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 second quarter period ended February 28, 2003
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 0-20212
ARROW INTERNATIONAL, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1969991
- -------------------------------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Bernville Road, Reading, Pennsylvania 19605
- ------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 378-0131
--------------
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
- -
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at April 10, 2003
--------- ------------------------------------
Common Stock, No Par Value 21,614,803
ARROW INTERNATIONAL, INC.
Form 10-Q Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at February 28, 2003
and August 31, 2002 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7-8
Consolidated Statements of Comprehensive Income 9
Notes to Consolidated Financial Statements 10-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-27
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27-29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
Certifications 33-34
Exhibit Index 35
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
February 28, August 31,
2003 2002
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,075 $ 33,103
Accounts receivable, net 84,576 74,983
Inventories 90,194 85,946
Prepaid expenses and other 26,863 25,464
Deferred income taxes 5,650 5,377
------------------- -------------------
Total current assets 232,358 224,873
------------------- -------------------
Property, plant and equipment 270,469 261,480
Less accumulated depreciation (140,708) (131,157)
------------------- -------------------
129,761 130,323
------------------- -------------------
Goodwill 38,757 38,591
Intangible and other assets, net 39,795 27,738
Deferred income taxes 3,912 4,155
------------------- -------------------
Total other assets 82,464 70,484
------------------- -------------------
Total assets $ 444,583 $ 425,680
======================= =======================
See accompanying notes to consolidated financial statements
Continued
-3-
ARROW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
February 28, August 31,
2003 2002
-------------------------- -----------------------
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 300 $ 300
Notes payable 17,816 16,132
Accounts payable 7,054 9,736
Cash overdrafts 3,966 2,697
Accrued liabilities 15,031 12,273
Accrued compensation 7,071 6,500
Accrued income taxes 5,879 2,787
-------------------------- -----------------------
Total current liabilities 57,117 50,425
Long-term debt 2,000 300
Accrued postretirement benefit obligations 14,909 14,599
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
5,000,000 shares authorized;
none issued - -
Common stock, no par value;
50,000,000 shares authorized;
26,478,813 shares issued 45,661 45,661
Additional paid-in capital 4,524 4,054
Retained earnings 385,863 365,778
Less treasury stock at cost:
4,865,128 and 4,507,994 shares,
respectively (63,738) (50,328)
Accumulated other comprehensive
(expense) (1,753) (4,809)
-------------------------- -----------------------
Total shareholders' equity 370,557 360,356
-------------------------- -----------------------
Total liabilities and shareholders' equity $ 444,583 $ 425,680
========================== =======================
See accompanying notes to consolidated financial statements
-4-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the three months ended
--------------------------------------------------
February 28, February 28,
2003 2002
------------------------ ----------------------
Net sales $ 92,757 $ 85,826
Cost of goods sold 47,019 41,458
------------------------ ----------------------
Gross profit 45,738 44,368
------------------------ ----------------------
Operating expenses:
Research, development and engineering 6,409 6,389
Selling, general and administrative 21,735 18,784
------------------------ ----------------------
Operating income 17,594 19,195
------------------------ ----------------------
Other (income) expenses:
Interest expense, net of amount capitalized 138 192
Interest income (30) (43)
Other, net (179) 231
------------------------ ----------------------
Other (income) expenses, net (71) 380
------------------------ ----------------------
Income before income taxes 17,665 18,815
Provision for income taxes 5,741 6,115
------------------------ ----------------------
Net income $ 11,924 $ 12,700
======================== ======================
Basic earnings per common share $ 0.55 $ 0.59
======================== ======================
Diluted earnings per common share $ 0.55 $ 0.58
======================== ======================
Cash dividends per common share $ 0.080 $ 0.070
======================== ======================
Weighted average shares outstanding
used in computing basic earnings
per common share 21,691,983 21,862,123
======================== ======================
Weighted average shares outstanding
used in computing diluted earnings
per common share 21,871,226 22,067,240
======================== ======================
See accompanying notes to consolidated financial statements
-5-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
For the six months ended
--------------------------------------------------
February 28, February 28,
2003 2002
------------------------ ----------------------
Net sales $ 181,596 $ 170,028
Cost of goods sold 92,414 81,953
------------------------ ----------------------
Gross profit 89,182 88,075
------------------------ ----------------------
Operating expenses:
Research, development and engineering 12,481 13,119
Selling, general and administrative 41,921 37,853
------------------------ ----------------------
Operating income 34,780 37,103
------------------------ ----------------------
Other expenses (income):
Interest expense, net of amount capitalized 225 438
Interest income (170) (82)
Other, net 151 279
------------------------ ----------------------
Other expenses, net 206 635
------------------------ ----------------------
Income before income taxes 34,574 36,468
Provision for income taxes 11,236 11,852
------------------------ ----------------------
Net income $ 23,338 $ 24,616
======================== ======================
Basic earnings per common share $ 1.07 $ 1.13
======================== ======================
Diluted earnings per common share $ 1.07 $ 1.12
======================== ======================
Cash dividends per common share $ 0.150 $ 0.135
======================== ======================
Weighted average shares outstanding
used in computing basic earnings
per common share 21,777,060 21,876,819
======================== ======================
Weighted average shares outstanding
used in computing diluted earnings
per common share 21,905,877 22,047,128
======================== ======================
See accompanying notes to consolidated financial statements
-6-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
February 28, February 28,
2003 2002
---------------------- ------------------
Cash flows from operating activities:
Net income $ 23,338 $ 24,616
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 9,739 9,080
Amortization 1,978 1,718
Gain on sale of securities - (1,703)
Deferred income taxes (22) (2,128)
Realized holding gain on securities - 1,052
Unrealized holding gain on foreign currency options 204 671
Loss on sale of implantable drug
infusion pump business - 1,115
Increase (decrease) in provision for post retirement
benefit obligation 310 (327)
Other 363 377
Changes in operating assets and liabilities, net of effects
from acquisitions
Accounts receivable, net (2,316) (1,789)
Inventories 3,441 2,106
Prepaid expenses and other (1,214) (623)
Accounts payable and accrued liabilities (4,198) 1,511
Accrued compensation 375 (41)
Accrued income taxes 3,333 670
---------------------- ------------------
Total adjustments 11,993 11,689
---------------------- ------------------
Net cash provided by operating activities 35,331 36,305
Cash flows from investing activities:
Capital expenditures (7,297) (11,956)
(Increase) decrease in intangible and other assets (451) 120
Cash paid for businesses acquired (21,257) -
Proceeds from sale of securities - 2,540
---------------------- ------------------
Net cash used in investing activities (29,005) (9,296)
Cash flows from financing activities:
Increase (decrease) in notes payable 470 (15,110)
Principal payments of long-term debt (300) (300)
Increase (decrease) in book overdrafts 1,269 (1,422)
Dividends paid (3,062) (2,851)
Proceeds from stock options exercised 373 931
Purchase of treasury stock (13,676) (5,758)
---------------------- ------------------
Net cash used in financing activities (14,926) (24,510)
Effect of exchange rate changes on cash
and cash equivalents 572 (246)
Net change in cash and cash equivalents (8,028) 2,253
Cash and cash equivalents at beginning of year 33,103 2,968
---------------------- ------------------
Cash and cash equivalents at end of period $ 25,075 $ 5,221
====================== ==================
See accompanying notes to consolidated financial statements
Continued
-7-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
(Unaudited)
For the six months ended
------------------------------------------------
February 28, February 28,
2003 2002
--------------------- ----------------------
Supplemental schedule of noncash investing and financing activities:
The Company assumed liabilities in conjunction with the purchase of certain
assets as follows:
Estimated fair value of assets acquired $ 31,562 $ -
Liabilities assumed 10,305 -
--------------------- ----------------------
Cash paid for assets $ 21,257 $ -
===================== ======================
Cash paid for businesses acquired:
Working capital $ 9,488 -
Property, plant and equipment 294 -
Goodwill and intangible assets 13,725 -
Notes payable and current maturities
of long-term debt (250) -
Long-term debt (2,000) -
--------------------- ----------------------
$ 21,257 $ -
===================== ======================
Treasury Stock issued for 401(k) plan contribution $ 363 $ 377
===================== ======================
See accompanying notes to consolidated financial statements
-8-
ARROW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months Ended
February 28, February 28,
2003 2002
----------------- ------------------
Net income $ 11,924 $ 12,700
Other comprehensive income (expense):
Currency translation adjustments 2,895 (361)
Unrealized holding gain on foreign currency
option contracts 103 703
Unrealized holding loss on securities,
net of tax ($0 and $192, respectively) - (309)
Reclassification adjustment for gains
on securities included in net income, net of
tax ($0 and $653, respectively) - (1,050)
----------------- ------------------
Other comprehensive income (expense) 2,998 (1,017)
----------------- ------------------
Total comprehensive income $ 14,922 $ 11,683
================= ==================
For the Six Months Ended
February 28, February 28,
2003 2002
----------------- ------------------
Net income $ 23,338 24,616
Other comprehensive income (expense):
Currency translation adjustments 2,852 (766)
Unrealized holding gain on foreign currency
option contracts 204 671
Unrealized holding loss on securities,
net of tax ($0 and $399, respectively) - (642)
Reclassification adjustment for gains
on securities included in net income, net of
tax ($0 and $653, respectively) - (1,050)
----------------- ------------------
Other comprehensive income (expense) 3,056 (1,787)
----------------- ------------------
Total comprehensive income $ 26,394 22,829
================= ==================
See accompanying notes to consolidated financial statements
-9-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation:
These unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of the consolidated financial position,
results of operations, and cash flows of Arrow International, Inc. (the
"Company") for the interim periods presented. Results for the interim periods
are not necessarily indicative of results for the entire year. Such statements
are presented in accordance with the requirements of Form 10-Q and do not
include all disclosures normally required by generally accepted accounting
principles or those normally made on Form 10-K. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report to Stockholders for the fiscal year
ended August 31, 2002.
Note 2 - Inventories:
Inventories are summarized as follows:
February 28, August 31,
2003 2002
---------------- ---------------
Finished goods $ 28,134 $ 27,425
Semi-finished goods 24,172 23,054
Work-in-process 10,881 8,478
Raw materials 27,007 26,989
---------------- ---------------
$ 90,194 $ 85,946
================ ===============
Note 3 - Commitments and Contingencies:
The Company is a party to certain legal actions, including product liability
matters, arising in the ordinary course of its business. From time to time, the
Company is also subject to legal actions involving patent and other intellectual
property claims.
The Company is currently a defendant in two related lawsuits alleging that
certain of its hemodialysis catheter products infringe patents owned by or
licensed to the plaintiffs. A preliminary trial date for these actions that had
initially been set for May 13, 2003 has recently been postponed to an as yet to
be determined date later in calendar 2003. Based on information presently
available to the Company, the Company believes that its products do not infringe
any valid claim of the plaintiffs' patents and that, consequently, at trial or
subsequently on appeal, it has meritorious legal defenses with respect to these
actions.
Continued
-10-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 3 - Commitments and Contingencies (continued):
The Company is also currently a defendant in a lawsuit alleging that certain of
its Cannon-Cath(TM) split-tip hemodialysis catheters, which were acquired as
part of the Company's acquisition in November 2002 of specified assets of
Diatek, Inc., infringe a patent owned by or licensed to the plaintiffs. The
plaintiffs are also seeking a preliminary injunction to prevent the Company from
selling these products. Based on information presently available to the Company,
the Company believes that its products do not infringe any valid claim of the
plaintiffs' patent and that, consequently, at the preliminary injunction hearing
or later in this litigation, it has meritorious legal defenses with respect to
this action and is vigorously contesting it.
Although the ultimate outcome of any of these actions is not expected to have a
material adverse effect on the Company's business or financial condition,
whether an adverse outcome in any of these actions would materially adversely
affect the Company's reported results of operations in any future period cannot
be predicted with certainty.
As previously reported, a product liability lawsuit against the Company tried
before a jury in Arkansas state court, resulted in a judgment against the
Company in May 2001 for compensatory and punitive damages. In February 2003, the
Company's appeal from this judgment to the Arkansas state court of appeals was
unsuccessful. On April 3, 2003, the Company's petition to the Arkansas Supreme
Court to hear the appeal of the state court of appeals' decision was denied. In
February 2003, the Company was successful in defending an action brought by its
insurer seeking a judicial declaration that it would not be obligated to
indemnify the Company for the punitive damages portion of the judgment. As a
result, subject to deductibles specified in the Company's product liability
insurance policies, all compensatory and punitive damages resulting from this
product liability lawsuit are covered by the Company's primary and excess
product liability insurance policies.
Note 4 - Accounting Policies:
The Company has disclosed in Note 1 to its consolidated financial statements
included in its Annual Report on Form 10-K for the fiscal year ended August 31,
2002 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's Form 10-K. The accounting principles utilized by the
Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.
Continued
-11-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 4 - Accounting Policies (continued):
The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.
Certain prior period information has been reclassified for comparative purposes.
Note 5 - Segment Reporting:
The Company operates as a single reportable segment. The Company operates in
four main geographic regions, therefore, information by product category and
geographic areas is presented below.
The following table provides quarterly information about the Company's sales by
product category:
Quarter ended Quarter ended
February 28, 2003 February 28, 2002
----------------- -----------------
Critical Cardiac Critical Cardiac
Care Care Care Care
--------------- ---------------- --------------- -------------
Sales to external
customers $ 78,500 $ 14,300 $ 72,200 $ 13,600
The following tables present quarterly information about geographic areas:
Quarter ended February 28, 2003
--------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe International Consolidated
------------- ----------- ----------- ------------- ------------
Sales to unaffiliated
customers $ 62,200 $ 11,600 $ 14,300 $ 4,700 $ 92,800
Quarter ended February 28, 2002
--------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe International Consolidated
------------- ----------- ----------- ------------- ------------
Sales to unaffiliated
customers $ 57,805 $ 11,200 $ 12,595 $ 4,200 $ 85,800
Continued
-12-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 5 - Segment Reporting: (Continued)
The following table provides year-to-date information about the Company's sales
by product category:
Six months ended Six months ended
February 28, 2003 February 28, 2002
----------------- -----------------
Critical Cardiac Critical Cardiac
Care Care Care Care
--------------- ---------------- --------------- -------------
Sales to external
customers $ 154,700 $ 26,900 $ 143,200 $ 26,800
The following tables present year-to-date information about geographic areas:
Six months ended February 28, 2003
--------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe International Consolidated
------------- ----------- ----------- ------------- ------------
Sales to unaffiliated
customers $ 121,700 $ 24,500 $ 26,700 $ 8,700 $ 181,600
Six months ended February 28, 2002
--------------------------------------------------------------------------------------------
United Asia and Other
States Africa Europe International Consolidated
------------- ----------- ----------- ------------- ------------
Sales to unaffiliated
customers $ 114,100 $ 22,600 $ 24,000 $ 9,300 $ 170,000
Note 6 - New Accounting Standards:
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The transition
guidance and provisions of this statement for annual disclosures are effective
for fiscal years ending after December 15, 2002. The provisions for
interim-period disclosures are effective for financial reports that contain
financial statements for interim periods beginning after December 15, 2002. The
Company is studying the provisions of this statement and will comply with its
interim-period disclosure requirements in the third quarter of fiscal 2003.
Continued
-13-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Business Acquisitions:
On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for
$12,624, which includes the relief from $5,539 of accounts receivable that had
been due from this distributor, subject to post-closing adjustments. As of
February 28, 2003, pursuant to the asset purchase agreement, the Company has
paid $12,374 in cash and owes an additional $250 in notes payable in respect of
the purchase price for this acquisition. Stepic Medical had been the Company's
distributor in the greater New York City area, eastern New York State, and parts
of Connecticut and New Jersey since 1977.
This acquisition has been accounted for using the purchase method of accounting.
The excess of the purchase price over the estimated fair value of the net assets
acquired was approximately $90. Intangible assets acquired of $3,452 are being
amortized over a period of five years. The results of operations of this
business are included in the Company's consolidated financial statements from
the date of acquisition. The purchase price for this acquisition was allocated
as follows:
Accounts receivable $10,090
Inventories 6,830
Other current assets 25
Property, plant and equipment 116
Goodwill and intangible assets 3,542
Current liabilities (7,979)
-------------
Total Purchase Price $12,624
=============
On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and sale of chronic hemodialysis catheters, for
approximately $10,883, subject to post-closing adjustments and contingent
payments. As of February 28, 2003, pursuant to the asset purchase agreement, the
Company has paid $8,883 in cash and owes an additional $2,000 in notes payable
in respect of the purchase price for this acquisition. The products acquired in
the transaction are expected to complement the Company's existing hemodialysis
product line. This acquisition has been accounted for using the purchase method
of accounting. The purchase price for this acquisition did not exceed the
estimated fair value of the net assets acquired and, therefore, no goodwill has
been recorded by the Company in connection therewith. Intangible assets acquired
of $10,183, consisting primarily of intellectual property rights, are being
amortized over a period of 20 years based on the legal life of the underlying
acquired technology. An independent valuation firm was used to determine a
preliminary fair market value of the intangible assets acquired. Pursuant to the
asset purchase agreement relating to this transaction, the Company may be
required to make contingent payments to Diatek based on the achievement of
specified annual sales levels of certain hemodialysis
Continued
-14-
ARROW INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
(Unaudited)
Note 7 - Business Acquisitions (continued):
product lines. Any such payments would begin in fiscal 2004 based on fiscal 2003
sales levels. The results of operations of this business are included in the
Company's consolidated financial statements from the date of acquisition. The
purchase price for this acquisition was allocated as follows:
Accounts receivable $ 176
Inventories 423
Property, plant and equipment 179
Intangible assets 10,183
Current liabilities (78)
-------------
Total Purchase Price $ 10,883
=============
Pro forma amounts are not presented as the acquisitions described above did not
have any material effect on the Company's results of operations or financial
condition for any of the years presented.
Note 8 - Subsequent Event:
On March 18, 2003, the Company purchased substantially all of the assets of the
company doing business as NeoCare(R) in San Antonio, Texas for approximately
$16,452, subject to post-closing adjustments. NeoCare(R) is a supplier of
specialty catheters and related procedure kits to neonatal intensive care units.
The Company believes that this acquisition will further strengthen the Company's
broad product line of critical care related products and will serve as the base
for possible further expansion of the Company's pediatric product line.
-15-
ARROW INTERNATIONAL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING
MATERIAL RISKS, UNCERTAINTIES AND CONTINGENCIES, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, SEE EXHIBIT 99.1 TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
AND THE COMPANY'S PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
Results of Operations
Three Months Ended February 28, 2003 Compared to Three Months Ended February 28,
2002
Net sales for the three months ended February 28, 2003 increased by $7.0
million, or 8.2%, to $92.8 million from $85.8 million in the same period last
year due primarily to an increase in critical care product sales, including
sales of products distributed by the Company's acquired Stepic subsidiary, and a
favorable foreign exchange impact in the second quarter of fiscal 2003 as a
result of the weakness of the U.S. dollar relative to currencies of countries in
which the Company operates direct sales subsidiaries, as discussed below. Net
sales represent gross sales invoiced to customers, less certain related charges,
including discounts, returns, rebates and other allowances. Revenue from sales
is recognized at the time products are shipped and title is passed to the
customer. The following is a summary of the Company's sales by product platform:
Sales by Product Platform
(in millions) Quarter ended
-------------
February 28, 2003 February 28, 2002
----------------- -----------------
Central Venous Catheters $44.4 $42.3
Specialty Catheters 30.8 28.0
Stepic distributed products 3.3 -
Drug Infusion Pumps - 1.9
---- ---
Subtotal Critical Care 78.5 72.2
Cardiac Care 14.3 13.6
---- ----
TOTAL $92.8 $85.8
===== =====
Sales of critical care products increased 8.7% to $78.5 million from $72.2
million in the comparable prior year period due primarily to increased sales of
central venous and specialty catheters offset by decreased sales of drug
infusion pump products as a result of the Company's divestiture of its
implantable drug infusion pump business on April 1, 2002 as discussed below. The
strength of critical care product sales in the second quarter of fiscal 2003 was
primarily due to an increasing number of hospitals that began purchasing the
Company's newly introduced procedure kits featuring its safety components. This
trend is expected to continue as hospitals seek to protect their personnel from
inadvertent blood exposure due to needle sticks and other sharp-related
injuries. Sales of specialty catheters increased in the second quarter of fiscal
2003 due to improved sales of the Company's Percutaneous Thrombolytic Device and
epidural products in addition to increased sales of renal access products. Sales
of cardiac care products increased to $14.3 million from
-16-
ARROW INTERNATIONAL, INC.
$13.6 million, an increase of 5.1% from the comparable prior year period, due
primarily to increased sales of intra-aortic balloon ("IAB") products.
International sales increased by 9.3% to $30.6 million in the second quarter of
fiscal 2003 from $28.0 million in the comparable prior year period and
represented 33.0% of net sales, compared to 32.6% in the same prior year period.
As a result of the weakness of the U.S. dollar relative to currencies of
countries in which the Company operates direct sales subsidiaries, net sales for
the quarter increased by $2.2 million.
On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this divestiture, the
Company reported no sales of implantable drug infusion pump products for the
three months ended February 28, 2003, compared to $1.9 million of such sales in
the same period of fiscal 2002.
Gross profit increased 2.9% to $45.7 million in the three months ended February
28, 2003, compared to $44.4 million in the same period of fiscal 2002. As a
percentage of net sales, gross profit decreased to 49.3% during the three months
ended February 28, 2003 from 51.7% in the comparable prior year period. The
decline in gross margin was due primarily to lower margins realized on the sale
of inventories of products purchased as part of the Company's acquisition of the
net assets of Stepic Medical, the Company's former New York City distributor, on
September 3, 2002, and the distribution of acquired products of other medical
device manufacturers through the Company's Stepic subsidiary.
Research, development and engineering expenses were $6.4 million in both of the
three month periods ended February 28, 2003 and February 28, 2002. As a
percentage of net sales, these expenses decreased in the second quarter of
fiscal 2003 to 6.9% compared to 7.4% in the same period in fiscal 2002 as a
result of increased net sales in the second quarter of fiscal 2003. During the
second quarter of fiscal 2003, research, development and engineering expenses
were affected by decreased research and development spending on the Arrow
LionHeart(TM), the Company's Left Ventricular Assist System, decreased research
and development expenditures for the Company's implantable drug infusion pump
product line as a result of the Company's divestiture of this business in April
2002, offset by increased research and development spending for the CorAide(TM)
continuous flow ventricular assist system, the Company's joint research and
development program with The Cleveland Clinic Foundation. A description of the
current status of the Company's major research and development programs is
provided below under "Six Months Ended February 28, 2003 Compared to Six Months
Ended February 28, 2002."
Selling, general and administrative expenses increased by 15.4% to $21.7 million
during the three months ended February 28, 2003 from $18.8 million in the
comparable prior year period and, as a percentage of net sales, increased to
23.4% in the second quarter of fiscal 2003 from 21.9% in the comparable period
of fiscal 2002. This increase was due primarily to several factors: (1)
increased legal costs of $1.1 million associated with the Company's defense of
patent litigation relating to its acute hemodialysis catheter products (see Item
1. Notes to Consolidated Financial Statements - Note 3); (2) increased expenses
of $0.2 million relating to the Company's defined benefit pension plans; (3)
increased expenses of $0.3 million relating to the strengthening of the
Company's international marketing; and (4) selling, general and administrative
expenses of $1.4 million incurred in connection with the Company's acquisitions
of Stepic Medical and Diatek, as further discussed below under "Liquidity and
Capital Resources." This increase was offset in part by a decrease in expenses
of $1.0 million relating to the Company's implantable drug infusion pump
business as a result of its having been sold in April 2002. The Company expects
to incur additional legal costs of approximately $1.3 million in the second half
of fiscal 2003 in connection with an upcoming trial in the patent litigation
relating to acute hemodialysis catheter products.
-17-
ARROW INTERNATIONAL, INC.
Principally due to the above factors, operating income decreased in the second
quarter of fiscal 2003 by 8.3% to $17.6 million from $19.2 million in the
comparable prior year period.
Other expenses (income), net, was ($0.1) million of income in the second quarter
of fiscal 2003 compared to $0.4 million of expense in the same prior year period
principally due to lower interest expense on the Company's revolving credit
facility.
As a result of the factors discussed above, income before income taxes decreased
in the second quarter of fiscal 2003 by 5.9% to $17.7 million from $18.8 million
in the comparable prior year period. For the second quarter of each of fiscal
2003 and 2002, the Company's effective income tax rate was 32.5%.
Net income in the second quarter of fiscal 2003 decreased by 6.3% to $11.9
million from $12.7 million in the comparable prior year period primarily as a
result of the above factors. As a percentage of net sales, net income
represented 12.9% in the three months ended February 28, 2003 compared to 14.8%
in the same period of fiscal 2002.
Basic earnings per common share were $0.55 in the three months ended February
28, 2003, down 6.8%, or $0.04 per share, from $0.59 in the comparable prior year
period. Diluted earnings per share were $0.55 in the three months ended February
28, 2003, down 5.2%, or $0.03 per share, from $0.58 in the comparable prior year
period. Weighted average common shares outstanding used in computing basic
earnings per common share decreased to 21,691,983 in the second quarter of
fiscal 2003 from 21,862,123 in the comparable prior year period. Weighted
average shares of common stock outstanding used in computing diluted earnings
per common share decreased to 21,871,226 in the second quarter of fiscal 2003
from 22,067,240 in the comparable prior year period. These decreases were
primarily a result of the Company's share repurchase program, which, as
discussed below, remains in effect.
Six Months Ended February 28, 2003 Compared to Six Months Ended February 28,
2002
Net sales for the six months ended February 28, 2003 increased by $11.6 million,
or 6.8%, to $181.6 million from $170.0 million in the same period last year.
This increase was due primarily to increased sales of the Company's critical
care products, including sales of products distributed by the Company's acquired
Stepic subsidiary.
The following is a summary of the Company's sales by product platform:
Sales by Product Platform
(in millions) Six months ended
----------------
February 28, 2003 February 28, 2002
----------------- -----------------
Central Venous Catheters $87.1 $82.4
Specialty Catheters 61.2 56.9
Stepic distributed products 6.4 -
Drug Infusion Pumps - 3.9
----- -----
Subtotal Critical Care 154.7 143.2
Cardiac Care 26.9 26.8
----- -----
TOTAL $181.6 $170.0
====== ======
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ARROW INTERNATIONAL, INC.
Sales of critical care products were $154.7 million for the six months ended
February 28, 2003, compared to $143.2 million in the same period of fiscal 2002,
due primarily to increased sales of central venous and specialty catheters
offset by decreased sales of drug infusion pump products as a result of the
Company's divestiture of its implantable drug infusion pump business on April 1,
2002, as discussed below. Sales of specialty catheters increased in the six
months ended February 28, 2003 due to improved sales of the Company's
Percutaneous Thrombolytic Device and epidural products in addition to increased
sales of renal access products. Cardiac care product sales increased to $26.9
million from $26.8 million, an increase of 0.4% from the comparable prior year
period, due primarily to increased sales of IAB products offset in part by
decreased sales to another medical device manufacturer. International sales
increased by 7.2% to $59.9 million from $55.9 million in the same prior year
period, and increased to 33.0% of net sales for the six months ended February
28, 2003 from 32.9% in the comparable period of fiscal 2002. As a result of the
weakness of the U.S. dollar relative to currencies of countries in which the
Company operates direct sales subsidiaries, net sales for the six month period
ended February 28, 2003 increased by $2.6 million.
On April 1, 2002, the Company completed the sale of substantially all of the
assets of its implantable drug infusion business pursuant to an asset purchase
agreement dated as of March 1, 2002. As a result of this divestiture, the
Company reported no sales of implantable drug infusion pump products for the six
months ended February 28, 2003, compared to $3.9 million of such sales in the
same period of fiscal 2002.
Gross profit increased 1.2% to $89.2 million in the six months ended February
28, 2003, compared to $88.1 million in the same period of fiscal 2002. As a
percentage of net sales, gross profit decreased to 49.1% during the six months
ended February 28, 2003 from 51.8% in the comparable period of fiscal 2002. The
decline in gross margin was due primarily to lower margins realized on the sale
of inventories of products purchased as part of the Company's acquisition of the
net assets of Stepic Medical, the Company's former New York City distributor, on
September 3, 2002, and the distribution of acquired products of other medical
device manufacturers through the Company's Stepic subsidiary.
Research, development and engineering expenses decreased by 4.6% to $12.5
million in the six months ended February 28, 2003 from $13.1 million in the
comparable prior year period. As a percentage of net sales, these expenses
decreased in the first half of fiscal 2003 to 6.9%, compared to 7.7% in the same
period in fiscal 2002, due primarily to lower research and development spending
on the Arrow LionHeart(TM), the Company's Left Ventricular Assist System, in
addition to less research and development expenditures for the Company's
implantable drug infusion pump product line as a result of the Company's
divestiture of this business in April 2002, offset in part by increased research
and development spending for the CorAide(TM) continuous flow ventricular assist
system, the Company's joint research and development program with The Cleveland
Clinic Foundation.
The Company has implanted the Arrow LionHeart(TM) in 34 patients worldwide
including 26 in Europe. To date, the total number of European sites approved to
implant the device is ten and the total number of worldwide approved sites is
15. The Company's European Notified Body, TUV Product Services of Munich
Germany, is currently reviewing the Company's application to sell the Arrow
LionHeart(TM) in Europe with the required CE mark. A decision on this
application is expected during the second quarter of calendar year 2003. There
have been no significant changes in patient status since the Company's Quarterly
Report on Form 10-Q for the quarter ended November 30, 2002, and the Company
believes that the Arrow LionHeart(TM) is providing comparable or better results
than other approved mechanical
-19-
ARROW INTERNATIONAL, INC.
assist devices. Therefore, the Company continues to anticipate that it will
receive approval to CE mark the Arrow LionHeart(TM) for sale in Europe in the
first half of calendar year 2003, although it cannot assure that such approval
will be obtained.
The Company's CorAide(TM) continuous flow ventricular assist system is now ready
for initial human implants with regulatory approvals in place at two European
sites. Patient screening is now in progress for initial implants of the
CorAide(TM) as a bridge-to-transplant and bridge-to-recovery device. The Company
believes that a successful CorAide(TM) device would provide a lower cost, less
invasive and broader application approach to ventricular assist than pulsatile
devices that are currently available or under development.
Selling, general and administrative expenses increased by 10.6% to $41.9 million
during the six months ended February 28, 2003 from $37.9 million in the
comparable prior year period and, as a percentage of net sales, increased to
23.1% in the first half of fiscal 2003 from 22.3% in the comparable period of
fiscal 2002. This increase was due primarily to several factors: (1) increased
legal costs of $1.6 million associated with the Company's defense of patent
litigation relating to its acute hemodialysis catheter products (see Item 1.
Notes to Consolidated Financial Statements - Note 3); (2) increased expenses of
$0.4 million relating to the Company's defined benefit pension plans; (3)
increased expenses of $0.5 million relating to the strengthing of the Company's
international marketing; and (4) selling, general and administrative expenses of
$2.4 million incurred in connection with the Company's acquisitions of Stepic
Medical and Diatek, as further discussed below under "Liquidity and Capital
Resources." This increase was offset in part by a decrease in expenses of $2.1
million relating to the Company's implantable drug infusion pump business as a
result of its having been sold in April 2002. The Company expects to incur
additional legal costs of approximately $1.3 million in the second half of
fiscal 2003 in connection with an upcoming trial in the patent litigation
relating to acute hemodialysis catheter products.
Principally due to the above factors, operating income decreased in the first
half of fiscal 2003 by 6.2% to $34.8 million from $37.1 million in the
comparable period of fiscal 2002.
Other expenses (income), net, decreased to $0.2 million of expense in the first
half of fiscal 2003 from $0.6 million of expense in the same period of the prior
fiscal year principally due to lower interest expense on the Company's revolving
credit facility.
As a result of the factors discussed above, income before income taxes decreased
in the first half of fiscal 2003 by 5.2% to $34.6 million from $36.5 million in
the comparable prior year period. For the six months ended February 28, 2003 and
February 28, 2002 the Company's effective income tax rate was 32.5%.
Net income decreased by 5.3% to $23.3 million in the six months ended February
28, 2003 from $24.6 million in the first half of fiscal 2002. As a percentage of
net sales, net income represented 12.9% during the six months ended February 28,
2003 compared to 14.5% in the same period of fiscal 2002.
Basic earnings per common share were $1.07 in the six month period ended
February 28, 2003 down 5.3%, or $0.06 per share, from $1.13 in the comparable
prior year period. Diluted earnings per common share were $1.07 in the six month
period ended February 28, 2003, down 4.5%, or $0.05 per share, from $1.12 per
share in the comparable prior year period primarily as a result of the above
factors. Weighted average shares of common stock outstanding used in computing
basic earnings per common share decreased to 21,777,060 in the first half of
fiscal 2003 from 21,876,819 in the comparable prior year period. Weighted
average shares of common stock outstanding used in computing diluted earnings
per common share decreased to 21,905,877 in the first half of fiscal 2003 from
22,047,128 in the comparable prior period. These decreases were primarily a
result of the Company's share repurchase program, which, as discussed below,
remains in effect.
-20-
ARROW INTERNATIONAL, INC.
Liquidity and Capital Resources
The Company's primary source of funds is cash generated from operations, as
shown in the Company's Consolidated Statement of Cash Flows. For the six months
ended February 28, 2003, net cash provided by operations was $35.3 million, a
decrease of $1.0 million from the comparable prior year period, due primarily to
increased payments of accounts payable offset in part by an increase in accrued
taxes. Accounts receivable, measured in days sales outstanding during the
period, increased to 84 days at February 28, 2003 from 80 days at August 31,
2002, due primarily to increased accounts receivable in connection with the
Company's purchase of the net assets of Stepic Medical, as further discussed
below, and a fewer number of collection days in February 2003 as compared to
August 2002.
Accounts payable decreased $2.7 million in the six months ended February 28,
2003, compared to a $1.4 million increase in the same period of fiscal 2002, due
primarily to the timing of the Company's payments to its vendors.
Accrued taxes increased $3.1 million in the six months ended February 28, 2003,
compared to a $0.7 million increase in the same period of fiscal 2002, due
primarily to the timing of estimated tax payments.
Net cash used in the Company's investing activities increased to $29.0 million
in the six months ended February 28, 2003 from $9.3 million in the comparable
period of fiscal 2002, due primarily to the Company's business acquisitions
completed in the first six months of fiscal 2003, as further discussed below.
Capital expenditures decreased to $7.3 million in the six month period ending
February 28, 2003 from $12.0 million in the comparable prior year period
primarily as a result of higher capital expenditures in fiscal 2002 associated
with the Czech Republic plant expansion, as further discussed below, in addition
to higher expenditures for certain computer software and hardware.
On September 3, 2002, the Company purchased the net assets of its former New
York City distributor, Stepic Medical, from Horizon Medical Products for $12.6
million, which includes the relief from $5.5 million of accounts receivable that
had been due from this distributor, subject to post-closing adjustments. As of
February 28, 2003, pursuant to the asset purchase agreement, the Company has
paid $12.4 million in cash and owes an additional $0.2 million in notes payable
in respect of the purchase price for this acquisition. Stepic Medical had been
the Company's distributor in the greater New York City area, eastern New York
State, and parts of Connecticut and New Jersey since 1977.
This acquisition has been accounted for using the purchase method of accounting.
The excess of the purchase price over the estimated fair value of the net assets
acquired was approximately $0.1 million. Intangible assets acquired of $3.5
million are being amortized over a period of five years. The results of
operations of this business are included in the Company's consolidated financial
statements from the date of acquisition.
-21-
ARROW INTERNATIONAL, INC.
The purchase price for this acquisition was allocated as follows:
(in millions)
Accounts receivable $10.1
Inventories 6.8
Other current assets -
Property, plant and equipment 0.1
Goodwill and intangible assets 3.5
Current liabilities (7.9)
----------
Total Purchase Price $12.6
==========
On November 25, 2002, the Company purchased specified assets and assumed
specified liabilities of Diatek, Inc., a company in the business of the
development, manufacture and sale of chronic hemodialysis catheters, for
approximately $10.9 million, subject to post-closing adjustments and contingent
payments. As of February 28, 2003, pursuant to the asset purchase agreement, the
Company has paid $8.9 million in cash and owes an additional $2.0 million in
notes payable in respect of the purchase price for this acquisition. The
products acquired in the transaction are expected to complement the Company's
existing hemodialysis product line. This acquisition has been accounted for
using the purchase method of accounting. The purchase price for this acquisition
did not exceed the estimated fair value of the net assets acquired and,
therefore, no goodwill has been recorded by the Company in connection therewith.
Intangible assets acquired of $10.2 million, consisting primarily of
intellectual property rights, are being amortized over a period of 20 years
based on the legal life of the underlying acquired technology. An independent
valuation firm was used to determine a preliminary fair market value of the
intangible assets acquired. Pursuant to the asset purchase agreement relating to
this transaction, the Company may be required to make contingent payments to
Diatek based on the achievement of specified annual sales levels of certain
hemodialysis product lines. Any such payments would begin in fiscal 2004 based
on fiscal 2003 sales levels. The results of operations of this business are
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price for this acquisition was allocated as follows:
(in millions)
Accounts receivable $ 0.2
Inventories 0.4
Property, plant and equipment 0.2
Intangible assets 10.2
Current liabilities (0.1)
----------
Total Purchase Price $10.9
==========
As part of the Company's 1998 purchase of assets of the cardiac assist division
of C.R. Bard, Inc., the Company also agreed to acquire specified assets and
assume specified liabilities of the Belmont Instruments Corporation for $7.3
million based on the achievement of certain milestones. The Company paid $2.3
million in fiscal 2000, $3.5 million in fiscal 2001, and $1.0 million in fiscal
2002 for achievement of milestones during those periods. During the six months
ended February 28, 2003, the Company paid $500,000 to Belmont for achievement of
the final two milestones, representing the seventh and eighth quarterly
installments of $250,000 payable by the Company (which payments commenced in
April 2001). With these final two payments, the Company has completed its
payment obligations to Belmont pursuant to the asset purchase agreement and, as
of February 28, 2003, no longer owes any amounts to
-22-
ARROW INTERNATIONAL, INC.
Belmont. The acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the net assets acquired was approximately $7.1 million. The results of
operations of this business are included in the Company's consolidated financial
statements from the date of acquisition.
Financing activities used $14.9 million of net cash in the six months ended
February 28, 2003, compared to $24.5 million in the comparable prior year
period, primarily as a result of a decrease in the Company's repayment of
borrowings under its U.S. revolving credit facility offset in part by an
increase in the Company's use of cash to purchase shares of its common stock in
the open market in connection with its share repurchase program. The Company's
Board of Directors has authorized the repurchase of up to a maximum of 2,000,000
shares under the share repurchase program. During the six months ended February
28, 2003, the Company purchased 378,800 shares of its common stock under this
program for $13.7 million. As of February 28, 2003, the Company had repurchased
a total of 1,797,600 shares under this program for approximately $57.3 million
since the program's inception in March 1999.
To provide additional liquidity and flexibility in funding its operations, the
Company from time to time also borrows amounts under credit facilities and other
external sources of financing. At February 28, 2003, the Company had a revolving
credit facility providing a total of $65.0 million in available revolving credit
for general business purposes. At February 28, 2003, the Company had $7.1
million outstanding under this credit facility, all of which is owed by its
foreign subsidiaries. Under this credit facility, the Company is required to
comply with the following financial covenants: maintain a ratio of total
liabilities to tangible net worth (total assets less total liabilities and
intangible assets) of no more than 1.5 to 1 and a cash flow coverage ratio of
1.25 to 1 or greater; a limitation on certain mergers, consolidations and sales
of assets by the Company or its subsidiaries; a limitation on its and its
subsidiaries' incurrence of liens; and a requirement that the lender approve the
incurrence of additional indebtedness unrelated to the revolving credit facility
when the aggregate principal amount of such new additional indebtedness exceeds
$50.0 million. At February 28, 2003, the Company was in compliance with all such
covenants. Failure to remain in compliance with these covenants could trigger an
acceleration of the Company's obligation to repay all outstanding borrowings
under this credit facility. In addition, certain other subsidiaries of the
Company had revolving credit facilities totaling the U.S. dollar equivalent of
$18.7 million, of which $10.7 million was outstanding as of February 28, 2003.
Interest rate terms for both U.S. and foreign bank credit facilities are based
on either bids provided by the lender or the prime rate, London Interbank
Offered Rates (LIBOR) or Certificate of Deposit Rates, plus applicable margins.
Certain of these borrowings, primarily those with U.S. banks, are due on demand.
Interest is payable monthly during the revolving credit period. Combined
borrowings under these facilities increased $1.7 million and $16.6 million
during the six months ended February 28, 2003 and February 28, 2002,
respectively.
-23-
ARROW INTERNATIONAL, INC.
A summary of all of the Company's contractual obligations and commercial
commitments as of February 28, 2003 were as follows:
PAYMENTS DUE
OR
COMMITMENT EXPIRATION
BY PERIOD
--------------------------------------------------
CONTRACTUAL OBLIGATIONS AND LESS THAN 1 - 3 4 - 5 AFTER 5
COMMERCIAL COMMITMENTS TOTAL 1 YEAR YEARS YEARS YEARS
- ---------------------- ----- ------ ----- ----- -----
($ IN MILLIONS)
Long-term debt $ 2.3 $ 0.3 $ 2.0 $ - $ -
Operating leases 8.9 3.7 3.4 0.8 1.0
Other long-term obligations 0.4 0.0 0.1 0.1 0.2
Lines of credit* 17.8 17.8 - - -
Standby letters of credit 1.4 1.4 - - -
----- ----- ------ ------ ------
Total cash contractual obligations and
commercial commitments $30.8 $23.2 $ 5.5 $ 0.9 $ 1.2
===== ===== ====== ====== ======
* Includes short-term indebtedness of the Company and its subsidiaries under
various revolving credit facilities, as discussed above in this Item 2.
During the six month periods ended February 28, 2003 and 2002, the percentage of
the Company's sales invoiced in currencies other than U.S. dollars was 22.0% and
21.0%, respectively. In addition, a part of the Company's costs of goods sold is
denominated in foreign currencies. The Company enters into foreign currency
exchange and foreign currency option contracts, which are derivative financial
instruments, with major financial institutions to reduce the effect of these
foreign currency risks, primarily on U.S. dollar cash inflows resulting from the
collection of intercompany receivables denominated in foreign currencies and to
hedge anticipated sales in foreign currencies to foreign subsidiaries. Such
transactions occur throughout the year and are probable, but not firmly
committed. Forward contracts are marked to market each accounting period, and
the resulting gains or losses on these contracts are recorded in Other Income /
Expense of the Company's consolidated statements of income. Realized gains and
losses on these contracts are offset by changes in the U.S. dollar value of the
foreign currency denominated assets, liabilities and transaction being hedged.
The premiums paid on foreign currency option contracts are recorded as assets
and amortized over the life of the option. Other than the risk associated with
the financial condition of the counterparties, the Company's maximum exposure
related to foreign currency options is limited to the premiums paid. The total
premiums authorized to be paid in any fiscal year cannot exceed $1.0 million
pursuant to the terms of the Foreign Currency Management Policy Statement
approved by the Company's Board of Directors in fiscal 2001. Gains and losses on
purchased option contracts result from changes in intrinsic or time value. Both
time value and intrinsic value gains and losses are recorded in shareholders'
equity (as a component of comprehensive income) until the period in which the
underlying sale by the foreign subsidiary to an unrelated third party is
recognized, at which point those deferred gains and losses are recognized in net
sales. By their nature, all such contracts involve risk, including the risk of
nonperformance by counterparties. Accordingly, losses relating to these
contracts could have a material adverse effect upon the Company's business,
financial
-24-
ARROW INTERNATIONAL, INC.
condition and results of operations. Based upon the Company's knowledge of the
financial condition of the counterparties to its existing forward contracts, the
Company believes that it does not have any material exposure to any individual
counterparty. The Company's policy prohibits the use of derivative instruments
for speculative purposes. As of February 28, 2003, outstanding foreign currency
exchange contracts totaling the U.S. dollar equivalent of $8.5 million mature at
various dates through May 2003. As of February 28, 2003, the Company had no
foreign currency option contracts outstanding. The Company expects to continue
to utilize foreign currency exchange and foreign currency option contracts to
manage its exposure, although there can be no assurance that the Company's
efforts in this regard will be successful.
In fiscal 2001, the Company's Board of Directors approved spending of up to
$10.0 million for the construction of additional manufacturing capacity,
including related equipment, at its existing manufacturing and research facility
in the Czech Republic. Construction of the additional space at this facility was
completed in December 2001. As of February 28, 2003, the Company has completed
the construction, including the purchase of related equipment, and has spent the
authorized amount.
Based upon its present plans, the Company believes that its working capital,
operating cash flow and available credit resources will be adequate to repay
current portions of long-term debt, to finance currently planned capital
expenditures and repurchases of the Company's stock in the open market, and to
meet the currently foreseeable liquidity needs of the Company.
During the periods discussed above, the overall effects of inflation and
seasonality on the Company's business were not significant.
Critical Accounting Policies and Estimates
The Company has disclosed in Note 1 to its consolidated financial statements and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its Annual Report on Form 10-K for the fiscal year ended
August 31, 2002 those accounting policies that it considers to be significant in
determining its results of operations and financial position. There have been no
material changes to the critical accounting policies previously identified and
described in the Company's Form 10-K. The accounting principles utilized by the
Company in preparing its consolidated financial statements conform in all
material respects to generally accepted accounting principles in the United
States of America.
The preparation of these consolidated financial statements requires the
Company's management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its financial statements.
The Company bases its estimates on historical experience, actuarial valuations
and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
the Company's management there may be other estimates or assumptions that are
reasonable, the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other reasonable estimate
or assumption would materially impact the financial statements.
-25-
ARROW INTERNATIONAL, INC.
New Accounting Standards
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", was issued in December 2002. This
statement provides companies with two additional alternative transition methods
for recognizing a company's voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method. It
also amends the existing disclosure requirements of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The transition
guidance and provisions of this statement for annual disclosures are effective
for fiscal years ending after December 15, 2002. The provisions for
interim-period disclosures are effective for financial reports that contain
financial statements for interim periods beginning after December 15, 2002. The
Company is studying the provisions of this statement and will comply with its
interim-period disclosure requirements in the third quarter of fiscal 2003.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
Certain statements contained in this report or in other written or oral
statements made from time to time by the Company may contain forward-looking
statements as defined in the Private Securities Litigation Act of 1995. Such
statements may use words such as "anticipate," "estimate," "expect," "believe,"
"may," "intend" and similar words or terms. Although the Company believes that
the expectations in such forward-looking statements are reasonable, the Company
can give no assurance that such expectations will prove to have been correct.
The forward-looking statements are based upon a number of assumptions and
estimates that, while presented with specificity and considered reasonable by
the Company, are inherently subject to significant business, economic and
competitive risks, uncertainties and contingencies which are beyond the control
of the Company, and upon assumptions with respect to future business decisions
which are subject to change. Accordingly, the forward-looking statements are
only an estimate, and actual results will vary from the forward-looking
statements, and these variations may be material. The Company is not obligated
to update any forward-looking statement, but investors are urged to consult any
further disclosures the Company makes in the Company's filings with the
Securities and Exchange Commission. Consequently, the inclusion of the
forward-looking statements should not be regarded as a representation by the
Company of results that actually will be achieved. Forward-looking statements
are necessarily speculative in nature, and it is usually the case that one or
more of the assumptions in the forward-looking statements do not materialize.
Investors are cautioned not to place undue reliance on the forward-looking
statements. The Company cautions investors that the factors set forth below,
which are described in further detail in Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2002 and in its other
filings with the Securities and Exchange Commission, could cause the Company's
results to differ materially from those stated in the forward-looking
statements.
-26-
ARROW INTERNATIONAL, INC.
These factors include: (i) stringent regulation of the Company's products by the
U.S. Food and Drug Administration and, in some jurisdictions, by state, local
and foreign governmental authorities; (ii) the highly competitive market for
medical devices and the rapid pace of product development and technological
change in this market; (iii) pressures imposed by the health care industry to
reduce the cost or usage of medical products and services; (iv) dependence on
patents and proprietary rights to protect the Company's trade secrets and
technology, and the need for litigation to enforce or defend these rights; (v)
risks associated with the Company's international operations; (vi) potential
product liability risks inherent in the design, manufacture and marketing of
medical devices; (vii) risks associated with the Company's use of derivative
financial instruments; and (viii) dependence on the continued service of key
members of the Company's management.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Financial Instruments:
During the six month periods ended February 28, 2003 and 2002, the percentage of
the Company's sales invoiced in currencies other than U.S. dollars was 22.0% and
21.0%, respectively. In addition, a small part of the Company's cost of goods
sold is denominated in foreign currencies. The Company enters into foreign
currency forward contracts, which are derivative financial instruments, with
major financial institutions to reduce the effect of these foreign currency risk
exposures, primarily on U.S. dollar cash inflows resulting from the collection
of intercompany receivables denominated in foreign currencies. Such transactions
occur throughout the year and are probable, but not firmly committed. Forward
contracts are marked to market each accounting period, and the resulting gains
or losses on these contracts are recorded in Other Income / Expense of the
Company's consolidated statements of income. Realized gains and losses on these
contracts are offset by the changes in the U.S. collar value of foreign
denominated assets, liabilities and transactions being hedged. The Company does
not use financial instruments for trading or speculative purposes. The Company
expects to continue to utilize foreign currency exchange contracts to manage its
exposure, although there can be no assurance that the Company's efforts in this
regard will be successful.
The Company's exposure to credit risk consists principally of trade receivables.
Hospitals and international dealers account for a substantial portion of trade
receivables and collateral is generally not required. The risk associated with
this concentration is limited due to the Company's on-going credit review
procedures. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
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ARROW INTERNATIONAL, INC.
At February 28, 2003 the Company had forward currency exchange contracts to sell
foreign currencies which mature at various dates through May 2003. The following
table identifies forward exchange contracts to sell foreign currencies at
February 28, 2003 and August 31, 2002, as follows:
February 28, 2003 August 31, 2002
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------------- --------------- ---------------- ---------------
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 425 $ 424 $ 1,471 $ 1,480
Canadian dollars 301 303 318 320
Euro 4,287 4,293 3,441 3,424
Mexican peso 533 534 793 792
African rand 244 245 192 187
--------------- --------------- ---------------- ---------------
$ 5,790 $ 5,799 $ 6,215 $ 6,203
=============== =============== ================ ===============
At February 28, 2003, the Company also had foreign currency forward exchange
contracts to buy foreign currencies which mature at various dates through March
2003. The following table identifies forward exchange contracts to buy foreign
currencies at February 28, 2003 and August 31, 2002:
February 28, 2003 August 31, 2002
Notional Fair Market Notional Fair Market
Amounts Value Amounts Value
--------------- --------------- ---------------- ---------------
Foreign currency: (U.S. Dollar Equivalents)
Czech koruna $ 2,720 $ 2,714 $ 3,848 $ 3,879
From time to time, the Company purchases foreign currency option contracts to
hedge anticipated sales in foreign currencies to foreign subsidiaries. The
option premiums paid are recorded as assets and amortized over the life of the
option. Other than the risk associated with the financial condition of the
counterparties, the Company's maximum exposure related to foreign currency
options is limited to the premiums paid. The total premiums authorized to be
paid in any fiscal year cannot exceed $1.0 million pursuant to the terms of the
Foreign Currency Management Policy Statement as approved by the Company's Board
of Directors in fiscal 2001. Gains and losses on purchased option contracts
result from changes in intrinsic or time value. Both time value and intrinsic
value gains and losses are recorded in shareholders' equity (as a component of
comprehensive income) until the period in which the underlying sale by the
foreign subsidiary to an unrelated third party is recognized, at which point
those deferred gains and losses are recognized in net sales. During the three
and six month periods ended February 28, 2003, the Company recognized intrinsic
value losses against net sales of $106 and $212, respectively. At February 28,
2003, the Company had unrealized holding losses of $82 related to these foreign
currency option contracts.
-28-
ARROW INTERNATIONAL, INC.
The Company had no foreign currency option contracts outstanding at February 28,
2003, as indicated in the following table:
February 28, 2003 August 31, 2002
Premium Fair Market Premium Fair Market
Paid Value Paid Value
---- ----- ---- -----
Foreign currency: (U.S. Dollar Equivalents)
Japanese yen $ 0 $ 0 $ 188 $ 8
Item 4. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing of this
quarterly report on Form 10-Q, the Company's Chief Executive Officer and its
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
in the reports that the Company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weaknesses and, therefore, there were no corrective actions taken.
-29-
ARROW INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of shareholders on January 15,
2003.
(b) At the annual meeting, the following matters were voted upon: (i)
the election of two directors (in connection with which (A) proxies
were solicited pursuant to Regulation 14D under the Securities
Exchange Act of 1934, (B) there was no solicitation in opposition to
management's nominees as listed in the proxy statement and (C) such
nominees were elected); and (ii) the ratification of the appointment
of PricewaterhouseCoopers, LLP as independent accountants of the
Company for the current fiscal year.
With respect to the election of directors, votes were cast as follows:
John H. Broadbent, Jr.
----------------------
Votes for 19,839,595
Withheld 643,281
George W. Ebright
-----------------
Votes for 20,439,763
Withheld 43,113
With respect to the other matter, votes were cast as follows:
Ratification of the Appointment
of Independent Accountants
--------------------------
Votes for 19,938,512
Votes against 543,264
Abstentions 1,100
There were no broker non-votes in respect of these matters.
-30-
ARROW INTERNATIONAL, INC.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 35 for a list of the Exhibits filed
as a part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
February 28, 2003.
-31-
ARROW INTERNATIONAL, INC.
SIGNATURE
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.
ARROW INTERNATIONAL, INC.
(Registrant)
Date: April 11, 2003 By: /s/ Frederick J. Hirt
---------------------------------
(signature)
Frederick J. Hirt
Chief Financial Officer and
Vice President-Finance
(Principal Financial Officer and
Chief Accounting Officer)
-32-
CERTIFICATIONS
I, Marlin Miller, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arrow International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003
/s/ Marlin Miller, Jr.
----------------------------------
Marlin Miller, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
-33-
CERTIFICATIONS
I, Frederick J. Hirt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arrow International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 11, 2003
/s/ Frederick J. Hirt
--------------------------------------------------
Frederick J. Hirt
Chief Financial Officer and Vice President/Finance
(Principal Financial Officer and Chief Accounting Officer)
-34-
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT METHOD OF FILING
- ------ ---------- ----------------
99.1 Certification of Chief Executive Officer Furnished herewith.
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer Furnished herewith.
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-35-