 | 161 | 75 | ||||||||||||
Weighted average common shares outstanding assuming dilution | 33,237 | 32,822 | 33,262 | 32,368 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.05 | $ | 0.14 | $ | 0.09 | ||||||||
Diluted | $ | 0.05 | $ | 0.05 | $ | 0.13 | $ | 0.09 |
For the three and nine months ended September 30, 2007, potential common stock from approximately 1,716,000 and 1,576,000 stock options, respectively, were not included in the diluted earnings per share calculation because their effect is antidilutive. For both the three and nine months ended October 1, 2006, potential common stock from approximately 2,433,000 stock options were not included in the diluted earnings per share calculation because their effect is antidilutive.
NOTE L –CONTINGENCIES
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. Management currently is not aware of any such proceedings or claims that it believes will have, individually or in aggregate, a material adverse effect on the Company’s business, financial condition, or operating results.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Theragenics Corporation is a medical device company serving the cancer treatment and surgical markets, operating in two business segments. In its brachytherapy seed business, the Company produces, markets and sells TheraSeed®, its premier palladium-103 prostate cancer treatment device; I-Seed, its iodine-125 based prostate cancer treatment device; and other related products and services. Theragenics is the world’s largest producer of palladium-103, the radioactive isotope that supplies the therapeutic radiation for its TheraSeed® device. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize the TheraSeed® device. The majority of TheraSeed® sales are channeled through third-party distributors. The Company also sells its TheraSeed® and I-Seed devices directly to physicians.
The Company’s surgical products business consists of wound closure and vascular access products. Wound closure includes sutures, needles and other surgical products with applications in, among other areas, urology, veterinary, cardiology, orthopedics, plastic surgery and dental. Vascular access includes introducers and guidewires used in the interventional radiology, interventional cardiology and vascular surgery markets.
The Company has substantially diversified its operations and revenues in recent years. Prior to 2003, the Company’s sole product was the palladium-103 TheraSeed® prostate cancer treatment device. In 2003, the Company began to market I-Seed, an iodine-125 based prostate cancer treatment device. In May 2005, the Company expanded into the surgical products business with the acquisition of CP Medical Corporation (“CP Medical”), followed by the acquisition of Galt Medical Corp. (“Galt”) in August 2006. CP Medical and Galt comprise the Company’s surgical products business, which accounted for 45% of consolidated revenue in the first nine months of 2007. Prior to May 2005, the brachytherapy seed business constituted 100% of the Company’s revenue.
Galt was acquired on August 2, 2006, for $32.7 million (net of $2.3 million of cash acquired), including $29.7 million in cash and the issuance of common shares valued at $3.1 million. The Company borrowed $7.5 million under its $40.0 million credit facility in connection with the Galt acquisition. The Company’s consolidated results of operations include the results of Galt subsequent to the acquisition date.
Results of Operations
Revenue
Following is a summary of revenue by segment (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2007 | October 1, 2006 | Change (%) | September 30, 2007 | October 1, 2006 | Change (%) | |||||||||||||||||||
Brachytherapy seed | ||||||||||||||||||||||||
Product sales | $ | 8,233 | $ | 8,694 | (5.3 | %) | $ | 24,997 | $ | 26,008 | (3.9 | %) | ||||||||||||
Continuing licensing fees | 244 | 154 | 58.4 | % | 679 | 458 | 48.3 | % | ||||||||||||||||
One-time license fees | — | 400 | (100.0 | %) | — | 400 | (100.0 | %) | ||||||||||||||||
Total brachytherapy seed | 8,477 | 9,248 | (8.3 | %) | 25,676 | 26,866 | (4.4 | %) | ||||||||||||||||
Surgical products | 7,587 | 5,112 | 48.4 | % | 21,498 | 12,573 | 71.0 | % | ||||||||||||||||
Intersegment eliminations | (63 | ) | (40 | ) | 57.5 | % | (147 | ) | (135 | ) | 8.9 | % | ||||||||||||
Consolidated | $ | 16,001 | $ | 14,320 | 11.7 | % | $ | 47,027 | $ | 39,304 | 19.6 | % |
The increase in consolidated revenue over the 2006 periods is a result of the increase in the surgical products segment, which includes wound closure and vascular access products. Revenue for 2007 includes the results of Galt, which was acquired in August 2006. A significant portion of wound closure and vascular access products are sold to original equipment manufacturers and distributors. Ordering patterns of these customers vary and are difficult to predict. Accordingly, surgical products revenue is subject to fluctuation on a quarter to quarter basis.
18
Brachytherapy product sales decreased 5% and 4% in the three and nine month period ended September 30, 2007, respectively, compared to the 2006 periods. This decrease was due to a decline in sales to our main distributor, which decreased 17% and 15% for the three and nine months ended September 30, 2007, respectively, somewhat offset by increased revenue from direct sales. The sales decline to this main distributor was attributable to a 6% reduction in transfer price, which was effective February 1, 2007, with the remaining decreases due to lower unit volumes. Continued declines in unit volumes sold to distributors would reduce gross profit further due to the significant fixed cost component of manufacturing expenses to the extent not offset by increased direct sales. However, because of this significant fixed cost component, any appreciable increases in unit volumes to distributors could have the impact of increasing overall margins. The future effect of the pricing reduction to the Company’s distributors is dependent upon the ability of the distributors to leverage this pricing reduction to maintain or increase unit volumes.
The Company also maintains its own internal brachytherapy sales force that sells TheraSeed® and I-Seed directly to hospitals and physicians. Revenue from direct sales increased 10% and 11% for the three and nine months ended September 30, 2007, respectively, over the comparable 2006 periods. This increase in direct sales resulted from programs implemented by the direct sales force, including direct to consumer advertising programs. The average selling price of the TheraSeed® device sold directly to hospitals and physicians during the third quarter and first nine months of 2007 was comparable to the respective 2006 periods.
The Company has two non-exclusive distribution agreements in place for the distribution of the TheraSeed® device. The primary distribution agreement is with C. R. Bard (“Bard”), which is effective through December 31, 2008 (the “Bard Agreement”). Sales to Bard represented approximately 51% and 54% of total brachytherapy seed product revenue and approximately 26% and 28% of consolidated revenue for both the three months and nine months ended September 30, 2007, respectively. Sales to Bard represented approximately 58% and 61% of total brachytherapy seed product revenue, and approximately 35% and 40% of consolidated revenue, for the three and nine months ended October 1, 2006, respectively.
The terms of the Bard Agreement provide for automatic one-year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires on December 31, 2008, and will be automatically extended for one additional year unless either party gives notice by December 31, 2007 of its intent not to extend the agreement.
Management believes that Medicare reimbursement policies have affected the brachytherapy market and can also continue to affect the brachytherapy market. In December 2006 Congress enacted the Tax Relief and Health Care Act of 2006 (the “Act”), which retained the “charges adjusted to costs” reimbursement methodology for brachytherapy seeds throughout 2007. The Company believes that it is likely that fixed reimbursement rates for seeds will be implemented beginning in 2008, (see “Medicare Developments” below) and that this and other factors can be expected to lead to continued pricing pressure from hospitals and other health care providers. This could have an adverse effect on brachytherapy revenue.
Revenue in the 2006 periods included $400,000 of one-time license fee revenue in the brachytherapy business related to the license of the Company’s TheraSphere® product. Under the terms of the license agreement, this one-time fee was due upon the licensee receiving the CE Mark and European registration for TheraSphere® in certain European countries. The licensing agreement provides for continuing license fees from European and U.S. product sales of TheraSphere®, though continuing license fees are not expected to be significant in the near future. Commencing in the second quarter of 2008, the licensing rate will be reduced to approximately one-half of its current rate, and license fee revenue will decline accordingly. Expenses related to the license agreement will decline by a like amount, and no net effect on operating income is expected.
Some of the Company’s competitors experienced a temporary interruption of their palladium-103 supply in the third quarter, and the Company supplied certain of those competitors’ customers for several weeks. Although such sales did not materially affect revenues during the quarter ended September 30, 2007, it demonstrates the value and reliability of the Company’s manufacturing capabilities.
19
Operating income and costs and expenses
Following is a summary of operating income by segment (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2007 | October 1, 2006 | Change (%) | September 30, 2007 | October 1, 2006 | Change (%) | |||||||||||||||||||
Brachytherapy seed | ||||||||||||||||||||||||
Operating income | $ | 1,244 | $ | 1,708 | (27.2 | %) | $ | 3,335 | $ | 1,647 | 102.5 | % | ||||||||||||
One-time license fees | — | (400 | ) | n/a | — | (400 | ) | n/a | ||||||||||||||||
Restructuring related items | — | — | — | — | 170 | n/a | ||||||||||||||||||
Brachytherapy seed excluding special items | 1,244 | 1,308 | (4.9 | )% | 3,335 | 1,417 | 135.4 | % | ||||||||||||||||
Surgical products | 1,160 | 140 | 728.6 | % | 2,766 | 977 | 183.1 | % | ||||||||||||||||
Intersegment eliminations | (7 | ) | (20 | ) | (65.0 | %) | (12 | ) | (33 | ) | (63.6 | %) | ||||||||||||
Operating income | ||||||||||||||||||||||||
Consolidated | $ | 2,397 | $ | 1,828 | 31.1 | % | $ | 6,089 | $ | 2,591 | 135.0 | % | ||||||||||||
Excluding special items | $ | 2,397 | $ | 1,428 | 67.9 | % | $ | 6,089 | $ | 2,361 | 157.9 | % |
Operating income excluding special items is a non-GAAP financial measure used by management in its analysis of the Company’s operating performance. Because of the significance of the one-time license fee and restructuring related items, we believe presentation of financial measures excluding the impact of these items provides supplemental information that is helpful to an understanding of the operating results of the Company’s businesses and period-to-period comparisons of performance. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results.
Operating income excluding special items in the brachytherapy segment increased 135% in the nine month period compared to the 2006 period. This increase was a result of cost reductions in operating expenses as compared to 2006, partially offsetting the effect of lower revenue. Cost reductions were a result of operating efficiencies and other savings programs implemented in the third quarter of 2006. Gross margins on product sales were approximately 54% in the 2007 nine month period compared to 52% in 2006. Selling, general and administrative (SG&A) expenses were the significant portion of the cost reductions in the nine months ended September 30, 2007, decreasing by $2.5 million as compared to 2006. These SG&A reductions were primarily a result of decreases in advertising and professional fees. Operating income excluding special items for the three months ending September 30, 2007 decreased 5% compared to 2006, affected by lower revenue. Expense savings compared to the prior year were not as significant in the third quarter of 2007 as they were for the nine month period because the cost reduction programs generating the expense savings were implemented in the third quarter of 2006. Accordingly, we do not currently expect continued cost reductions on a year over year basis. Gross margins on product sales were 55% and 53% in the third quarter of 2007 and 2006, respectively. Looking forward, gross margins in the brachytherapy seed business are expected to be dependent primarily on sales levels, due to the high fixed cost component of brachytherapy operations.
Operating income in the surgical products segment include the results of Galt, acquired in August 2006. Gross margins in the surgical products segment were 43% and 42% for the three and nine months ended September 30, 2007, respectively, and are dependent on product and sales channel mix. In addition to the inclusion of Galt, operating income improved over the 2006 periods due to reductions in professional fees and bad debt expenses partially offset by severance costs. Efficiencies were also realized because of the larger scale of the surgical products business in 2007. Overall SG&A expenses as a percent of sales in the surgical products segment decreased to 25% for the three months ended September 30, 2007 from 32% in the comparable 2006 period and to 27% for the first nine months of 2007 compared to 30% in the comparable 2006 period. To support anticipated growth, the Company expects to continue to make investments in staffing and other infrastructure in the surgical products segment. Accordingly, SG&A expenses may fluctuate as a percentage of sales in future periods.
20
Research and development (“R&D”) expenses increased over the 2006 periods as investments were made in new product development. The Company expects to continue to invest in R&D during 2007 and 2008 as investments are made in product development to address growth opportunities in our businesses.
Other
Interest income was $530,000 and $1,653,000 for the three and nine months ended September 30, 2007, respectively, compared to $362,000 and $1,231,000 for the comparable 2006 periods. The 2007 nine month period includes $309,000 of one-time interest income related to $1.9 million of refunded federal income taxes. The interest income was recognized in the second quarter of 2007 upon settlement of the IRS’ examination of the Company’s 2004 federal income tax return. Other increases in interest income were a result of higher interest rates in 2007, partially offset due to having fewer invested funds in the 2007 periods, as $29.7 million in cash was utilized for the acquisition of Galt in August 2006. The Company’s investments consist primarily of short-term cash investments and high-credit quality corporate and municipal obligations, in accordance with the Company’s investment policies. Funds available for investment have and will continue to be utilized for the Company’s current and future expansion programs and strategic opportunities for growth and diversification. As funds continue to be used for these programs and activities, and as interest rates continue to change, management expects interest income to fluctuate accordingly.
Income tax expense
The Company’s effective income tax rates for the three and nine months ended September 30, 2007 were approximately 36% and 38%, respectively, and include federal and state income taxes. The year to date effective rate is reflective of the approximate effective tax rate expected for 2007.
The Company’s effective tax rate for the three and nine months ended October 1, 2006 was approximately 19%. During 2006 the Company had an allowance for a deferred income tax asset that was reduced during the course of the year as it became more likely than not that some portion of the deferred tax asset would be realized. The three and nine months ended October 1, 2006 included a tax benefit of approximately $1.0 million and $1.4 million, respectively, representing a reduction in the allowance for the deferred income tax asset and significantly reducing the effective tax rate for each period. In the fourth quarter of 2006, Management determined that it was more likely than not that substantially all of the remaining deferred tax asset would be recognized and, accordingly, the significant portion of the allowance was released. The balance of the allowance at September 30, 2007 is $241,000, primarily representing certain state net operating loss carryforwards for which the Company believes it is more likely than not that the benefit will not be realized.
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for 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 derecognition, classification, interest expense and penalties, accounting in interim periods, disclosure and transition. The Company has evaluated its tax positions for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years that remain subject to examination by major tax jurisdictions as of September 30, 2007. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or income tax examinations by tax authorities for years prior to 2003. The Company concluded that there are no significant uncertain tax positions requiring recognition in the financial statements. Accordingly, adoption of FIN 48 did not have a material effect on the Company’s financial statements.
The Company’s policy is to recognize accrued interest expense and penalties associated with uncertain tax positions as a component of income tax expense. Inasmuch as the Company has concluded that there are no significant uncertain tax positions, no amounts of interest or penalties have been accrued.
During 2007, the IRS completed an examination of the Company’s 2004 and 2005 federal income tax return with no significant adjustments. Upon settlement of the 2004 audit, the Company received a refund of federal income tax previously paid of $1.9 million. This refund resulted from the carryback of tax losses that were reported in the Company’s 2004 federal income tax return. The Company also received $309,000 of interest income related to this refund, which was recognized upon settlement of the IRS examination in the second quarter of 2007.
21
Critical Accounting Policies
The preparation of financial statements requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following is not intended to be a comprehensive list of all of the Company’s accounting policies. The Company’s significant accounting policies are more fully described in the notes to its consolidated financial statements included in its Annual Report on Form 10-K and as updated in its Forms 10-Q for the current fiscal year. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for Management’s judgment in their application. The accounting policies described below are those which we believe are most critical in fully understanding and evaluating our reported financial results, and are areas in which Management’s judgment in selecting an available alternative might produce a materially different result.
Property, plant and equipment. Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets. The Company’s estimates can result in differences from the actual useful lives of certain assets. The significant portion of equipment is comprised of the Company’s cyclotrons, utilized in the brachytherapy business. As of September 30, 2007, the Company owned and operated eight cyclotrons, the first of which entered service in 1998. Each of the Company’s cyclotrons is depreciated using an estimated 10-year life. Management’s estimate of the useful life of these cyclotrons is based on the Company’s experience to date with these cyclotrons. Based on experience gained relative to the operation, refurbishment, and maintenance of the cyclotrons, Management believes there is a substantive basis for the current depreciable lives of the cyclotrons.
Management will continue to periodically examine estimates used for depreciation for reasonableness. If the Company determines that the useful life of property, plant or equipment should be shortened or lengthened, depreciation expense would be adjusted accordingly for the remaining useful lives of the identified assets.
Management assesses the impairment of its depreciable assets whenever events or circumstances indicate that such assets might be impaired. In the event the expected undiscounted future cash flow attributable to the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. The estimation of fair value, whether in conjunction with an asset to be held and used or with an asset held for sale, also involves judgment.
It is possible that Management’s estimates concerning the realizability of the Company’s depreciable assets or assets held for sale could change in the future.
Goodwill. The Company has $36.1 million of goodwill associated with its surgical products business and $2.6 million of goodwill associated with its brachytherapy seed business. The Company accounts for goodwill and other intangible assets in accordance with the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. The first step of the impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill and intangible assets with indefinite lives. If fair value exceeds book value, goodwill is considered not impaired. If book value exceeds fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. For this step the implied fair value of the goodwill is compared with the book value of the goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to that excess. Any loss recognized cannot exceed the carrying amount of goodwill. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited once the measurement of that loss is completed.
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The Company performs an annual goodwill impairment assessment during the fourth quarter. Management also makes judgments about goodwill whenever events or changes in circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist. The timing of an impairment test may result in charges to our statements of income in the current reporting period that could not have been reasonably foreseen in prior periods. In order to estimate the fair value of goodwill, Management typically makes various assumptions about the future prospects for the reporting unit that the asset relates to, considers market factors specific to that reporting unit and estimates future cash flows to be generated by that reporting unit. Assumptions used in these assessments are consistent with the Company’s internal planning. The most recent assessment was performed in the fourth quarter of 2006 and the Company determined that goodwill was not impaired.
Goodwill of $20.5 million was recorded in connection with the acquisition of Galt in August 2006. During the first nine months of 2007, goodwill was reduced by $166,000 as a result of certain adjustments made to the allocation of the purchase price.
Intangible assets with definite lives are being amortized, and this amortization is included in the accompanying consolidated statements of operations.
Allowance for doubtful accounts and returns. Management judgments and estimates are made and used in connection with establishing an allowance for the possibility that portions of our accounts receivable balances may become uncollectible or subject to return. Accounts receivable are reduced by this allowance. Specifically, Management analyzes accounts receivable in relation to current economic trends, changes in our customer payment history, and changes in sales returns history in establishing this allowance.
Share-based compensation. The Company accounts for share-based compensation in accordance with Statement of Financial Accounting Standard No. 123R, Shared-based Payment (‘SFAS 123R”). Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the Company’s stock price volatility, employee stock option exercise behaviors and, for performance based awards, expected performance rates during the vesting period.
Expected stock price volatility is primarily based on the historical volatility of the Company’s stock price over the most recent period commensurate with the expected option life. When determining the expected life of stock options, the Company classifies options into groups for employees where relatively homogeneous exercise behavior is expected. The vesting period of the options, the length of time similar grants have remained outstanding in the past, and the expected volatility of the stock is also considered. These factors may cause the expected volatility and expected life of options granted to differ from period to period.
In February 2006, the Compensation Committee of the Board of Directors approved the issuance of performance restricted stock units to executive officers, which vest on December 31, 2008 (the “2006 Performance Restricted Stock Units”). The number of common shares issuable upon vesting of the 2006 Performance Restricted Stock Units is subject to a minimum of 31,200 shares and a maximum of 208,000 shares, and will be partly based on the Company’s revenue and earnings per share from 2006 to 2008, relative to its strategic objectives over the same period, and partly based on the subjective discretion of the Compensation Committee. The grant date fair value of the 2006 Performance Restricted Stock Units was based on the fair value of the underlying common stock and is recognized over the three-year requisite service period. For the portion of the 2006 Performance Restricted Stock Units containing performance conditions, the grant date fair value is adjusted each period for the number of shares ultimately expected to be issued. For the portion of the 2006 Performance Restricted Stock Units subject to discretionary performance conditions, the grant date has not been established and accordingly, the fair value of the award is updated each period for changes in the fair value of the underlying common stock. To the extent that the underlying fair value of the Company’s common stock varies significantly, and/or the number of shares issuable is determined, the Company may record additional compensation expense or adjust cumulative compensation expense.
Income taxes. Our judgments, assumptions and estimates relative to the provision for income taxes take into account current tax laws and our interpretation of current tax laws. Management must make assumptions, judgments and estimates to determine our tax provision and our deferred income tax assets and liabilities, including the valuation allowance to be recorded against a deferred tax asset. Actual operating results and the underlying amount and category of income in future years could differ materially from our current assumptions, judgments and estimates of recoverable net deferred taxes.
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Management evaluates the realizability of the deferred tax assets and assesses the need for the valuation allowance each reporting period. In the future if, based on the facts and circumstances surrounding the Company’s ability to generate adequate future taxable income, it becomes more likely than not that some or all of the deferred tax asset will not be realized, the valuation allowance may be required to be increased. At September 30, 2007, the Company has recorded a current gross deferred tax asset of $5.6 million, a long-term deferred tax liability of $5.4 million and an allowance of $241,000.
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material effect on the Company’s financial statements. Management considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.
Liquidity and Capital Resources
The Company had cash, short-term investments and marketable securities of $45.1 million at September 30, 2007, compared to $33.0 million at December 31, 2006. Marketable securities consist primarily of high-credit quality corporate and municipal obligations, in accordance with the Company’s investment policies. The aggregate increase in cash, short-term investments and marketable securities was primarily the result of cash generated from operations.
Working capital was $66.6 million at September 30, 2007, compared to $58.3 million at December 31, 2006. The Company also has a Credit Agreement with a financial institution that provides for revolving borrowings of up to $40.0 million, including a $5.0 million sub-limit for letters of credit, through a credit facility that expires on October 31, 2009. Borrowings of $7.5 million were outstanding under the Credit Agreement as of September 30, 2007. Interest is payable quarterly at LIBOR plus 1% (effective rate of 6.5% at September 30, 2007). Letters of credit, representing decommission funding required by the Georgia Department of Natural Resources, totaling $876,000 were outstanding under the Credit Agreement as of September 30, 2007. The Credit Agreement is unsecured, but provides for a lien to be established on substantially all of the assets of the Company (subject to certain exceptions) in the event certain events of default occur under the Credit Agreement. The Credit Agreement, as amended, contains representations and warranties, as well as affirmative, reporting and negative covenants, customary for financings of this type. Among other things, certain provisions of the Credit Agreement limit the incurrence of additional debt and require the maintenance of certain financial ratios and tests. The Company was in compliance with these covenants as of September 30, 2007.
Cash provided by operations was $13.1 million and $5.9 million during the nine months ended September 30, 2007 and October 1, 2006, respectively. Cash provided by operations consists of net earnings plus non-cash expenses such as depreciation, amortization, deferred income taxes and stock based compensation, and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables. In addition to higher net earnings and non cash expenses, significant items affecting the increase in cash from operations for 2007 over 2006 include a $2.3 million decrease in prepaid expenses and other current assets, arising primarily due to the receipt of a federal income tax refund of $1.9 million in 2007, and an increase of $1.0 million in income taxes payable. A significant item reducing cash from operations was an increase in accounts receivable of $1.0 million, resulting from higher sales. As of September 30, 2007, the Company has utilized substantially all of its net operating loss carryforwards for income taxes. Accordingly, the Company expects to begin paying income taxes at normal rates going forward, which will have a negative effect on cash flow from operations in the future.
Capital expenditures totaled $1.2 million and $563,000 during the first nine months of 2007 and 2006, respectively. The Company expects current capital expenditure rates to continue in 2007 and 2008 as investments continue to be made to support capacity, primarily in the surgical products business. In 2006, $29.7 million in cash was used for the acquisition of Galt.
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Cash provided by financing activities was $170,000 and $7.6 million in the first nine months of 2007 and 2006, respectively. The 2006 amount was primarily a result of $7.5 million in borrowings under the Company’s $40.0 million credit facility. The remainder consists of cash proceeds from the exercise of stock options and the Company’s Employee Stock Purchase Plan.
Cash is expected to be used in 2007 for increased marketing and brachytherapy support activities, support for growth in the surgical products segment, and in the pursuit of additional diversification efforts such as the purchase of technologies, products or companies.
The Company believes that current cash and investment balances and cash from future operations and credit facilities will be sufficient to meet its current anticipated working capital and capital expenditure requirements. In the event additional financing becomes necessary, management may choose to raise those funds through other means of financing as appropriate.
Medicare Developments
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which went into effect on January 1, 2004, contained brachytherapy provisions requiring Medicare to reimburse hospitals for each brachytherapy seed/source furnished between January 1, 2004 to December 31, 2006 based on the hospital’s costs for each patient (calculated from the hospital’s charges adjusted by the hospital’s specific cost-to-charge ratio). The MMA also directed the U.S. Government Accountability Office (“GAO”) to conduct a study examining future payment policies for brachytherapy seeds. The GAO published its report on July 25, 2006, concluding that the Centers for Medicare & Medicaid Services (“CMS”), the regulatory body that sets Medicare reimbursement policies, could establish separate prospective payment rates effective in 2007 for palladium-103 brachytherapy seeds/sources (such as TheraSeed®) and iodine-125 seeds/sources using Medicare’s hospital outpatient data.
Although subsequently superceded by Congress, CMS posted a final rule on November 1, 2006 with fixed prospective payment rates for brachytherapy seeds for Medicare's hospital outpatient prospective payment system (“OPPS”) that would have applied to calendar year 2007. The use of prospective payment rates would have fixed the per seed rate at which hospitals would have been reimbursed in 2007. The Company believed that CMS’ approach to determining the fixed prospective reimbursement rate for brachytherapy seeds was fundamentally flawed. For example, CMS did not stratify cost data on differing seed configurations, such as loose versus “stranded” seeds. Accordingly, the Company continued to work with policy makers in an effort to rectify the shortcomings it believed to be contained in the new CMS rule.
In December 2006, Congress enacted the Tax Relief and Health Care Act of 2006 (the “Act”), which extended and refined the Medicare safeguards initially enacted by Congress in 2003 for brachytherapy seeds administered in the hospital outpatient setting. The Act’s provisions on brachytherapy superceded the final rule published by CMS on November 1, 2006 by extending the current “charges adjusted to cost” reimbursement policies for brachytherapy seeds through the end of 2007, ensuring that the Medicare program would not implement potentially restrictive caps on reimbursement during that period. In addition, the legislation recognized that prostate cancer patients must have meaningful access to stranded brachytherapy seeds, which increasingly are used in clinical practice to further enhance the safety and efficacy of treatment. The legislation established a permanent requirement for Medicare to use separate codes for the reimbursement of stranded brachytherapy devices, beginning no later than July 1, 2007. Stranded seeds are becoming a larger portion of Theragenics’ brachytherapy business. This important provision should allow reimbursement rules to recognize the value of this important clinical configuration even after 2007.
Effective July 2007, CMS issued new reimbursement codes for brachytherapy sources. The codes are isotope specific and recognize the distinction between nonstranded versus stranded seeds, as mandated by the Act. In early November 2007, CMS also posted a final OPPS rule for calendar year 2008 with fixed prospective reimbursement rates for these new codes. The Company believes it is likely that fixed reimbursement rates for seeds will be implemented beginning in 2008, and that this and other factors can be expected to lead to continued pricing pressure from hospitals and other health care providers. This could have an adverse effect on brachytherapy revenue. The Company also continues to work through the Coalition for the Advancement of Brachytherapy, the brachytherapy industry trade organization, in an effort to extend the current “charges adjusted to costs” reimbursement methodology for brachytherapy seeds.
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Forward Looking and Cautionary Statements
This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding sales, marketing and distribution efforts, ordering patterns of customers, the Company’s direct sales organization, including, but not limited to, its growth and effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness and continuation of non-exclusive distribution agreements, pricing for the TheraSeed® and I-Seed devices, anticipated growth in the surgical products business segment, future cost of sales and gross margins, R&D efforts and expenses, investment in additional personnel and infrastructure, SG&A expenses, other income, potential new products and opportunities, the development of new markets and technologies, diversification of operations, results in general, plans and strategies for continuing diversification, and the sufficiency of the Company’s liquidity and capital resources. From time to time, the Company may also make other forward-looking statements relating to such matters as well as statements relating to anticipated financial performance, business prospects, technological developments, other research and development activities and similar matters. These forward-looking statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated, including risks associated with new product development cycles, effectiveness and execution of marketing and sales programs of the Company’s business segments and its distributors, third party distribution agreements, competitive conditions and selling tactics of the Company’s competitors, potential changes in third-party reimbursement (including CMS), changes in product pricing by the Company’s brachytherapy business segment, changes in cost of materials used in production processes, continued acceptance of the Company’s products by the market, continued demand for the Company’s brachytherapy, wound closure and vascular access products, integration of acquired companies into the Theragenics organization, capitalization on opportunities for growth within the Company’s surgical products business segment, ability to recognize benefits from areas of shared expertise, competition within the medical device industry, development and growth of new applications within the markets for brachytherapy, wound closure, vascular access, and, more broadly, medical devices, competition from companies within brachytherapy, wound closure, vascular access and, more broadly, medical device markets, competition from other methods of treatment, ability to execute on acquisition opportunities on favorable terms and successfully integrate any acquisitions, and the risks identified in Part II, Item 1A of the Company’s most recent Form 10-K Annual Report. All forward looking statements and cautionary statements included in this document are made as of the date hereof based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward looking statement or cautionary statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk exposure related to market risk sensitive financial instruments is not material. As of September 30, 2007, the Company had borrowings of $7.5 million and letters of credit of approximately $876,000 outstanding under the terms of its Credit Agreement. Interest on outstanding borrowings is payable monthly at LIBOR plus 1% (effective rate of 6.5% as of September 30, 2007).
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007, the end of the period covered by this report.
The Company acquired Galt Medical Corp. (“Galt”) on August 2, 2006. Since the date of acquisition, the Company has been focusing on analyzing, evaluating, and implementing changes in Galt's procedures and controls to determine their effectiveness and to make them consistent with our disclosure controls and procedures. Prior to our acquisition of Galt, Galt was not required to prepare financial statements in accordance with accounting principles generally accepted in the United States of America. In addition, Galt was not previously required to maintain disclosure controls and procedures or maintain, document and assess internal control over financial reporting, in each case as required under the rules and regulation of the Securities and Exchange Commission. As noted in Management's Report on Internal Control over Financial Reporting in the Company’s Form 10-K for the year ended December 31, 2006 and as permitted by guidance issued by the staff of the U.S. Securities and Exchange Commission, Galt was excluded from the scope of management’s assessment over the effectiveness of internal control over financial reporting as of December 31, 2006. We have similarly excluded Galt from the scope of our quarterly discussion of material changes in internal control over financial reporting below. Galt constituted 19.4% of consolidated revenue for the nine months ended September 30, 2007 and 22.7% of consolidated assets as of September 30, 2007.
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No changes in the Company’s internal control over financial reporting were identified as having occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as described above with respect to Galt.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. Management currently is not aware of any such legal proceedings or claims that it believes will have, individually or in aggregate, a material adverse effect on the Company’s business, financial condition, or operating results.
Item 1A. Risk Factors
In addition to the other information set forth in this report, and in the following paragraph, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results, should be carefully considered. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Management believes that the brachytherapy industry continues to be affected by competition from alternate therapies, declining prices for iodine-125 and palladium-103 seeds, competitors’ selling tactics and the effects of consolidation in the industry. Theragenics’ brachytherapy business also continues to be affected by the Company’s non-exclusive distributors. Medicare reimbursement policies have affected the brachytherapy market and can also continue to affect the brachytherapy market. In December 2006 Congress enacted the Tax Relief and Health Care Act of 2006, which retained the “charges adjusted to cost” reimbursement methodology for brachytherapy seeds for 2007. The Company believes it is likely that fixed prospective reimbursement rates for seeds will be implemented beginning in 2008, (see “Medicare Developments” above) and that this and other factors can be expected to lead to continued pricing pressure from hospitals and other health care providers. This could have an adverse effect on brachytherapy revenue. Additionally, Theragenics and/or its non-exclusive distributors may continue to change their respective pricing policies for the TheraSeed® device and Theragenics may change its pricing policy with respect to I-seed in order to take advantage of market opportunities or respond to competitive situations. Responding to market opportunities and competitive situations could have an adverse effect on average selling prices. Responding to market opportunities and competitive situations could also have a favorable effect or prevent an unfavorable effect on market share and volumes. Conversely, the Company or its non-exclusive distributors could individually and independently decide to maintain per unit pricing under certain competitive situations that could adversely affect current or potential market share and volumes.
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Item 6. Exhibits
Exhibit No. | Title | |
3.1 | Amended and Restated Bylaws of Theragenics Corporation (incorporated by reference from the Current Report on Form 8-K dated August 17, 2007) | |
10.1 | Employment Agreement dated August 21, 2007 between Galt Medical Corp. and Michael Lang. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
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.
REGISTRANT: | |||
THERAGENICS CORPORATION | |||
Date: November 8, 2007 | By: | /s/ M. Christine Jacobs | |
M. Christine Jacobs Chief Executive Officer |
Date: November 8, 2007 | By: | /s/ Francis J. Tarallo | |
Francis J. Tarallo Chief Financial Officer |