UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999
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or
[_] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1501 Ardmore Boulevard
Pittsburgh, Pennsylvania 15221
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 412-731-2100
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 and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No .
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As of April 30, 1999, there were 30,584,364 shares of Common Stock of the
registrant outstanding.
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -- March 31, 1999 and June 30, 1998.
Consolidated statements of operations -- Three and nine months ended
March 31, 1999 and 1998.
Consolidated statements of cash flows -- Nine months ended March 31,
1999 and 1998.
Notes to consolidated financial statements -- March 31, 1999.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
March 31 June 30
1999 1998
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ASSETS
CURRENT ASSETS
Cash and short-term investments $ 19,612,892 $ 14,874,753
Trade accounts receivable, less allowance for
doubtful accounts of $9,268,000 and $8,246,000 112,085,824 90,985,120
Inventories 59,481,919 58,897,764
Prepaid expenses and other 16,586,282 14,977,842
Deferred income tax benefits 14,948,226 14,948,226
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TOTAL CURRENT ASSETS 222,715,143 194,683,705
PROPERTY, PLANT AND EQUIPMENT
Land 3,343,342 3,360,885
Building 12,405,493 13,564,623
Machinery and equipment 60,207,633 54,087,893
Furniture, office and computer equipment 35,616,584 27,170,001
Leasehold improvements 1,436,772 1,148,251
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113,009,824 99,331,653
Less allowances for depreciation
and amortization 55,054,194 50,408,095
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57,955,630 48,923,558
Funds held in trust for construction
of new facility 844,344 817,820
OTHER ASSETS 13,435,141 14,774,380
COST IN EXCESS OF NET ASSETS OF
BUSINESS ACQUIRED 66,313,268 68,902,667
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$ 361,263,526 $ 328,102,130
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See notes to consolidated financial statements.
March 31 June 30
1999 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 24,725,226 $ 20,966,011
Accrued expenses and other 34,986,241 33,048,316
Current portion of long-term obligations 958,976 3,119,617
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TOTAL CURRENT LIABILITIES 60,670,443 57,133,944
LONG-TERM OBLIGATIONS 99,659,081 69,316,177
MINORITY INTEREST 773,630 812,116
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
32,978,047 shares at March 31, 1999 and
32,678,632 shares at June 30, 1998 329,780 326,786
Additional capital 108,118,099 105,376,608
Cumulative effect of foreign currency translations (1,890,486) (1,416,465)
Retained earnings 119,577,986 97,648,469
Treasury stock (25,975,007) (1,095,505)
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TOTAL SHAREHOLDERS' EQUITY 200,160,372 200,839,893
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$ 361,263,526 $ 328,102,130
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended Nine months ended
March 31 March 31
1999 1998 1999 1998
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Net sales $ 90,882,059 $ 80,127,507 $ 267,490,880 $ 266,349,507
Cost of goods sold 46,577,974 41,899,865 138,193,374 136,006,865
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44,304,085 38,227,642 129,297,506 130,342,642
General and administrative expenses 10,844,007 9,653,659 31,929,197 27,826,466
Sales, marketing and commission expenses 14,624,638 16,046,023 45,152,804 49,729,365
Research and development expenses 3,989,291 4,815,363 12,923,191 15,126,363
Merger related costs -0- 37,502,626 -0- 37,502,626
Costs associated with an unsolicited offer to acquire
Healthdyne Technologies, Inc. -0- -0- -0- 650,000
Interest expense 1,377,194 890,765 3,558,478 3,038,765
Other income (299,753) (386,819) (815,359) (1,245,819)
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30,535,377 68,521,617 92,748,311 132,627,766
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INCOME (LOSS) BEFORE INCOME TAXES 13,768,708 (30,293,975) 36,549,195 (2,285,124)
Income taxes 5,507,484 (8,044,444) 14,619,678 3,157,555
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NET INCOME (LOSS) 8,261,224 (22,249,531) 21,929,517 (5,442,679)
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Basic earnings (loss) per share $ 0.26 $ (0.69) $ 0.69 $ (0.17)
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Basic shares outstanding 31,423,061 32,417,850 31,866,880 31,933,484
Diluted earnings (loss) per share $ 0.26 $ (0.69) $ 0.68 $ (0.17)
============= ============= ============= =============
Diluted shares outstanding 31,869,297 32,417,850 32,335,152 31,933,484
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Nine Months Ended March 31
1999 1998
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OPERATING ACTIVITIES
Net income $ 21,929,517 $ (5,442,679)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,007,257 11,410,116
Changes in operating assets and liabilities:
Increase in accounts receivable (21,100,704) (13,901,080)
Increase in inventories (584,155) (11,044,407)
Decrease in other operating assets and liabilities 2,819,342 14,347,093
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NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 17,071,256 (4,630,957)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (18,341,877) (14,631,821)
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NET CASH USED BY
INVESTING ACTIVITIES (18,341,877) (14,631,821)
FINANCING ACTIVITIES
Net increase in borrowings 28,182,263 12,497,978
Issuance of common stock 2,744,485 6,883,732
Acquisition of treasury stock (24,879,502) (213,057)
Decrease in minority interest (38,486) (34,811)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 6,008,760 19,133,842
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INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 4,738,139 (128,936)
Cash and short-term investments at beginning of period 14,874,753 18,630,657
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 19,612,892 $ 18,501,721
============ =============
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
MARCH 31, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
March 31, 1999 June 30, 1998
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Raw materials $21,551,121 $18,540,521
Work in process 6,421,356 7,570,524
Finished goods 31,509,442 32,786,719
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$59,481,919 $58,897,764
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NOTE C -- CONTINGENCIES
As previously disclosed, the Company is party to actions filed in a federal
District Court in January 1995 and June 1996 in which a competitor alleges that
the Company's manufacture and sale in the United States of certain products
infringes four of the competitor's patents. In its response to these actions,
the Company has denied the allegations and has separately sought judgment that
the claims under the patents are invalid or unenforceable and that the Company
does not infringe upon the patents. The January 1995 and June 1996 actions have
been consolidated, and discovery is currently underway. The Court has granted
the Company's motions for summary judgment that the Company does not infringe
two of the competitor's patents. The Company believes that none of its products
infringe any of the patents in question in the event that any one or more of
such patents should be held to be valid, and it intends to vigorously defend
this position.
NOTE D -- MERGER; POOLING OF INTERESTS ACCOUNTING
In February 1998, the Company merged a wholly owned subsidiary with Healthdyne
Technologies, Inc. ("Healthdyne") in a stock for stock merger by issuing
approximately 12,000,000 shares of the Company's common stock in exchange for
the outstanding shares of Healthdyne. The merger was accounted for as a pooling
of interests. Accordingly, the consolidated financial statements include, for
all periods presented, the combined financial results and financial position of
the Company and Healthdyne. Healthdyne has since been renamed Respironics
Georgia, Inc.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995
The statements contained in this Quarterly Report on Form 10-Q, specifically
those contained in Item 2 "Management's Discussion and Analysis of Results of
Operations and Financial Condition", along with statements in other reports
filed with the Securities and Exchange Commission, external documents and oral
presentations which are not historical are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21B of the Securities and Exchange Act of 1934, as amended. These
forward looking statements represent the Company's present expectations or
beliefs concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Results actually
achieved may differ materially from expected results included in these
statements. Those factors include the following: third party reimbursement;
increasing price competition and other competitive factors in the sale of
products; the United States Food and Drug Administration (the "FDA"), the
Health Care Financing Administration ("HCFA"), the Durable Medical Equipment
Regional Carriers ("DMERC's") and other government regulation; intellectual
property and related litigation; foreign currency fluctuations, regulations and
other factors affecting operations and sales outside the United States including
potential future effects of the change in sovereignty of Hong Kong; and customer
consolidation and concentration.
Item 2. Management's Discussion and Analysis of Result of Operations
and Financial Condition
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1999 were $90,882,000 representing
a 13% increase from the $80,127,000 recorded for the quarter ended March 31,
1998. Sales for the nine months ended March 31, 1999 were $267,491,000,
essentially equal to the $226,350,000 recorded in the year earlier period.
Sales for the current quarter and nine month period were adversely impacted by a
decrease in sales of the Company's non-invasive ventilatory support products for
home use in the United States as compared to prior year levels. This sales
decrease was due primarily to uncertainty in the market concerning government
insurance coverage guidelines for the home use of these products in the United
States and the corresponding reduction in purchases of these units by the
Company's dealer customers pending resolution of the coverage guidelines.
Government policy makers issued a draft coverage policy in July 1998 that was
more restrictive than had been expected. The Company, along with trade and
medical associations, other device manufacturers, and home care dealers, have
filed formal comments as permitted with the policy makers indicating
disagreement with the draft coverage policy. The Company now estimates that
further guidance on the policy makers' position will be issued in mid-calendar
year 1999. This guidance may be in the form of a draft proposal subject to
further comment prior to becoming final. The Company believes that until these
final guidelines are issued, sales of its noninvasive ventilatory support units
for home use in the United States will continue to be negatively impacted as
compared with periods prior to the uncertainty regarding government insurance
coverage guidelines. If the final guidelines issued are either as restrictive
as, or more restrictive than, the initial draft guidelines, the Company's sales
of its noninvasive ventilatory support units for home use in the United States
will continue to be negatively impacted. Sales in the current quarter and nine
month period of the Company's other major product line, obstructive sleep apnea
products, increased on a unit and dollar
basis as compared to prior year totals. In addition, sales of the Company's
non-invasive ventilatory support unit for hospital use and of its oxygen
concentrator unit increased on a unit and dollar basis for the both the quarter
and nine month period as compared to prior year totals, primarily because of new
product introductions.
The Company's gross profit was 49% of net sales for the quarter ended March 31,
1999 as compared to 48% of net sales for the quarter ended March 31, 1998 and
was 48% of net sales for the nine months ended March 31, 1999 as compared to 49%
for the nine months ended March 31, 1998. The gross profit percentage increase
for the quarterly comparison was due primarily to sales mix, lower product cost
for several major products, and higher total sales levels. These factors offset
decreases in average selling prices for the Company's major products (which had
been expected). The gross profit percentage decrease for the year to date
comparison was due was due primarily to minimal growth in total sales levels and
to sales mix.
General and administrative expenses were $10,844,000 (12% of net sales) for the
quarter ended March 31, 1999 as compared to $9,654,000 (12% of net sales) for
the quarter ended March 31, 1998. General and administrative expenses were
$31,929,000 (12% of net sales) for the nine months ended March 31, 1999 as
compared to $27,826,000 (10% of net sales) for the year earlier period. The
increase in the expenses for both periods was due primarily to increased
information systems costs, allowances for doubtful accounts, and
other administrative expenses. These increased expenses were partially offset
by cost reductions that the Company achieved since the February 1998 merger
with Healthdyne.
Sales, marketing and commission expenses were $14,625,000 (16% of net sales) for
the quarter ended March 31, 1999 as compared to $16,046,000 (20% of net
sales) for the quarter ended March 31, 1998. Sales, marketing and commission
expenses were $45,153,000 (17% of net sales) for the nine months ended March 31,
1999 as compared to $49,729,000 (19% of net sales) for the year earlier
period. The decrease in these expenses was due primarily to the cost reductions
that the Company achieved since the February 1998 merger with Healthdyne.
Research and development expenses were $3,989,000 (4% of net sales) for the
quarter ended March 31, 1999 as compared to $4,815,000 (6% of net sales) for
the quarter ended March 31, 1998. Research and development expenses were
$12,923,000 (5% of net sales) for the nine months ended March 31, 1999 as
compared to $15,127,000 (6% of net sales) for the year earlier period. The
decrease in these expenses was due primarily to the elimination of duplicate
product development efforts following the merger with Healthdyne in February
1998. Significant product development efforts are ongoing, and new product
launches in all of the Company's major product areas are planned, and in some
cases have already taken place, in fiscal year 1999 with additional new product
introductions scheduled for fiscal year 2000.
During the quarter ended March 31, 1998, the Company incurred $37,500,000 in
costs related to the merger with Healthdyne. The primary components of these
costs were direct expenses of the transaction such as legal and investment
banking fees, severance and other employment related costs, and asset write
downs to reflect decisions made regarding product and operational
standardization.
During the nine months ended March 31, 1998, the Company incurred $650,000 in
costs associated with an unsolicited offer by another company to acquire
Healthdyne.
The Company's effective income tax rate from operations (i.e. excluding the
impact of the merger costs described above) was 40% for all periods presented.
Because certain of the direct expenses of the Healthdyne merger such as
investment banking and legal fees are not fully deductible for income tax
purposes, the Company did not receive the full tax benefit of these costs.
Accordingly, the income tax benefit recorded for the quarter ended March 31,
1998 represented only 27% of the pre-tax loss reported, and for the nine months
ended March 31, 1998, income tax expense was recorded even though a pre-tax
loss was reported.
As a result of the factors described above, the Company's net income was
$8,261,000 (9% of net sales) or $0.26 per diluted share for the quarter ended
March 31, 1999 as compared to a net loss of $22,250,000 or $(0.69) per
diluted share for the quarter ended March 31, 1998. Net income was $21,930,000
(8% of net sales) or $0.68 per diluted share for the nine months ended March 31,
1999 as compared to a net loss of $5,443,000 or $(0.17) per diluted share for
the nine months ended March 31, 1998. Excluding the impact of the merger costs
and the costs associated with the unsolicited offer to acquire Healthdyne, the
Company's net income was $4,324,000 (5% of net sales) or $0.13 per diluted share
for the quarter ended March 31, 1998 and $21,521,000 (8% of net sales) or $0.65
per diluted share for the nine months ended March 31, 1998.
Earnings per share amounts for the three and nine month periods ended March 31,
1999 reflect the impact of shares repurchased under the Company's stock buyback
program which is described below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $162,045,000 at March 31, 1999 and
$137,550,000 at June 30, 1998. Net cash provided by operating activities was
$17,071,000 for the nine months ended March 31, 1999 as compared to a net use of
cash of $4,631,000 for the nine months ended March 31, 1998. The increase in net
cash provided by operating activities for the current nine month period was due
primarily to higher earnings and to a smaller increase in inventory in the
current nine period than in the prior year's nine month period.
Net cash used by investing activities was $18,342,000 for the nine months ended
March 31, 1999 as compared to $14,632,000 for the nine months ended December
31, 1997. The majority of the cash used by investing activities for both
periods represented capital expenditures, including the purchase of production
equipment, computer and telecommunications equipment, and office equipment. The
funding for the investment activities in the current period was provided by
positive cash flows from operating activities and accumulated cash and short
term investments and for the prior year nine month period was provided by
accumulated cash and short term investments.
Net cash provided by financing activities includes borrowings and repayments
under the Company's various long-term obligations. In August 1998, the
Company's Board of Directors authorized a stock buy-back of up to 1,000,000
shares of the Company's outstanding common stock. In October 1998, the Company's
Board of Directors authorized an additional 1,000,000 shares under the buyback
program. In March 1999, the Company's Board of Directors authorized an
additional 1,000,000 shares under the buyback program. During the nine month
period ended March 31, 1999, the Company repurchased 1,983,000 shares under the
buyback program, resulting in a use of cash of $24,880,000. Through May 12,
1999, a total of 2,628,000 shares have been repurchased. Shares that are
repurchased are added to treasury shares pending future use and reduce the
number of shares outstanding.
The Company believes that projected positive cash flow from operating
activities, the availability of additional funds under its revolving credit
facility and its accumulated cash and short-term investments will be sufficient
to meet its current and presently anticipated future needs for the next 12
months for operating activities, investing activities, and financing activities.
YEAR 2000
Year 2000 State of Readiness
The Company is currently executing an overall Year 2000 compliance strategy
utilizing the services of a Year 2000 consulting firm. A program management
office is in place consisting of full time staff resources from both the Company
and the consulting firm to address the four identified primary risk areas: core
business information systems and technology; issues relative to the Company's
products; issues relative to third party product and service providers; and
issues relative to the Company's facilities.
Year 2000 compliance of the Company's core business information systems and
technology has been largely addressed with the recent implementation of Year
2000 compliant enterprise-wide resource planning ("ERP") software at each of the
Company's major locations.
A technical review of the Company's current and discontinued product lines
addressing Year 2000 issues has been completed. One non-compliance was found
and the correction originally implemented for the product that was non-
conforming proved to be ineffective. The Company began providing a revised
correction for this product to customers in March 1999. A strategy for dealing
with customer inquiries regarding Year 2000 compliance of the Company's products
has been implemented as well.
A review of issues relating to third party product and service providers' Year
2000 compliance, (including defining inventory and vendor management processes,
planning a third party compliance assessment process and identifying potential
contingency planning and remediation strategies) has been completed. The
assessment and remediation of non-compliant products and services is now being
executed. The Company's current expectation is that issues relating to the
third party product and suppliers' Year 2000 compliance will be resolved by
September 1999. A preliminary review of issues relating to the Year 2000
compliance of the Company's facilities infrastructure has been completed and no
major problems or significant risks are anticipated based on this preliminary
review. A more detailed facilities review is being conducted and is anticipated
to be completed by September 1999.
Year 2000 Costs
Total costs for the Company's Year 2000 compliance efforts are currently
estimated to be approximately $11,000,000. The majority of these costs relate
to the ERP system installations and upgrades and have been, and will be,
capitalized and charged to expense over the estimated useful life of the
associated software and hardware. The remaining costs have been, and will be,
charged directly to expense. Additional costs could be incurred if significant
remediation activities are required with third party suppliers (see below).
Risks and Contingency Plans
Based on the Year 2000 compliance work conducted to date and described above,
the Company's most significant risk, and its reasonably likely worst case
scenario relative to Year 2000 compliance, appears to be that upon completion of
its review of its third party product and service providers' Year 2000
compliance, it determines that certain of its third party product and service
suppliers may not be Year 2000 compliant. If such product and service suppliers
in fact do not become Year 2000 compliant in a timely manner and these suppliers
cannot provide the Company with products and services in a timely and cost
effective manner, future operating results could be adversely affected. The
Company believes that the vendor management process that is currently in place
will identify these potential risks.
Efforts to formalize contingency plans across the company are underway. The
contingency planning scope of work will focus on third party products and
service providers. In addition, contingency plans will be developed as needed
in the event that risks arise other than those related to third party product
and service providers.
For products and services where the Company's needs are not unique or where a
long term relationship with a supplier does not exist, a search for alternative
suppliers who are Year 2000 compliant would be conducted and suppliers changed
as needed prior to January 1, 2000.
While the Company believes that raw materials and components for its products
are readily available from a number of suppliers and believes that its service
needs are not significantly unique from other companies, it is possible that for
some of its suppliers who are identified as being non-compliant, certain
remediation strategies with the supplier may be employed, at least initially, as
an alternative to switching suppliers because of the operational difficulties
that switching suppliers could cause. These remediation strategies include, but
are not limited to, increasing purchases from the suppliers in question prior to
January 1, 2000 to provide a safety stock if the supplier experiences difficulty
and providing the Company's Year 2000 compliance resources to assist the
supplier in becoming compliant.
PART 2 OTHER INFORMATION
Item 1: Legal Proceedings
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Not applicable
Item 2: Change in Securities
- ------- --------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3: Defaults Upon Senior Securities
- ------- -------------------------------
(a) Not applicable
(b) Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable
Item 5: Other Information
- ------- -----------------
Not applicable
Item 6: Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
Exhibit 10.37 Amended and Restated Employment Agreement between the
Company and Gerald E. McGinnis
(b) Reports on Form 8-K
On February 19, 1999, the Company filed a Form 8-K to report that James W. Liken
and J. Paul Yokubinas had been elected to the Company's Board of Directors for
terms extending through the annual meeting of shareholders of the Company in
2000 and 1999, respectively.
SIGNATURES
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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.
RESPIRONICS, INC.
Date: May 14, 1999 /s/ Daniel J. Bevevino
------------------- ---------------------------------------
Daniel J. Bevevino
Vice President, and Chief
Financial and Principal Accounting
Officer
Signing on behalf of the registrant
and as Chief Financial and
Accounting Officer