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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1995
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-14980
NELLCOR INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789249
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4280 HACIENDA DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(Zip code)
TELEPHONE: (510) 463-4000
(Registrant's telephone number, including area code)
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 such
filing requirements for the past 90 days.
Yes __X__No _____
Number of shares of Common Stock, $.001 par value, outstanding as of April
2, 1995 was 16,536,574.
Page 1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NELLCOR INCORPORATED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS April 2, 1995 July 3, 1994
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Current assets:
Cash and cash equivalents $ 100,885 $ 68,163
Marketable securities 42,395 53,470
Accounts receivable, net of allowance for doubtful
accounts of $1,090 ($1,128 at July 3, 1994) 38,634 34,308
Inventories 25,614 27,238
Deferred income taxes and other current assets 6,638 5,231
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Total current assets 214,166 188,410
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Property and equipment, at cost 77,469 73,487
Accumulated depreciation (43,492) (39,315)
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Net property and equipment 33,977 34,172
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Intangibles and other assets, net of accumulated amortization 15,415 15,566
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$263,558 $238,148
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,799 $ 14,229
Accrued liabilities:
Payroll and payroll related 13,857 11,091
Warranty 3,754 1,882
Other 6,648 4,811
Income taxes payable 3,660 1,570
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Total current liabilities 38,718 33,583
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Deferred income taxes -- 452
Stockholders' equity:
Common stock, par value 18 17
Additional paid-in-capital 106,679 90,302
Retained earnings 152,731 127,329
Accumulated translation adjustment (43) 100
Notes receivable from stockholders (5) (5)
Treasury stock, at cost (1,148,000 shares at April 2, 1995;
522,500 shares at July 3, 1994) (34,540) (13,630)
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Total stockholders' equity 224,840 204,113
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$263,558 $238,148
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SEE ACCOMPANYING NOTE
Page 2
NELLCOR INCORPORATED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
For the Three For the Nine
Months Ended Months Ended
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April 2, 1995 April 3,1994 April 2, 1995 April 3,1994
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Net revenue $ 71,035 $ 61,646 $ 190,766 $ 169,907
Cost of goods sold 27,916 23,998 76,079 68,342
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Gross profit 43,119 37,648 114,687 101,565
Operating expenses:
Research and development 6,545 5,933 19,932 17,316
Selling, general
and administrative 20,607 19,342 58,018 54,195
Restructuring charge -- -- -- 500
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27,152 25,275 77,950 72,011
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Income from operations 15,967 12,373 36,737 29,554
Litigation settlement -- 2,000 -- 2,000
Interest and other, net 1,874 835 4,236 2,275
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Income before income taxes 17,841 15,208 40,973 33,829
Provision for income taxes 6,783 5,856 15,573 12,762
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Net Income $ 11,058 $ 9,352 $ 25,400 $ 21,067
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Net income per common and
common equivalent share $ 0.65 $ 0.55 $ 1.51 $ 1.25
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Weighted average common
and common equivalent
shares used in the calculation
of income per share 16,909 17,040 16,857 16,857
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SEE ACCOMPANYING NOTE
Page 3
NELLCOR INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
For the Nine
Months Ended
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April 2, 1995 April 3, 1994
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Cash flows from operating activities:
Net income $25,400 $21,067
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 11,866 11,215
Deferred income taxes (452) 1,834
Increases (decreases) in cash flows,
as a result of changes in:
Accounts receivable (3,300) 1,906
Inventories 1,624 (1,495)
Other current assets (2,809) (3,055)
Other assets (1,854) (1,167)
Accounts payable (3,418) 1,906
Accrued liabilities 6,340 (721)
Income taxes payable 2,057 107
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Cash provided by operating activities 35,454 31,597
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Cash flows from investing activities:
Capital expenditures (7,489) (11,510)
Cash used to purchase securities held-to-maturity (12,636) (92,694)
Proceeds from maturities of securities held-to-maturity 23,711 100,663
Purchase of non-marketable equity securities (2,100) --
Other (188) --
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Cash provided (used) by investing activities 1,298 (3,541)
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Cash flows from financing activities:
Proceeds from the issuance of common stock under the
Company's stock plans and related tax benefits,
net of notes receivable from stockholders 16,378 7,741
Purchase of treasury shares (20,910) (8,270)
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Cash used by financing activities (4,532) (529)
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Effect of exchange rate changes on cash balances 502 (41)
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Increase in cash and cash equivalents 32,722 27,486
Cash and cash equivalents at the beginning of the period 68,163 45,906
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Cash and cash equivalents at the end of the period $100,885 $73,392
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Page 4
NELLCOR INCORPORATED NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL. The consolidated financial statements reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations as
of the end of and for the periods indicated.
The accompanying interim consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's 1994 Annual Report to Stockholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Security and Exchange Commission rules and regulations. The
Company believes the information included in the report on Form 10-Q, when read
in conjunction with the Consolidated Financial Statements and related Notes
thereto included in the Company's 1994 Annual Report to Stockholders, is not
misleading. Information reflecting the financial position of the Company at
July 3, 1994 is derived from audited financial statements.
The results of operations for the three month and nine month periods ended April
2, 1995 are not necessarily indicative of operating results for the full fiscal
year.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market (net realizable value). Interim and year-end inventory balances were
as follows (IN THOUSANDS):
April 2, 1995 July 3, 1994
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Raw materials $12,524 $10,040
Work-in process 4,203 5,180
Finished goods 8,887 12,018
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$25,614 $27,238
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STATEMENT OF CASH FLOWS. The Company paid income taxes of approximately $11.1
million and $12.5 million in the nine months ended April 2, 1995 and April 3,
1994, respectively.
PROPERTY AND EQUIPMENT. Depreciation expense was approximately $7.6 million in
the first nine months of fiscal 1995 and $7.8 million in the first nine months
of fiscal 1994.
Page 5
INVESTMENTS IN DEBT AND EQUITY SECURITIES. During fiscal 1995, the Company
adopted Statement of Financial Accounting Standards Number 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). Implementation
of SFAS 115 did not have a material effect on Nellcor's financial position or
results of operations. SFAS 115 requires that all investment securities be
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. As of April 2, 1995, the Company was carrying investments totaling
$44.5 million, of which $39.2 million were classified as held-to-maturity.
These held-to-maturity securities, which the Company has the positive intent and
ability to hold to maturity, are stated at amortized cost.
As of April 2, 1995, the Company was also carrying available-for-sale
investments totaling $5.3 million. Investments classified as available-for-sale
are either equity securities or securities which the Company does not intend to
hold to maturity. No sales or transfers were made during the period. The
difference between the carrying value of the Company's available-for-sale
securities and their market value was immaterial as of April 2, 1995.
Security type Carrying Value
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Current assets:
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Marketable Securities
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HELD-TO-MATURITY:
Debt securities issued by the U.S.
Treasury and other U.S. government
corporations and agencies $ 12,979
Debt securities issued by states of the
United States and political subdivisions
of the states 26,234
AVAILABLE-FOR-SALE:
Mortgage backed securities 3,182
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Marketable securities $ 42,395
Non-current assets:
AVAILABLE-FOR-SALE:
Equity securities $ 2,100
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Investments in debt and equity securities: $ 44,495
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SUBSEQUENT EVENT. In May 1995, the Company acquired Pierre Medical, a
privately-held French manufacturer of respiratory products used in the home, for
approximately $21.1 million in cash. In the event that certain performance
milestones are achieved subsequent to the acquisition, additional compensation
would be payable to the former principal stockholders of Pierre who will
continue to manage the company. Pierre Medical currently markets noninvasive
ventilators, sleep apnea therapy systems, oxygen concentrators and related
respiratory products in Western Europe, primarily in France. The acquisition
will be accounted for as a purchase and, accordingly, Pierre Medical's results
will be included in Nellcor's financial statements subsequent to the
acquisition date.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED APRIL 2,
1995, COMPARED WITH THE YEAR-TO-DATE PERIOD AND THIRD QUARTER ENDED APRIL 3,
1994.
The Company's net income for the third quarter of fiscal 1995 was $11.1 million,
$0.65 per share, compared to $9.4 million, or $0.55 per share, for the same
period last year. Net income for the first nine months of fiscal 1995 was $25.4
million, $1.51 per share, compared to $21.1 million, or $1.25 per share, for the
same period a year ago. Third quarter and year-to-date fiscal 1994 net income
includes the effect of a $2.0 million pre-tax litigation settlement paid to
Nellcor in the third quarter of fiscal 1994. Excluding the after-tax effect of
this settlement of $1.2 million or $0.07 per share in fiscal 1994, net income
for the third quarter and first nine months of fiscal 1995 increased by 37 and
28 percent, respectively, over the same periods a year ago.
The Company's net revenue for the third quarter of fiscal 1995 increased to
$71.0 million from $61.6 million in the third quarter of fiscal 1994 and
increased to $190.8 million for the first nine months of fiscal 1995 from $169.9
million in the same period last year. The increase in net revenue principally
resulted from higher sales of oximetry products across the Company's domestic
and international markets as well as increased sales of EDENTEC -Registered
Trademark- apnea monitoring and recording products. The Company's oximetry
products include oximetry instruments, sensors, and OEM modules.
The Company's principal oximetry instruments include the N-20 portable pulse
oximeter, the N-180, N-185, N-200, and N-250 standalone pulse oximeters, and
the N-3000 pulse oximeter, a module of the NELLCOR SYMPHONY -TM- multiparameter
monitoring system which was first introduced to international markets in the
third quarter of fiscal 1994. For the third quarter and first nine months of
fiscal 1995, net revenue from oximetry instruments increased primarily due to
international sales of the N-3000 and higher unit sales of the N-20 portable
pulse oximeter, partially offset by lower average selling prices.
Oximetry sensors include adhesive, reusable, and recycled sensor product lines.
Revenue from oximetry sensors increased for the third quarter and first nine
months of fiscal 1995 primarily due to continued growth in the installed base of
the Company's monitors and the products of the Company's licensees and OEM
customers. Higher unit sales across all lines were partially offset by slightly
lower average selling prices for adhesive and recycled sensors.
Revenue from OEM oximetry modules for the third quarter and first nine months of
fiscal 1995 increased from the same periods a year ago as higher unit shipments
were partially offset by lower average selling prices. During the third quarter
of fiscal 1995, Nellcor added two manufacturers of multiparameter monitoring
systems as new OEM customers, Fukuda M-E Kogyo Company of Japan and Narcosul
Aparelhos Cientificos Ltda. of Brazil.
Page 7
The Company's primary gas products include the ULTRA CAP -Registered Trademark-
combination pulse oximeter and capnograph, the STAT CAP -Registered Trademark-
airway carbon dioxide indicator, as well as the EASY CAP-Registered Trademark-
and PEDI-CAP -TM- end-tidal carbon dioxide detectors, and related accessories.
Revenue from gas products in the third quarter and first nine months of fiscal
1995 decreased compared to the same periods a year ago due primarily to lower
sales of the discontinued N-1000 multi-function monitor, N-1500 anesthetic agent
monitor, and the N-2500 anesthesia safety monitor. Sales of these discontinued
monitors represented less than 1 percent of net revenue for the first nine
months in both fiscal 1994 and fiscal 1995.
The principal apnea monitoring and recording products sold by EdenTec include
the ASSURANCE- Registered Trademark- 2000 heart and respiration monitor, the
ASSURANCE 3000 heart and respiration monitor, and the EDENTRACE- REGISTERED
TRADEMARK- II and EDENTRACE II PLUS -TM- multi-channel recording systems, and
related accessories. Revenue from these apnea products for the third quarter
and first nine months of fiscal 1995 increased from the same periods a year ago
due primarily to higher sales of the ASSURANCE 2000 and EDENTRACE II PLUS
products into alternate care markets, including the home.
International revenue increased 49 percent in the third quarter of fiscal 1995
to $15.9 million from $10.7 million for the third quarter of fiscal 1994. For
the first nine months of fiscal 1995, international revenue increased 40 percent
to $40.2 million from $28.8 million for the same period a year ago.
International revenue increased across all markets during the quarter primarily
due to higher sales of oximetry sensors, the N-3000 pulse oximeter, and OEM
modules. Favorable foreign currency exchange rates accounted for 11 and 8
percentage points of the international revenue growth during the third quarter
and first nine months of fiscal 1995, respectively.
During the third quarter of fiscal 1995, the Company received marketing
clearance from the U.S. Food and Drug Administration (FDA) for the N-3100
noninvasive blood pressure monitor. The N-3100, one of the modules of the
NELLCOR SYMPHONY -TM- multiparameter monitoring system, was introduced to
international markets in the first quarter of fiscal 1995.
Sales of the HEALTHQUIZ -TM- system, a patient-driven automated medical history
system that electronically captures patient information, have been limited since
the product was first introduced during the fourth quarter of fiscal 1994. The
Company continues to devote substantial marketing, sales, and engineering
resources to the product. A dedicated HEALTHQUIZ sales force is being
established to further focus the Company's efforts on sales of the product.
In the second half of fiscal 1991, the Company began commercial shipments of the
N-CAT -Registered Trademark- non-invasive continuous blood pressure monitor
developed and manufactured by Colin Electronics of Japan (Colin). Shipments of
the N-CAT monitor to date have been limited, and since the fourth quarter of
fiscal 1992, shipments have been suspended pending evaluation of new versions of
the product software developed by Colin intended to improve the product's
operating performance. Costs associated with this evaluation were not material
during the third quarter of fiscal 1995 and were expensed as incurred. After
evaluating the most recent enhancements to the product's software, the Company
is now satisfied with the performance of the N-CAT monitor. Because of
modifications made to the product's software, Colin plans to resubmit a 510(K)
to the FDA to gain clearance to market the product in the U.S. While there is
no assurance that U.S. marketing clearance will be granted by the FDA, the
Company may consider marketing the N-CAT monitor internationally in order to
begin recovering its investment in N-CAT monitor assets and marketing rights.
Page 8
Gross profit as a percentage of net revenue for the third quarter of fiscal 1995
at 61 percent was comparable to the third quarter of fiscal 1994. For the first
nine months of fiscal 1995, gross margin at 60 percent was comparable to the
same period last year. Higher margins associated with the favorable effect
which foreign currency exchange rates had upon revenue, and margin improvement
at EdenTec were partially offset by higher warranty and product upgrade costs.
Operating expenses for the third quarter of fiscal 1995 decreased to 38 percent
of net revenue from 41 percent for the third quarter last year. Operating
expenses for the first nine months of fiscal 1995 decreased to 41 percent from
42 percent of net revenue for the same period a year ago.
Research and development expenses decreased to 9 percent from 10 percent of net
revenue for the third quarter of fiscal 1995. Research and development expenses
increased in absolute dollars primarily due to higher monitoring systems
development costs. For the third quarter of fiscal 1995, selling, general, and
administrative expenses decreased to 29 percent of net revenue from 31 percent
for the same period in fiscal 1994. Selling, general, and administrative
expenses increased in absolute dollars in the third quarter of fiscal 1995 due
primarily to the unfavorable effect foreign currency exchange rates had upon
international operating expenses, increased funding of the Company's profit
sharing and bonus programs, and higher oximetry marketing expenses, partially
offset by lower legal expenses.
Liquidity and Capital Resources
At April 2, 1995, the Company had cash, cash equivalents and marketable
securities of approximately $143.3 million compared to $121.6 million at the end
of fiscal 1994. The Company has met its liquidity and capital requirements from
internally generated cash.
Operating activities provided positive cash flows of approximately $35.5 million
during the first nine months of fiscal 1995. Depreciation and amortization were
significant non-cash operating activities during the period. Sales of
marketable securities, partially offset by purchases of marketable securities
and capital expenditures, principally for manufacturing equipment, were
significant investing activities during the first nine months of fiscal 1995.
Shares of Nellcor common stock issued under the Company's stock option plans
were significant sources of cash from financing activities for the first nine
months of fiscal 1995. Repurchases of shares of Nellcor common stock during the
first nine months of fiscal 1995 under the Company's Limited Stock Repurchase
Program were significant uses of cash from financing activities. Shares
repurchased under the Limited Stock Repurchase Program are repurchased to offset
the dilutive effects of the Company's stock option plans and the 1986 Employee
Stock Participation Plan, as amended. No shares were repurchased under the
Company's General Stock Repurchase Program, which authorizes the repurchase and
retirement of up to a total of one million shares of common stock from time to
time in the open market. The Company does not plan to resume share repurchases
under the General Stock Repurchase Program in the near term.
Page 9
In May 1995, the Company acquired Pierre Medical, a privately-held French
manufacturer of respiratory products used in the home, for approximately $21.1
million in cash. In the event that certain performance milestones are achieved
subsequent to the acquisition, additional compensation would be payable to the
former principal stockholders of Pierre who will continue to manage the company.
Pierre Medical currently markets noninvasive ventilators, sleep apnea therapy
systems, oxygen concentrators and related respiratory products in Western
Europe, primarily in France. The acquisition will be accounted for as a
purchase and, accordingly, Pierre Medical's results will be included in
Nellcor's financial statements subsequent to the acquisition date.
The Company has a $50 million credit facility with a syndicate of banks. The
credit facility is available to the Company for general corporate purposes and
provides the Company with additional financial resources to take advantage of
strategic business opportunities. As of April 2, 1995, the Company had not
drawn against this credit facility and had no long term debt obligations. The
Company anticipates that current capital resources combined with cash generated
from operating activities will be sufficient to meet its liquidity and capital
expenditure requirements at least through the end of fiscal 1995.
Page 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
With regard to the patent litigation with BOC Health Care, Inc., claims by BOC
that certain Nellcor patents are invalid or, if found by the court to be valid,
then not infringed by BOC, remain to be resolved in litigation between Nellcor
and BOC, Inc. currently pending in Delaware federal district court. The Company
completed trial and post trial briefing work in this litigation, and awaits the
opinion of the federal district court. The Company is vigorously defending its
patents in this litigation, and believes that the outcome of this legal
proceeding will not have an adverse effect on the Company's financial position
or results of operations.
Page 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
11.1 Statement of computation of net income per share.
27.1 Financial Data Schedule
b) Reports on Form 8-K.
During the third quarter of fiscal 1995, the Company filed a Form 8-K dated
March 13, 1995. The Form 8-K announced Nellcor's agreement to acquire
Pierre Medical, and reported the Company's equity investment in Heartstream
Inc., a privately-held medical device manufacturer.
Page 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
NELLCOR INCORPORATED
DATED May 17, 1995 By /s/ Michael P. Downey
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Michael P. Downey
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 13
EXHIBIT INDEX
Exhibit No. Description Location in Form 10-Q
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11.1 Statement of computation of net income per share Page 15
27.1 Financial Data Schedule --
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