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, 2012
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. 001-14339
THERAGENICS CORPORATION®
(Exact name of registrant as specified in its charter)
Delaware | 58-1528626 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer o Non Accelerated Filer o Smaller Reporting Company x
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 6, 2012 the number of shares of $0.01 par value common stock outstanding was 29,991,990.
THERAGENICS CORPORATION
TABLE OF CONTENTS
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | ||
Condensed Consolidated Statements of Comprehensive Earnings for the three and nine months ended September 30, 2012 and September 30, 2011 | 3 | |
Condensed Consolidated Balance Sheets – September 30, 2012 and December 31, 2011 | 4 | |
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011 | 5 | |
Notes to Condensed Consolidated Financial Statements | 6 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15 | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 24 | |
ITEM 4. CONTROLS AND PROCEDURES | 25 | |
PART II. OTHER INFORMATION | 25 | |
ITEM 1. LEGAL PROCEEDINGS | 25 | |
ITEM 1A. RISK FACTORS | 25 | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 25 | |
ITEM 6. EXHIBITS | 26 | |
SIGNATURES | 27 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
REVENUE | ||||||||||||||||
Product sales | $ | 19,286 | $ | 20,500 | $ | 61,578 | $ | 61,206 | ||||||||
License and fee income | 630 | 562 | 1,877 | 1,645 | ||||||||||||
19,916 | 21,062 | 63,455 | 62,851 | |||||||||||||
COST OF SALES | 12,472 | 12,293 | 39,388 | 37,407 | ||||||||||||
GROSS PROFIT | 7,444 | 8,769 | 24,067 | 25,444 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Selling, general and administrative | 5,338 | 5,651 | 16,617 | 17,044 | ||||||||||||
Amortization of purchased intangibles | 665 | 698 | 2,526 | 2,094 | ||||||||||||
Research and development | 281 | 380 | 870 | 1,375 | ||||||||||||
Loss on sale of equipment | — | 2 | 3 | 4 | ||||||||||||
6,284 | 6,731 | 20,016 | 20,517 | |||||||||||||
EARNINGS FROM OPERATIONS | 1,160 | 2,038 | 4,051 | 4,927 | ||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest income | 28 | 39 | 102 | 122 | ||||||||||||
Interest expense | (163 | ) | (166 | ) | (482 | ) | (529 | ) | ||||||||
Other | 6 | 1 | 8 | 4 | ||||||||||||
(129 | ) | (126 | ) | (372 | ) | (403 | ) | |||||||||
EARNINGS BEFORE INCOME TAXES | 1,031 | 1,912 | 3,679 | 4,524 | ||||||||||||
Income tax expense | 341 | 771 | 1,217 | 1,740 | ||||||||||||
NET EARNINGS | $ | 690 | $ | 1,141 | $ | 2,462 | $ | 2,784 | ||||||||
EARNINGS PER SHARE: | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.08 | $ | 0.08 | ||||||||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.07 | $ | 0.08 | ||||||||
WEIGHTED AVERAGE SHARES: | ||||||||||||||||
Basic | 29,752 | 33,442 | 32,304 | 33,400 | ||||||||||||
Diluted | 30,383 | 33,727 | 32,911 | 33,766 | ||||||||||||
COMPREHENSIVE EARNINGS | ||||||||||||||||
Net earnings | $ | 690 | $ | 1,141 | $ | 2,462 | $ | 2,784 | ||||||||
Other comprehensive earnings, net of taxes | ||||||||||||||||
Reclassification adjustment for gain included in | ||||||||||||||||
net earnings | (7 | ) | — | (8 | ) | — | ||||||||||
Unrealized gain (loss) on securities | 29 | (62 | ) | 77 | (43 | ) | ||||||||||
Total other comprehensive earnings | 22 | (62 | ) | 69 | (43 | ) | ||||||||||
Total comprehensive earnings | $ | 712 | $ | 1,079 | $ | 2,531 | $ | 2,741 |
The accompanying notes are an integral part of these statements.
3
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
September 30, 2012 (Unaudited) | December 31, 2011 | |||||||
ASSETS CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 20,122 | $ | 29,553 | ||||
Marketable securities | 11,648 | 11,625 | ||||||
Trade accounts receivable, less allowance of $717 in 2012 and $2,757 in 2011 | 10,371 | 11,375 | ||||||
Inventories | 16,299 | 15,771 | ||||||
Deferred income tax asset | 1,118 | 2,028 | ||||||
Refundable income taxes | 106 | 401 | ||||||
Prepaid expenses and other current assets | 650 | 985 | ||||||
TOTAL CURRENT ASSETS | 60,314 | 71,738 | ||||||
Property and equipment, net | 32,921 | 34,519 | ||||||
Intangible assets, net | 11,882 | 9,459 | ||||||
Deferred income tax asset | 709 | — | ||||||
Other assets | 72 | 102 | ||||||
TOTAL ASSETS | $ | 105,898 | $ | 115,818 |
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 1,468 | $ | 1,816 | ||||
Accrued salaries, wages and payroll taxes | 2,940 | 2,861 | ||||||
Short-term borrowings | — | 23,667 | ||||||
Other current liabilities | 1,285 | 1,104 | ||||||
TOTAL CURRENT LIABILITIES | 5,693 | 29,448 | ||||||
Long-term borrowings | 22,000 | — | ||||||
Deferred income taxes | — | 1,043 | ||||||
Asset retirement obligations | 854 | 807 | ||||||
Other long-term liabilities | 342 | 398 | ||||||
TOTAL LIABILITIES | 28,889 | 31,696 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, authorized 100,000 shares of $0.01 par value, issued 34,741 in 2012 and 33,991 in 2011 | 347 | 340 | ||||||
Additional paid-in capital | 75,436 | 74,705 | ||||||
Retained earnings | 11,555 | 9,093 | ||||||
Accumulated other comprehensive gain (loss) | 53 | (16 | ) | |||||
Common stock in treasury, at cost – 4,762 shares in 2012 | (10,382 | ) | — | |||||
TOTAL SHAREHOLDERS’ EQUITY | 77,009 | 84,122 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 105,898 | $ | 115,818 |
The accompanying notes are an integral part of these statements.
4
THERAGENICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings | $ | 2,462 | $ | 2,784 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,893 | 5,404 | ||||||
Deferred income taxes | (842 | ) | (213 | ) | ||||
Provision for allowances | 288 | 452 | ||||||
Share-based compensation | 685 | 560 | ||||||
Decommissioning retirement liability | 47 | 43 | ||||||
Other non-cash gains/losses | (62 | ) | (94 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 815 | (545 | ) | |||||
Inventories | (369 | ) | (2,857 | ) | ||||
Prepaid expenses and other current assets | 335 | 52 | ||||||
Trade accounts payable | (348 | ) | 496 | |||||
Accrued salaries, wages and payroll taxes | 79 | 426 | ||||||
Income taxes payable | 295 | 406 | ||||||
Other current liabilities | 21 | 18 | ||||||
Other | (26 | ) | 81 | |||||
Net cash provided by operating activities | 9,273 | 7,013 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases and construction of property and equipment | (1,384 | ) | (1,683 | ) | ||||
Cash paid for acquisition of Core Oncology customer base | (5,229 | ) | — | |||||
Proceeds from sale of property and equipment | — | 36 | ||||||
Purchases of marketable securities | (5,612 | ) | (10,147 | ) | ||||
Maturities of marketable securities | 4,745 | 6,935 | ||||||
Proceeds from sales of marketable securities | 785 | 187 | ||||||
Net cash used by investing activities | (6,695 | ) | (4,672 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Cash paid for shares repurchased from tender offer, including transaction costs | (10,382 | ) | — | |||||
Repayment of borrowings | (1,667 | ) | (2,500 | ) | ||||
Employee stock purchase plan | 53 | 44 | ||||||
Other | (13 | ) | (14 | ) | ||||
Net cash used by financing activities | (12,009 | ) | (2,470 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | $ | (9,431 | ) | $ | (129 | ) | ||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 29,553 | 29,674 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 20,122 | $ | 29,545 | ||||
SUPPLEMENTARY CASH FLOW DISCLOSURE: | ||||||||
Interest paid | $ | 510 | $ | 615 | ||||
Income taxes paid | $ | 1,764 | $ | 1,548 | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Assets acquired from the Core transaction | $ | 250 | $ | — | ||||
Liability for property and equipment acquired | $ | — | $ | 90 |
The accompanying notes are an integral part of these statements.
5
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
NOTE A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited interim condensed consolidated financial statements reflect the consolidated operations of Theragenics Corporation and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The terms “Company”, “we”, “us”, or “our” mean Theragenics Corporation and all entities included in our consolidated financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures normally included in our annual consolidated financial statements.
To prepare financial statements in accordance with GAAP, we must make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts may differ from these estimated amounts. In our opinion, these interim financial statements include all adjustments (including normal recurring accruals) considered necessary for a fair presentation.
Our consolidated results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for a full year. These interim financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2011 included in the Form 10-K Annual Report that we filed with the SEC.
We are a medical device company serving the surgical products and cancer treatment markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products. Wound closure includes sutures, needles, and other surgical products. Vascular access includes introducers, guidewires, and related products. Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, radiofrequency devices, implanters, introducer products and other needle based products. Our surgical products segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery. Our brachytherapy business manufactures, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 based TheraSeed® device, our iodine-125 based AgX100™ device and other related products and services.
NOTE B – ACQUISITION OF CORE ONCOLOGY’S PROSTATE BRACHYTHERAPY CUSTOMER BASE
On February 17, 2012, we acquired Core Oncology’s prostate brachytherapy customer base. In addition to the customer base, we also acquired certain packaging technologies, equipment related to the packaging technologies, and certain existing component inventory. We did not acquire Core’s facilities, manufacturing equipment or processes, or Core’s employees.
The total purchase price for the acquired assets is equal to one times the actual revenue generated from the acquired customers over the twelve-month period from September 2012 to August 2013, in excess of a $2.5 million Threshold Amount. Through September 30, 2012 we have paid $5.2 million in cash for this transaction, primarily consisting of prepayment of a portion of the earn out at closing in February and subsequent quarterly earn-out payments. We have four quarterly earn-out payments remaining through September 2013. Each quarterly earn-out payment is based upon that quarter’s revenue from the acquired customers, reduced by a portion of the Threshold Amount and by a portion of the prepayment made at closing. The final earn-out payment is calculated as one times the revenue actually recognized from the acquired customer base over the twelve-month period from September 2012 to August 2013 in excess of the total Threshold Amount, reduced by the prepayment and the cumulative amount of all previous earn-out payments made. Based on our current estimates, we expect to make additional payments for this earn-out based acquisition, representing a total purchase price of $5.5 million, including transaction costs.
6
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
We accounted for this transaction as an asset acquisition and, accordingly, have recorded the assets acquired at estimated total cost, including transaction costs. Current assets were recorded at fair value. The remaining total cost was allocated to non-current assets based on their relative fair values. The following preliminary amounts were recorded (in thousands):
Amount | Estimated Life | |||||
Inventory | $ | 258 | ||||
Developed technology equipment | 187 | 7 years | ||||
Intangibles | ||||||
Customer relationships | 4,539 | 7 years | ||||
Non-compete agreements | 384 | 5 years | ||||
Developed technology | 110 | 1.5 years | ||||
5,033 | 6.7 years | |||||
Total estimated cost of assets acquired | $ | 5,478 | ||||
We used the income approach to determine the fair value of the customer relationships acquired. This approach evaluates the present worth of the future economic benefits accruing from this asset over its estimated useful life, discounted to the present at a rate of return commensurate with the asset’s inherent risk. This approach requires significant judgments including the projected net cash flows and the weighted average cost of capital (“WACC”) used to discount the cash flows. We derive the assumptions related to cash flows primarily from our internal budgets and forecasts. These budgets and forecasts include information related to revenues, capacity, operating costs, and other information. The WACC and terminal value assumptions are based on our capital structure, cost of capital, inherent risk profiles, and industry outlook. The estimated fair value of all other assets acquired (other than the customer relationships) was based on commonly accepted valuation techniques that we believed to be appropriate in the circumstances.
Our estimates of the expected total purchase price of these assets may change based on, among other things, changes in forecasted revenues to be recognized from the acquired customers. Any changes in these estimates will cause changes in the carrying values of the non-current acquired assets and the resulting expenses charged to our earnings from these assets (primarily amortization of intangible assets). Such changes may be material to our results of operations and financial position. During the third quarter of 2012 we reduced our estimated total acquisition cost to $5.5 million from $9.3 million recorded in previous quarters. This reduction was based on a number of factors, including actual results from acquired customers, industry trends and results experienced over the previous six months, and the commencement of our annual budgeting and forecasting processes.
At December 31, 2011, we had accounts receivable due from Core totaling $2.2 million (the “Core Accounts Receivable”), for which an allowance had been established (see Note H), and a related current deferred tax asset of approximately $800,000 was recorded. In connection with the acquisition of the Core customer base, we released Core from any claims related to the Core Accounts Receivable. However, for income tax purposes this amount is currently accounted for as an increase in the tax basis of the acquired assets, which are primarily long-term intangible assets. Accordingly, the deferred tax asset associated with the acquired intangible assets has been recorded as a long-term deferred tax asset at September 30, 2012. In addition, we considered the fair value of the Core Accounts Receivable as of the date of acquisition and, based on our understanding of Core’s financial condition, concluded that such fair value was immaterial.
NOTE C – CREDIT AGREEMENT
On October 10, 2012, we executed a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with a financial institution. The Credit Agreement provides for up to $40 million of borrowings under a revolving credit facility (the “Revolver”). The Revolver matures on October 10, 2015 with interest on outstanding borrowings payable at the London Interbank Offered Rate (“LIBOR”) plus 1.75%. The Revolver also provides for a $5 million sub-limit for trade and stand-by letters of credit. The Credit Agreement is unsecured, but provides for a lien to be established on substantially all of our assets upon certain events of default. The Credit Agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the Credit Agreement restricts the incurrence of certain additional debt and certain capital expenditures, and requires the maintenance of certain financial ratios, including a minimum fixed charge coverage ratio, a maximum senior liabilities to tangible net worth ratio, and the maintenance of minimum liquid assets of $10 million, as all such ratios and terms are defined in the Credit Agreement.
7
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
This Credit Agreement amended and restated our prior credit agreement, which was scheduled to mature on October 31, 2012 and provided for a $30 million revolving loan with interest payable at LIBOR plus 2.25% and letter of credit commitment. At September 30, 2012, outstanding borrowings totaled $22 million and outstanding letters of credit totaled approximately $946,000.
NOTE D – FINANCIAL INSTRUMENTS AND FAIR VALUE
Financial Instruments
We are exposed to certain risks relating to our ongoing business operations. Prior to June 1, 2012 when our interest rate swaps expired, we managed our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement since our interest rates are floating rates based on LIBOR. Our interest rate swaps were intended to convert a portion of our floating rate debt to a fixed rate. We did not use interest rate swaps for speculative or trading purposes. We hold no other derivative financial instruments. Our interest rate swaps were recorded as liabilities at fair value on our condensed consolidated balance sheets. We entered into interest rate swaps that were designed to hedge our interest rate risk but were not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”). Changes in the fair value of these instruments were recognized as interest expense on our condensed consolidated statements of comprehensive earnings.
A roll forward of the notional value of our interest rate swaps is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Balance, beginning of the period | $ | — | $ | 9,333 | $ | 7,667 | $ | 11,000 | ||||||||
New contracts | — | — | — | — | ||||||||||||
Matured contracts | — | (833 | ) | (7,667 | ) | (2,500 | ) | |||||||||
Balance, end of the period | $ | — | $ | 8,500 | $ | — | $ | 8,500 |
The location and fair value of our derivative financial instruments not designated as hedging instruments in our condensed consolidated balance sheets were as follows (in thousands):
Type | Maturity | Balance Sheet Location | September 30, 2012 | December 31, 2011 | ||||||
Interest rate swaps | June 2012 | Other current liabilities | $ | — | $ | 57 | ||||
The following table includes information about gains and losses recognized on our derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of comprehensive earnings (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Location of Loss (Gain) Recognized in Income | |||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||||
Periodic settlements | $ | — | $ | 38 | $ | 60 | $ | 111 | Interest expense | ||||||||
Change in fair value | $ | — | $ | (38 | ) | $ | (57 | ) | $ | (98 | ) | Interest expense |
8
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
Financial Instruments Measured at Fair Value on a Recurring Basis
We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with guidance issued by the FASB, we use a three-level fair value hierarchy to prioritize the inputs used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
● | Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
● | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
We had the following assets (liabilities) measured at fair value on a recurring basis subject to disclosure requirements (in thousands):
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
September 30, 2012 | ||||||||||||||||
Money market funds | $ | 137 | $ | — | $ | — | $ | 137 | ||||||||
Marketable securities | 11,648 | — | — | 11,648 | ||||||||||||
Total assets | $ | 11,785 | $ | — | $ | — | $ | 11,785 | ||||||||
December 31, 2011 | ||||||||||||||||
Money market funds | $ | 8,483 | $ | — | $ | — | $ | 8,483 | ||||||||
Marketable securities | 11,625 | — | — | 11,625 | ||||||||||||
Total assets | $ | 20,108 | $ | — | $ | — | $ | 20,108 | ||||||||
Interest rate swaps liability | $ | — | $ | (57 | ) | $ | — | $ | (57 | ) |
Our interest rate swaps were contracts with our financial institution and were not contracts that could be traded in a ready market. We estimated the fair value of our interest rate swaps based on, among other things, discounted cash flows based upon current market expectations about future amounts, yield curves, and mid-market pricing. Accordingly, we classified our interest rate swap agreements as Level 2.
Financial Instruments Not Measured at Fair Value
Our financial instruments not measured at fair value consist of cash and cash equivalents, accounts receivable, and accounts payable, the carrying value of each approximating fair value due to the nature of these accounts. Our financial instruments not measured at fair value also include borrowings under our credit agreement. We estimate the fair value of outstanding borrowings under our credit agreement based on the current market rates applicable to borrowers with credit profiles similar to us (level 2). We estimate that the carrying value of our borrowings approximates fair value at September 30, 2012.
There were no nonfinancial assets or nonfinancial liabilities measured at fair value at September 30, 2012 or December 31, 2011.
9
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
NOTE E - 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. We estimate reserves for inventory obsolescence based on our judgment of future realization. Inventories were comprised of the following (in thousands):
September 30, 2012 | December 31, 2011 | |||||||
Raw materials | $ | 7,422 | $ | 7,756 | ||||
Work in process | 4,082 | 3,724 | ||||||
Finished goods | 4,550 | 3,988 | ||||||
Spare parts and supplies | 961 | 920 | ||||||
17,015 | 16,388 | |||||||
Allowance for obsolete inventory | (716 | ) | (617 | ) | ||||
Inventories, net | $ | 16,299 | $ | 15,771 |
NOTE F – INCOME TAXES
Our effective income tax rate, which include federal and state income taxes, was approximately 33% for both the three and nine months ending September 30, 2012. These tax rates were lower than taxes computed at the statutory rates primarily due to the domestic production deduction for income tax purposes.
NOTE G - SHARE-BASED COMPENSATION
Restricted Stock
A summary of activity in non-vested restricted stock awards during the first nine months of 2012 follows (shares in thousands):
Shares | Weighted average grant date fair value | |||||||
Non-vested at January 1, 2012 | 531 | $ | 1.65 | |||||
Granted | 710 | 1.57 | ||||||
Vested | (190 | ) | 1.74 | |||||
Forfeited | — | — | ||||||
Non-vested at September 30, 2012 | 1,051 | $ | 1.58 |
The 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. Non-cash compensation expense related to restricted stock totaled approximately $195,000 and $510,000 for the three and nine months ended September 30, 2012, respectively, and $101,000 and $279,000 for the three and nine months ended September 30, 2011, respectively. As of September 30, 2012, there was approximately $978,000 of unrecognized compensation cost related to the restricted shares, which is expected to be recognized over a weighted average period of 2.0 years. The total fair value of restricted stock vested during the nine months ended September 30, 2012 and 2011 was approximately $303,000 and $232,000, respectively.
10
THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
NOTE H - DISTRIBUTION AGREEMENTS AND MAJOR CUSTOMERS
Brachytherapy Seed Distribution Agreements
Our brachytherapy seed business sells our TheraSeed® device directly to healthcare providers and to third-party distributors. Under our third-party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada. Certain agreements also provide distributors with rights to distribute TheraSeed® for the treatment of solid localized tumors other than prostate and with rights to distribute to certain locations outside of North America. Such applications (non-prostate and outside of North America) have not been material. Our principal non-exclusive distribution agreement is with C. R. Bard (“Bard”). Our agreement with Bard (the “Bard Agreement”) provides 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 December 31, 2013 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2012.
Major Customers
Sales to Bard under the Bard Agreement represented approximately 23% and 25% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2012, respectively, and 26% and 28% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2011, respectively. Other than Bard, one distributor represented 10% of our brachytherapy seed segment revenues for both the three and nine months ended September 30, 2012. No other distributors represented 10% or more of brachytherapy seed segment revenues in 2011.
Accounts receivable from Bard represented approximately 16% of brachytherapy accounts receivable at September 30, 2012. At December 31, 2011, accounts receivable from Bard under the Bard Agreement represented approximately 19% of brachytherapy accounts receivable.
Core Oncology became an additional non-exclusive distributor of TheraSeed® in January 2010. In February 2011, we terminated our agreement with Core due to Core’s failure to satisfy its financial obligation to us in accordance with the contractual terms of the agreement. Core had been attempting to become current with amounts due to us. However, litigation filed against Core by a third party in January 2011 created what we viewed as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales. Subsequent to termination of the agreement, we continued to supply TheraSeed® to Core on a prepaid basis. Sales to Core in our brachytherapy segment totaled approximately 11% and 12% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2011, respectively. In the latter half of 2011, certain customers who previously purchased TheraSeed® through Core began purchasing either from us on a direct basis or through one of our other TheraSeed® distributors. At December 31, 2011 an allowance for doubtful accounts was established for the entire amount of accounts receivable due from Core, which totaled $2.2 million (the “Core Accounts Receivable”). On February 17, 2012, we acquired Core’s prostate brachytherapy customer base. See Note B. In connection with the acquisition of the Core customer base on February 17, 2012, we released Core from all claims existing at that date, including the Core Accounts Receivable. Accordingly, the $2.2 million for which an allowance had been established was written off as uncollectible for financial reporting purposes in 2012.
NOTE I - SEGMENT REPORTING
We are a medical device company serving the surgical product and cancer treatment markets, operating in two business segments. Our surgical products business consists of wound closure, vascular access, and specialty needle products. Our brachytherapy seed business produces, markets, and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 TheraSeed® device and our iodine-125 AgX100TM device.
Capital expenditures associated with our new ERP system were reported in our brachytherapy segment previously. We have changed the manner in which these costs are reported to reflect the segment that received the benefit of these amounts. This change had no effect on the consolidated amounts previously reported in 2011.
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THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
The following tables provide certain information for these segments (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues | ||||||||||||||||
Surgical products | $ | 14,246 | $ | 15,280 | $ | 45,662 | $ | 45,142 | ||||||||
Brachytherapy seed | 5,841 | 6,053 | 18,476 | 18,284 | ||||||||||||
Intersegment eliminations | (171 | ) | (271 | ) | (683 | ) | (575 | ) | ||||||||
$ | 19,916 | $ | 21,062 | $ | 63,455 | $ | 62,851 | |||||||||
Earnings from operations | ||||||||||||||||
Surgical products | $ | 243 | $ | 780 | $ | 1,030 | $ | 1,087 | ||||||||
Brachytherapy seed | 906 | 1,243 | 3,033 | 3,838 | ||||||||||||
Intersegment eliminations | 11 | 15 | (12 | ) | 2 | |||||||||||
$ | 1,160 | $ | 2,038 | $ | 4,051 | $ | 4,927 | |||||||||
Capital expenditures, excluding asset acquisition | ||||||||||||||||
Surgical products | $ | 341 | $ | 319 | $ | 1,024 | $ | 1,446 | ||||||||
Brachytherapy seed | 61 | 60 | 360 | 237 | ||||||||||||
$ | 402 | $ | 379 | $ | 1,384 | $ | 1,683 | |||||||||
Depreciation and amortization | ||||||||||||||||
Surgical products | $ | 1,232 | $ | 973 | $ | 3,675 | $ | 3,407 | ||||||||
Brachytherapy seed | 541 | 839 | 2,218 | 1,997 | ||||||||||||
$ | 1,773 | $ | 1,812 | $ | 5,893 | $ | 5,404 |
We evaluate business segment performance based on segment revenue and segment earnings from operations. Earnings from operations by segment do not include interest expense, interest income, other income and expense, or provisions for income taxes. Intersegment eliminations are for surgical products segment sales transactions. Corporate expenses are allocated based upon the relative revenue for each segment.
Supplemental information related to significant assets follows (in thousands):
September 30, 2012 | December 31, 2011 | |||||||
Identifiable assets | ||||||||
Surgical products | $ | 72,400 | $ | 72,475 | ||||
Brachytherapy seed | 58,877 | 60,791 | ||||||
Corporate investment in subsidiaries | 111,439 | 111,439 | ||||||
Intersegment eliminations | (136,818 | ) | (128,887 | ) | ||||
$ | 105,898 | $ | 115,818 | |||||
Intangible assets | ||||||||
Surgical products | $ | 7,329 | $ | 9,404 | ||||
Brachytherapy seed | 4,553 | 55 | ||||||
$ | 11,882 | $ | 9,459 | |||||
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THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
Information regarding revenue by geographic regions follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Product sales | ||||||||||||||||
United States | $ | 16,545 | $ | 17,928 | $ | 53,369 | $ | 53,779 | ||||||||
Europe | 2,073 | 1,894 | 5,867 | 6,078 | ||||||||||||
Other foreign countries | 668 | 678 | 2,342 | 1,349 | ||||||||||||
19,286 | 20,500 | 61,578 | 61,206 | |||||||||||||
License and fee income | ||||||||||||||||
United States | 277 | 225 | 782 | 644 | ||||||||||||
Canada | 353 | 337 | 1,095 | 1,001 | ||||||||||||
630 | 562 | 1,877 | 1,645 | |||||||||||||
$ | 19,916 | $ | 21,062 | $ | 63,455 | $ | 62,851 |
Foreign sales are attributed to countries based on the location of the customer. The license fees attributed to Canada are with Nordion, a Canadian based company, for the license of our TheraSphere® product. Less than 10% of all foreign product sales are related to the brachytherapy segment. Substantially all of our long-lived assets are located within the United States.
NOTE J – MODIFIED DUTCH AUCTION TENDER OFFER
On June 12, 2012, we announced a modified “Dutch Auction” tender offer to repurchase up to $10.0 million of our common stock. The offer period expired on July 11, 2012. On July 17, 2012 we repurchased 4,761,904 shares of our common stock for a total cost of $10.0 million, or $2.10 per share, excluding transaction costs. The purchase price was funded from cash on hand, and the shares repurchased represented approximately 14% of our issued and outstanding common stock at that time. We did not acquire any stated or unstated rights or privileges in connection with the repurchase of this common stock and, accordingly, the entire purchase price of $10.4 million, including transaction costs, was accounted for as treasury stock.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net earnings | $ | 690 | $ | 1,141 | $ | 2,462 | $ | 2,784 | ||||||||
Weighted average common shares outstanding | 29,752 | 33,442 | 32,304 | 33,400 | ||||||||||||
Incremental common shares issuable under stock options and awards | 631 | 285 | 607 | 366 | ||||||||||||
Weighted average common shares outstanding assuming dilution | 30,383 | 33,727 | 32,911 | 33,766 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.08 | $ | 0.08 | ||||||||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.07 | $ | 0.08 |
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THERAGENICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)
Diluted earnings per share does not include the effect of certain stock options and awards as their impact would be anti-dilutive. Approximately 792,000 stock options and awards for both the three and nine months ended September 30, 2012 were not included in the diluted earnings per share calculation because their effect is antidilutive. Approximately 1,413,000 and 1,077,000 stock options and awards for the three and nine months ended September 30, 2011, respectively, were not included in the diluted earnings per share calculation because their effect is antidilutive.
NOTE L – CONTINGENCIES
Litigation and claims
From time to time we may be a party to claims that arise in the ordinary course of business, none of which, in our view, is expected to have a material adverse effect on our consolidated financial position or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Theragenics Corporation is a medical device company serving the surgical products and cancer treatment markets, operating in two business segments. The terms "Company", "we", "us", or "our" mean Theragenics Corporation and all entities included in our consolidated financial statements.
Our surgical products business consists of wound closure, vascular access, and specialty needle products. Wound closure includes sutures, needles and other surgical products. Vascular access includes introducers, guidewires, and related products. Specialty needles include coaxial, biopsy, spinal and disposable veress needles, access trocars, radiofrequency devices, implanters, introducer products, and other needle based products. This segment serves a number of markets and applications, including among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine, pain management, endoscopy, and spinal surgery. Our surgical products business sells our devices and components primarily to original equipment manufacturers (“OEMs”) and to a network of distributors.
Our brachytherapy business manufactures, markets and distributes “seeds” used primarily in the minimally invasive treatment of localized prostate cancer. Our brachytherapy product line includes our palladium-103 based TheraSeed® device, our iodine-125 based AgX100™ device, and other related products and services. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize our devices. The majority of TheraSeed® sales are channeled through third-party distributors. We also maintain an in-house sales force that sells TheraSeed® and AgX100™ directly to physicians. We manufacture the TheraSeed® and the AgX100™ devices.
Acquisition of Core Oncology’s Prostate Brachytherapy Customer Base
On February 17, 2012, we acquired Core Oncology’s prostate brachytherapy customer base. This transaction has substantially increased our share of the iodine-125 segment of the prostate brachytherapy market. In addition to the customer base, we also acquired certain packaging technologies, equipment related to the packaging technologies, and certain existing component inventory. We did not acquire Core’s facilities, manufacturing equipment or processes, or Core’s employees. We accounted for this transaction as an asset acquisition.
The total purchase price for the acquired assets is equal to one times the actual revenue generated from the acquired customers over the twelve-month period from September 2012 to August 2013 (the “Earn-Out Period”), in excess of a $2.5 million Threshold Amount. Through September 30, 2012 we have paid $5.2 million in cash for this transaction, primarily consisting of prepayment of a portion of the earn out at closing in February plus subsequent earn-out payments. We have four quarterly earn-out payments remaining through September 2013. Each quarterly earn-out payment is based upon that quarter’s revenue from the acquired customers, reduced by a portion of the Threshold Amount and by a portion of the prepayment made at closing. The final earn-out payment is calculated as one times the revenue actually recognized from the acquired customer base over the twelve-month period from September 2012 to August 2013 in excess of the total Threshold Amount, reduced by the prepayment and the cumulative amount of all previous earn-out payments made. Based on our current estimates, we expect to make additional payments of $250,000 for this earn-out based acquisition, representing a total purchase price of $5.5 million, including transaction costs. However, remaining earn-out payments could be materially higher depending upon the actual amount of revenue generated from the acquired customers during the Earn-Out Period.
Modified Dutch Auction Tender Offer
On June 12, 2012, we announced a modified “Dutch Auction” tender offer to repurchase up to $10.0 million of our common stock. The offer period expired on July 11, 2012. On July 17, 2012 we repurchased 4,761,904 shares of our common stock for a total cost of $10.0 million, or $2.10 per share, excluding transaction costs. The purchase price was funded from cash on hand, and the shares repurchased represented approximately 14% of our issued and outstanding common stock at that time. We did not acquire any stated or unstated rights or privileges in connection with the repurchase of this common stock and, accordingly, the entire purchase price of $10.4 million, including transaction costs, was accounted for as treasury stock.
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Medical Device Tax
Significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). See our discussion below under “Other Regulatory Developments”. The PPACA includes provisions that, among other things, require the medical device industry to subidize healthcare reform in the form of a 2.3% excise tax on the U.S. sales of most medical devices beginning in 2013. While we continue to evaluate the impact of this tax on our overall business, if this tax was applicable to all of our product sales, this would have equated to an excise tax of approximately $2 million in 2011 and $1.4 million in the first nine months of 2012. This revenue-based tax will have a material impact on our consolidated results of operations, cash flows, and financial condition. See “Other Regulatory Developments” below.
Results of Operations
Revenue
Following is a summary of revenue by segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change ($) | 2012 | 2011 | Change ($) | |||||||||||||||||||
Revenues by segment: | ||||||||||||||||||||||||
Surgical products | ||||||||||||||||||||||||
Product sales | $ | 14,230 | $ | 15,259 | $ | (1,029 | ) | $ | 45,598 | $ | 45,088 | $ | 510 | |||||||||||
License and fee income | 16 | 21 | (5 | ) | 64 | 54 | 10 | |||||||||||||||||
Total surgical products | 14,246 | 15,280 | (1,034 | ) | 45,662 | 45,142 | 520 | |||||||||||||||||
Brachytherapy seed | ||||||||||||||||||||||||
Product sales | 5,227 | 5,512 | (285 | ) | 16,663 | 16,693 | (30 | ) | ||||||||||||||||
License and fee income | 614 | 541 | 73 | 1,813 | 1,591 | 222 | ||||||||||||||||||
Total brachytherapy seed | 5,841 | 6,053 | (212 | ) | 18,476 | 18,284 | 192 | |||||||||||||||||
Intersegment eliminations | (171 | ) | (271 | ) | 100 | (683 | ) | (575 | ) | (108 | ) | |||||||||||||
Consolidated | ||||||||||||||||||||||||
Product sales | 19,286 | 20,500 | (1,214 | ) | 61,578 | 61,206 | 372 | |||||||||||||||||
License and fee income | 630 | 562 | 68 | 1,877 | 1,645 | 232 | ||||||||||||||||||
Total consolidated | $ | 19,916 | $ | 21,062 | $ | (1,146 | ) | $ | 63,455 | $ | 62,851 | $ | 604 |
Surgical Products Segment
Revenue in our surgical products business decreased 7% in the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011. For the year to date period, revenue increased 1% in the nine months ended September 30, 2012 from the comparable 2011 period. Our customers’ ordering patterns continue to be variable and unpredictable, especially on a quarter-to-quarter basis. Customer behavior and ordering patterns also continue to be erratic due to significant macroeconomic uncertainties, such as the federal deficit, impending healthcare reform and the medical device tax, changing tax policies and other concerns. We expect this variability and unpredictable customer behavior to continue in the fourth quarter and into 2013. Sluggish demand and unpredictable behavior have a direct effect on our revenue and results.
Open orders in our surgical products segment were $13.5 million on September 30, 2012 compared to $13.9 million at December 31, 2011. Open orders represent firm orders from customers for future delivery. Open orders are not guaranteed shipments, and they are subject to cancellation or delay. Backlog in our surgical products business was $588,000 at September 30, 2012 and $379,000 at December 31, 2011. Backlog represents orders included in open orders on which we have missed promised shipment dates. We expect our open orders and backlog to continue to vary based on changes in ordering patterns of our larger customers and changes in customer behavior.
16
Recently we announced the launch of three new vascular access products. We launched our Galt Microslide™ Pediatric Introducer line (“Galt Microslide”) in the first quarter of 2012; our Galt VTI™ Valved Tearaway Introducer (“Galt VTI”) in the third quarter of 2012; and our Galt Centeze™ centesis drainage catheter in October. While sales of these new products have not been material in 2012, each of these new products is expected to provide our surgical products business with access to new markets and new customers. These new products are also expected to carry a higher gross profit margin than we are currently realizing in our surgical products business.
A significant portion of the products in our surgical business continue to be sold to OEMs and a network of distributors. Ordering patterns and behaviors of these customers vary and are difficult to predict. Accordingly, surgical products revenue continues to be subject to fluctuation, especially on a quarter-to-quarter basis. In addition, revenue has been and will continue to be affected by our customers’ and potential customers’ efforts to manage their supply chains and reduce costs. All of these factors may cause the fluctuations in our results to be even more volatile from period to period.
Brachytherapy Seed Segment
We sell our TheraSeed® palladium-103 device directly to healthcare providers and to third-party distributors. We also sell our AgX100TM iodine-125 based device, and other brachytherapy related products, directly to healthcare providers.
Our brachytherapy product sales decreased 5% for the quarter ended September 30, 2012 and were flat for the nine months ended September 30, 2012 from the comparable 2011 periods. Incremental revenues from the acquisition of the Core Oncology customer base totaled $1.0 million and $2.8 million for the three and nine months ended September 30, 2012, respectively. See “Acquisition of Core Oncology’s Prostate Brachytherapy Customer Base” above. Excluding the incremental sales to the acquired customers, brachytherapy product revenue, primarily from our TheraSeed® product, declined 24% and 17% for the three and nine months ended September 30, 2012, respectively.
In May 2012 the U.S. Preventive Services Task Force recommended against routine PSA screenings for healthy men without symptoms. We believe this recommendation may be leading to a decline in PSA screening. In addition, we believe there has been an increase in “active surveillance”, a practice where no immediate medical treatment is provided; but the physician and patient closely monitor the patient’s cancer for signs that the cancer is growing. We believe that declines in PSA screenings would lead to a decline in the number of men diagnosed with prostate cancer. Both a decline in the number of PSA screenings and an increase in the proportion of men diagnosed with prostate cancer but not seeking immediate medical treatment would in turn lead to a decline in the number of procedures to treat prostate cancer, including brachytherapy procedures.
The prostate brachytherapy industry in the United States continues to experience pressure from newer forms of treatment. Some newer forms of treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy. These newer forms of alternative treatments include Intensity Modulated Radiation Therapy (“IMRT”) and robotic surgery. In addition to treatment options that enjoy favorable reimbursement rates, we believe brachytherapy seed volume and revenue are also affected by disruptive pricing from other brachytherapy providers and uncertainties surrounding reimbursement.
We have non-exclusive distribution agreements in place for the distribution of our TheraSeed® device. Under our third party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada. Certain agreements also provide distributors with the right to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate and with rights to distribute to certain locations outside of North America. Such applications (non-prostate and outside of North America) have not been material and are not expected to become material in the near future. Our principal non-exclusive distribution agreement is with C.R. Bard (“Bard”). Our agreement with Bard provides 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 December 31, 2013 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2012. Sales to Bard under the agreement with Bard represented approximately 23% and 25% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2012, respectively, and 26% and 28% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2011, respectively.
17
We also currently have other non-exclusive distribution agreements in place for TheraSeed®. Other than Bard, one distributor represented 10% of our brachytherapy seed segment revenues for both the three and nine months ended September 30, 2012. No other distributors represented 10% or more of brachytherapy seed segment revenues in 2011. We may pursue additional distribution agreements for both palladium-103 and iodine-125 products in an effort to increase market share. We may also have opportunities to enter certain markets outside of the United States with an iodine-125 device.
Core became an additional non-exclusive distributor of TheraSeed® in January 2010. In February 2011, we terminated our agreement with Core due to Core’s failure to satisfy its financial obligation to us in accordance with the contractual terms of the agreement. Core had been attempting to become current with amounts due to us. However, litigation filed against Core by a third party in January 2011 created what we viewed as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales. Subsequent to termination of the agreement, we continued to supply TheraSeed® to Core on a prepaid basis. In the latter half of 2011, certain customers who previously purchased TheraSeed® through Core began purchasing either from us on a direct basis or through one of our other TheraSeed® distributors. In February 2012, we acquired Core’s prostate brachytherapy customer base. See above under “Acquisition of Core Oncology’s Prostate Brachytherapy Customer Base”. Sales to Core in our brachytherapy segment totaled approximately 11% and 12% of total brachytherapy seed segment revenue for the three and nine months ended September 30, 2011, respectively.
We believe that Medicare reimbursement policies have affected the brachytherapy market and will continue to affect the brachytherapy market. See “Medicare Developments” below.
License fees in our brachytherapy segment increased 13% and 14% for the three and nine months ended September 30, 2012, respectively, over the comparable 2011 periods. License fees include fees from the licensing of our TheraSphere® product, a medical device used for the treatment of liver cancer. License fees also include fees related to the licensing of certain intellectual property related to an expandable brachytherapy delivery system that we developed. This agreement, which was executed in May 2008, provides for a minimal non-refundable initial license fee and non-refundable, continuing royalties based upon sales and subject to certain minimums.
Operating income and costs and expenses
Following is a summary of operating income by segment (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change ($) | 2012 | 2011 | Change ($) | |||||||||||||||||||
Surgical products | $ | 243 | $ | 780 | $ | (537 | ) | $ | 1,030 | $ | 1,087 | $ | (57 | ) | ||||||||||
Brachytherapy seed | 906 | 1,243 | (337 | ) | 3,033 | 3,838 | (805 | ) | ||||||||||||||||
Intersegment eliminations | 11 | 15 | (4 | ) | (12 | ) | 2 | (14 | ) | |||||||||||||||
Consolidated | $ | 1,160 | $ | 2,038 | $ | (878 | ) | $ | 4,051 | $ | 4,927 | $ | (876 | ) |
Surgical Products Segment
In the third quarter of 2012, operating income in our surgical products segment was $243,000 compared to $780,000 in the third quarter of 2011. For the first nine months of 2012, operating income was $1.0 million compared to $1.1 million in the first nine months of 2011. Our gross profit margins on sales were 34% in the quarter ended September 30, 2012 compared to 37% in the quarter ended September 30, 2011. In the year to date period, our gross profit margin on sales was 34% for the nine months ended September 30, 2012 compared to 36% for the nine months ended September 30, 2011. Gross margins continue to be affected by our sales channel mix. We sell our surgical products primarily to OEM’s and to a network of distributors. Sales to OEM’s, which typically carry a lower gross profit margin than sales to dealers, have increased relative to total sales over the past several years from 84% in 2009 to 89% in 2012. We also experienced higher rework costs on some newer customer programs during 2012. Over time, we plan to increase margins by integrating manufacturing processes, improving efficiencies and introducing newer and higher margin products, such as the Galt VTI, Galt Microslide and Galt Centeze discussed above.
18
Selling, general and administrative (“SG&A”) costs were 25% of revenue for each of the quarters ended September 30, 2012 and 2011 and 26% of revenue for each of the nine month periods ended September 30, 2012 and 2011. The first nine months of 2011 included $218,000 of expenses related to responding to an unsolicited acquisition proposal while the 2012 periods included higher bad debt expense.
Research and development (“R&D”) expenses decreased $99,000 and $488,000 for the quarter and nine months ended September 30, 2012, respectively, from the comparable 2011 periods. Our R&D program is intended to focus on product extensions, next generation products, and new products that are complementary to our current product lines and that support our customers’ product lines. Our R&D program is directed toward 510(k) products that have an established market and not on products that require lengthy and expensive clinical trials. Looking forward, our quarterly results are expected to be affected by the timing of these investments. We recently introduced three new vascular access products. See our discussion under “Revenue - Surgical Products Segment” above.
Recently there have been worldwide shortages of certain animal-based materials utilized in some of our wound closure products. To date these shortages have not had a materially adverse effect on our operations or results. Currently we believe such shortages are being addressed by suppliers and will be short-term in nature. However, if such shortages worsen or endure for an extended period of time, we may experience increased costs for raw materials or delays in production, which could have a material adverse effect on our results of operations.
Looking forward, we expect a number of items to continue to affect the profitability in our surgical products business including, among other things:
· | ordering patterns of our larger OEM and distributor customers, |
· | costs created by unpredictability of customer ordering patterns, |
· | continued investments in infrastructure, R&D, products, and companies as we make investments to support anticipated future growth and to develop products to address growth opportunities, |
· | changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin, |
· | continued pricing pressure from customers, |
· | availability and pricing of raw material supplies, |
· | the utilization costs and benefits from our new, corporate-wide ERP systems, |
· | any changes in the demand for medical devices, |
· | the increasing scale of our surgical products business, and |
· | the 2.3% excise tax on medical devices under the PPACA. |
Brachytherapy Seed Segment
Operating income in our brachytherapy business was $906,000 in the third quarter of 2012 compared to $1.2 million in the third quarter of 2011. For the nine month period, operating income was $3.0 million in 2012 and $3.8 million in 2011. Sales of TheraSeed® decreased $1.1 and $2.3 million for the three and nine months ended September 30, 2012, respectively, from the comparable 2011 periods. Manufacturing expenses related to our TheraSeed® palladium-103 based device tend to be fixed in nature and, accordingly, these declines in revenue had a significant effect on operating income in the 2012 periods. Operating income in our brachytherapy seed business is expected to continue to be highly dependent on TheraSeed® sales levels due to the high fixed cost component of our manufacturing operations. Revenue from the acquired Core customers partially offset the decline in Theraseed® sales and contributed to operating income in 2012, though margins on iodine-125 based devices are lower than our TheraSeed® devices. Initially, we supplied the acquired customer base with iodine-125 based devices under a temporary supply agreement with Core as we transitioned the new customers. Effective July 1, 2012, we began to supply these acquired customers with our internally produced AgX100TM device, which lowered our cost of sales for these customers. The improved profitability from our internally produced AgX100 TM partially offset the decline in operating income resulting from our lower Theraseed® sales.
The first nine months of 2011 included $215,000 of bad debt expense related to amounts due under our prior distribution agreement with Core that were considered uncollectible. No such bad debt expense was incurred in the 2012 periods.
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Other income/expense
A summary of our interest expense is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest paid or accrued, including loan fees | $ | 166 | $ | 213 | $ | 559 | $ | 658 | ||||||||
Fair value adjustment | — | (38 | ) | (57 | ) | (98 | ) | |||||||||
Interest capitalized | (3 | ) | ( 9 | ) | (20 | ) | (31 | ) | ||||||||
Total interest expense | $ | 163 | $ | 166 | $ | 482 | $ | 529 |
Interest expense paid or accrued, including loan fees, is related to our effective interest rates and the level of our outstanding borrowings under our credit facility. Fair value adjustments are related to our interest rate swaps we previously held. Such fair value adjustments are unrealized gains or losses and reflect the period-to-period changes in the estimated fair value of our swaps. Interest capitalized relates to the development of our ERP system, which was completed in August 2012. Our weighted average effective interest rate was 2.5% at September 30, 2012.
We managed our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement since our interest rates are floating rates based on LIBOR. We no longer hold any derivative financial instruments since our interest rate swaps matured in June 2012. Changes in the fair value of our interest rate swaps were recognized as interest expense.
Income tax expense
Our effective income tax rate, which include federal and state income taxes, for both the quarter and nine months ended September 30, 2012, was approximately 33% compared to 40% and 38% for the quarter and nine months ended September 30, 2011, respectively. Our 2012 tax rates were lower than taxes computed at the statutory rates primarily due to the domestic production deduction for income tax purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements requires us 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 our 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. Our significant accounting policies are more fully described in the notes to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2011. Certain accounting policies, as more fully described under “Critical Accounting Policies and Estimates” included in the Management’s Discussion and Analysis of our 2011 Form 10-K, are those which we believe are most critical in fully understanding and evaluating our reported financial results, and are areas in which our judgment in selecting an available alternative might produce a materially different result. There have been no significant changes to our critical accounting policies since December 31, 2011, other than described as follows:
Estimates related to the acquisition of Core Oncology Customer Base. On February 17, 2012, we acquired Core Oncology’s prostate brachytherapy customer base. This transaction substantially increased our share of the iodine-125 segment of the prostate brachytherapy market. In addition to the customer base, we also acquired certain packaging technologies, equipment related to the packaging technologies, and certain existing component inventory. We did not acquire Core’s facilities, manufacturing equipment or processes, or Core’s employees.
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The total purchase price for the acquired assets is equal to one times the actual revenue generated from the acquired customers over the twelve-month period from September 2012 to August 2013 (the “Earn-Out Period”), in excess of a $2.5 million Threshold Amount. Through September 30, 2012 we have paid $5.2 million in cash for this transaction, primarily consisting of prepayment of a portion of the earn out at closing in February and subsequent earn-out payments. We have four quarterly earn-out payments remaining through September 2013. Each quarterly earn-out payment is based upon that quarter’s revenue from the acquired customers, reduced by a portion of the Threshold Amount and by a portion of the prepayment made at closing. The final earn-out payment is calculated as one times the revenue actually recognized from the acquired customer base over the twelve-month period from September 2012 to August 2013 in excess of the total Threshold Amount, reduced by the prepayment and the cumulative amount of all previous earn-out payments made. Based on our current estimates, we expect to make additional payments of $250,000 through September 2013 for this earn-out based acquisition. However, remaining earn-out payments could be materially higher depending upon the actual amount of revenue generated from the acquired customers during the Earn-Out Period.
We accounted for this transaction as an asset acquisition and, accordingly, have recorded the assets acquired at estimated total cost, including transaction costs. Current assets were recorded at fair value. The remaining total cost was allocated to non-current assets based on their relative fair values.
The assets acquired are recorded at the total estimated cost of $5.5 million, of which $5.0 million was allocated to long-term intangible assets with a weighted average life of 6.7 years. These estimates were based upon our forecast of the expected total purchase price. During the third quarter of 2012 we reduced our estimated total acquisition cost to $5.5 million from $9.3 million recorded in previous quarters. This reduction was based on a number of factors, including actual results from acquired customers, industry trends and results experienced over the previous six months, and the commencement of our annual budgeting and forecasting processes. Our estimates of the expected total purchase price of these assets may continue to change based on, among other things, changes in forecasted revenues to be recognized from the acquired customers. Any changes in these estimates will cause changes in the carrying values of the non-current acquired assets and the resulting expenses charged to our earnings from these assets (primarily amortization of intangible assets). Any changes in estimates may also affect the recorded amount of our estimated earn-out payment liabilities. Such changes may be material to our results of operations, cash flows, and financial position.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of our liquidity are: cash flows generated from operating activities, capital expenditures, operational investments to support growth (such as research and development programs), and acquisitions of businesses and technologies.
We had cash, cash equivalents, and marketable securities of $31.8 million at September 30, 2012 compared to $41.2 million at December 31, 2011.
Cash provided by operations was $9.3 million and $7.0 million during the first nine months of 2012 and 2011, respectively. Cash provided by operations consists of net earnings plus non-cash expenses such as depreciation, amortization, deferred income taxes and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables. The increase in cash from operations is primarily due to a decline in accounts receivable and less cash absorbed by inventory in the 2012 period.
Cash used by investing activities was $6.7 million during the first nine months of 2012. We used $5.2 million for the acquisition of the Core customer base in the first nine months of 2012, including transaction costs. We expect to use approximately $250,000 in cash for remaining earn-out payments and transaction costs estimated to be paid through September 30, 2013 for the acquisition of the Core customer base. See “Acquisition of Core Oncology’s Prostate Brachytherapy Customer Base” above. Capital expenditures, net of the acquisition of the Core customer base, totaled $1.4 million and $1.7 million during the first nine months of 2012 and 2011, respectively. Capital expenditures in 2012 of $393,000 related to our new ERP system. In August 2012, we completed implementation of our new ERP system at our remaining location.
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We expect our capital expenditures for the full year of 2012 excluding the Core transaction, to be approximately $2.0 million to $2.5 million. For 2013 we expect capital expenditures to be $2.5 million to $3.0 million. A portion of the anticipated 2012 and 2013 capital expenditures are expected to be attributable to our outsourcing efforts with independent manufacturers located in Costa Rica. We believe outsourcing of certain legacy products to manufacturers located outside of the United States could reduce our operating expenses in the future. To date, our activities related to outsourcing with manufacturers located outside the United States have not been material. Capital expenditures in 2012 and 2013 are also attributable to support growth in the surgical products segment and maintain the brachytherapy segment. However, the timing and amounts of capital expenditures are subject to fluctuation depending upon opportunities we may identify.
Cash used by financing activities was $12.0 million and $2.5 million during the first nine months of 2012 and 2011, respectively. In July 2012, we repurchased 4,761,904 shares of our common stock at $2.10 per share in a modified Dutch auction tender offer. Total cash utilized for this share repurchase, including transaction costs, was $10.4 million. We also used $1.7 million and $2.5 million for principal repayments on our outstanding borrowings in accordance with the terms of our credit facility for the first nine months of 2012 and 2011, respectively. No additional monthly principal payments are due under the terms of our credit agreement in 2012.
We may also continue to use cash for the pursuit of additional diversification efforts, such as product development and the purchase of technologies, products or companies. We believe that current cash and investment balances, our current credit facility (see below) and cash from future operations will be sufficient to meet our current short-term anticipated working capital and capital expenditure requirements. However, continued disruption and instability in the U.S. and global financial markets and worldwide economies, as well as increasing regulations, such as the medical device tax, may hinder our ability to take advantage of opportunities for long-term growth in our businesses. In the event additional financing becomes necessary, we may choose to raise those funds through other means of financing as appropriate.
Credit Agreement
On October 10, 2012, we executed a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with a financial institution. The Credit Agreement provides for up to $40 million of borrowings under a revolving credit facility (the “Revolver”). The Revolver matures on October 10, 2015 with interest on outstanding borrowings payable at the London Interbank Offered Rate (“LIBOR”) plus 1.75%. The Revolver also provides for a $5 million sub-limit for trade and stand-by letters of credit. The Credit Agreement is unsecured, but provides for a lien to be established on substantially all of our assets upon certain events of default. The Credit Agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type. Among other things, the Credit Agreement restricts the incurrence of certain additional debt and certain capital expenditures, and requires the maintenance of certain financial ratios, including a minimum fixed charge coverage ratio, a maximum senior liabilities to tangible net worth ratio, and the maintenance of minimum liquid assets of $10 million, as all such ratios and terms are defined in the Credit Agreement.
The Credit Agreement amended and restated our prior credit agreement, which was scheduled to mature on October 31, 2012 and provided for a $30 million revolving loan with interest payable at LIBOR plus 2.25% and letter of credit commitment. At September 30, 2012, outstanding borrowings totaled $22 million and outstanding letters of credit totaled approximately $946,000. Our effective interest rate at September 30, 2012 was 2.5%. Had our new Credit Agreement been in effect at that time, our effective interest rate would have been 2.0% at September 30, 2012.
Medicare Developments
Since 2010, Medicare has provided reimbursement for brachytherapy seeds under a hospital outpatient prospective payment system (“OPPS”) with fixed prospective payment rates for brachytherapy seeds. This fixed OPPS, which we sometimes refer to as “fixed reimbursement”, fixes the per seed rate at which Medicare reimburses hospitals for the purchase of seeds. Under the fixed OPPS, CMS establishes the fixed per seed rate on an annual basis. Fixed reimbursement policies at CMS have led to pricing pressure from hospitals and other healthcare providers and have had an adverse effect on our brachytherapy revenue. In November 2012, CMS published its final reimbursement rates for 2013, which include a 6% decline in the reimbursement rate for palladium-103 based devices and a small increase for iodine-125 based devices. From time to time, we expect to continue to support fair reimbursement for brachytherapy seeds. We believe our brachytherapy revenue may continue to be adversely affected by 1) CMS’ “fixed reimbursement” policies for brachytherapy seeds and 2) favorable CMS reimbursement rates enjoyed by alternative, less proven technologies for early stage prostate cancer treatment.
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Other Regulatory Developments
Significant reforms to the healthcare system were adopted in the form of the Patient Protection and Affordable Care Act (the “PPACA”). The PPACA includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. Specifically, the law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on the U.S. sales of most medical devices beginning in 2013. While we continue to evaluate the impact of this tax on our overall business, if this tax had been applicable to all of our product sales, this would have equated to an excise tax of approximately $2 million in 2011 and $1.4 million in the first nine months of 2012. This revenue-based tax will have a material impact on our consolidated results of operations, financial condition, and cash flows. Other provisions of the PPACA, such as requirements relating to employee health insurance, can be expected to increase our operating costs.
CMS has published proposed regulations that would implement provisions in PPACA related to disclosure of payments made by manufacturers to physicians and teaching hospitals. Because we manufacture a number of devices that are covered by the regulations, all payments that we make to physicians and teaching hospitals would be subject to this reporting requirement even if the payment relates to a device that is not considered a covered device. The tracking and reporting of these payments could have an adverse impact on our business and/or consolidated results of operations and financial condition and on our relationships with customers and potential customers.
In addition to the PPACA, various healthcare reform proposals have also emerged at the state level. Like the PPACA, these proposals could reduce medical procedure volumes and impact the demand for our products or the prices at which we sell our products. The impact of these proposals could have a material adverse effect on our business and/or consolidated results of operations and financial condition.
In August 2011, the Budget Control Act of 2011 was enacted into law to increase the federal debt ceiling. The law provided for spending cuts of nearly $1 trillion over the next 10 years, including proposed cuts to Medicare providers generally. The law further created a Congressional committee that was given a deadline of November 23, 2011 to develop recommendations for further reducing the federal deficit by another $1.2 trillion over 10 years. The committee was unable to agree on a plan by the November deadline, and as a result, automatic spending cuts, including a likely 2% cut to Medicare providers generally, will become effective beginning in 2013 unless further legislation is enacted. Medicaid is exempted from the automatic cuts. Any cuts to Medicare reimbursement which affect our products could have a material adverse effect on our business and/or our consolidated results of operations and financial condition.
Forward Looking and Cautionary Statements
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding sales, expected impact of the acquisition of Core’s prostate brachytherapy customer base, expected total purchase price of the Core asset acquistion, marketing and distribution efforts, ordering patterns of customers and our ability to fill our backlog, our expectation regarding changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin, effects of the medical device tax and healthcare reform generally third-party reimbursement, CMS policy, Medicare funding, sales mix, effectiveness and continuation of non-exclusive distribution agreements, anticipated growth in the surgical products business segment, the increasing scale of our surgical products business, future cost of sales and gross margins, R&D efforts and expenses, investment in additional personnel, infrastructure and capital assets, implementation of a new ERP system, future SG&A expenses, potential new products and opportunities, future results in general, plans and strategies for continuing diversification, valuation of marketable securities and cash equivalents we may hold, and the sufficiency of our liquidity and capital resources.
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Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. You should not consider this list to be a complete statement of all potential risks and uncertainties:
· | changes in the U.S. healthcare industry and regulatory environment; |
· | competition; |
· | ability to successfully retain acquired customers; |
· | new product development cycles; |
· | development and growth of new applications within our markets; |
· | changes in FDA regulatory approval processes; |
· | effectiveness and execution of marketing and sales programs, including those of our distributors; |
· | changes in third-party reimbursement, including CMS and private payors; |
· | potential changes in product pricing; |
· | changes in costs and availability of materials and other operating costs; |
· | continued acceptance of our products in the marketplace; |
· | changes in demand for products; |
· | our ability to meet customer demands and/or the need to incur additional costs and inefficiencies to meet such demand; |
· | a reduction in the number of procedures utilizing our devices caused by cost containment pressures, alternative therapies, or by other reasons; |
· | our ability to successfully identify, consummate and integrate strategic acquisitions or otherwise capitalize on opportunities for growth; |
· | increased costs or product delays required to comply with existing and changing regulations applicable to our businesses, operations and products; |
· | effectiveness of implementation of our new ERP system; |
· | ability to realize our estimate of fair value upon sale or liquidation of cash, cash equivalents and marketable securities that we may hold; |
· | retention of key employees; |
· | damage to one or more of our facilities; |
· | volatility in U.S. and global financial markets; |
· | substantial defaults in payments or a material reduction in purchases by, or loss of, a large customer; |
· | changes in circumstances that could impair our intangible assets; |
· | new or revised tax legislation or challenges to our tax positions; |
· | changes in accounting principles generally accepted in the United States of America; |
· | general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to us, our customers or our suppliers; |
· | governmental actions to control the federal debt; and |
· | the other factors set forth or incorporated by reference under “Risk Factors” in our 2011 Form 10-K. |
These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates on outstanding borrowings under our Revolver. A hypothetical 1% change in the interest rate would result in an increase or decrease in interest expense of $220,000 per year before income taxes, assuming the same level of borrowings. For further information, see Item 7A in our 2011 Annual Report on Form 10-K.
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Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012, the end of the period covered by this report.
During 2012, we have continued development of a corporate-wide Enterprise Resource Planning (“ERP”) system. Our new ERP system is expected to standardize and automate business processes, to improve operational and financial performance, and to enhance internal controls. We completed the implementation of our new ERP system at our one remaining location in August 2012. The implementation of our new ERP system at this location has resulted in changes to our business processes and internal controls over financial reporting in the third quarter of 2012.
Other than the changes mentioned above with respect to the implementation of our ERP system at our one remaining location, no changes in our internal control over financial reporting were identified as having occurred during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.
Item 1A. Risk Factors
In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, 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 us. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases by the Company during the three months ended September 30, 2012 of equity securities that are registered to us pursuant to Section 12 of the Exchange Act:
Issuer Purchases of Equity Securities
(a) | (b) | (c) | (d) | |||||
Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under these Plans or Programs | ||||
July 1 to 31, 2012 | 4,761,904 | $ | 2.10 | 4,761,904 | -- | |||
August 1 to 31, 2012 | -- | $ | -- | -- | -- | |||
September 1 to 30, 2012 | -- | $ | -- | -- | -- | |||
Total | 4,761,904 | $ | 2.10 | 4,761,904 | -- |
(1) | On June 12, 2012, we announced a modified “Dutch Auction” tender offer to repurchase up to $10.0 million of our common stock. The offer period expired on July 11, 2012. On July 17, 2012 we repurchased 4,761,904 shares of our common stock for a total cost of $10.0 million, or $2.10 per share, excluding transaction costs. For additional information about the "Dutch Auction" tender offer, see Note J to the Condensed Consolidated Financial Statements. |
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Item 6. Exhibits
Exhibit No. | Title | |
10.1 | Second Amended and Restated Credit Agreement dated as of October 10, 2012 among the Company, C.P. Medical Corporation, Galt Medical Corp., NeedleTech Products, Inc. and Wells Fargo, together with related Second Amended and Restated and Consolidated Line of Credit Note (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K Filed October 16, 2012). | |
10.2 | Advisor to the Chief Executive Officer Agreement dated September 5, 2012 between the Company and John Herndon. | |
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. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | XBRL Taxomony Extension Definition Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
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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 13, 2012 | By: | /s/ M. Christine Jacobs | |
M. Christine Jacobs Chief Executive Officer |
Date: November 13, 2012 | By: | /s/ Francis J. Tarallo | |
Francis J. Tarallo Chief Financial Officer |
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