May 16, 2005
Mr. Brian Cascio, Accounting Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Mail Stop 0306
RE: ARROW INTERNATIONAL, INC.
FORM 10-K FOR THE YEAR ENDED AUGUST 31, 2004 FILED NOVEMBER 12,
2004 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004
FORM 8-K DATED MARCH 21, 2005 FILE NO. 000-20212
Dear Mr. Cascio:
Arrow International, Inc. ("Arrow" or the "Company") has received your
correspondence dated April 25, 2005 regarding the comments of the staff of the
Division of Corporate Finance of the Securities and Exchange Commission (the
"Commission") to the above-referenced filings of the Company (the "Comment
Letter"). As requested, we have keyed our responses to the numbered paragraphs
in the Comment Letter and, in connection with certain of your comments, have
also provided you with supplemental information.
FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 2004
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - PAGE 31
NOTE 5. BUSINESS ACQUISITIONS - PAGE 47
1. We note that you refer to an independent valuation on page 48. While you
are not required to make reference to independent valuations, when you
do so, you must name the expert and file their written consents as an
exhibit to any registration statement. See Item 601(b) of Regulation
S-K. Please revise in future filings. Alternatively, you could disclose
the method and significant assumptions used by management to determine
the fair values.
Response to Comment No. 1:
We confirm that in future filings we will disclose the method and significant
assumptions used by management to determine the fair values of any acquired
1
assets or, in the alternative, we will name the expert used to complete our
independent valuation in connection with any acquisition and will file their
written consent as an exhibit to any registration statement in accordance with
Item 601 (b) of Regulation S-K.
NOTE 16. SEGMENT REPORTING - PAGE 59
2. SFAS 131 requires disclosure of long-lived assets by geographic area.
This disclosure should present tangible assets only and should not
include intangible assets. See question 22 in the FASB Staff
Implementation Guide to Statement 131. Revise future filings as
necessary.
Response to Comment No. 2:
We confirm that in future filings we will only disclose tangible assets in the
long-lived assets by geographic area section of the "Segment Reporting" footnote
to our financial statements in accordance with question 22 in the FASB Staff
Implementation Guide to SFAS 131.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004
ITEM 4. CONTROLS AND PROCEDURES - PAGE 25
3. Please clarify in future filings whether the internal control
observations were material weaknesses. If internal control observations
are material weaknesses, disclose in greater detail the nature of these
material weaknesses and when these were identified. In this regard, also
revise to disclose the specific steps that the company has taken, if
any, to remediate the material weakness and disclose whether the company
believes that the material weakness still exists at the end of the
period covered by the report.
Response to Comment No. 3:
We confirm that in future filings we will further clarify our assessment as to
whether any identified internal control observations are material weaknesses. If
we report any material weaknesses in any future filing, we will disclose in
greater detail the nature of such material weaknesses, when they were
identified, the specific steps we have taken to remediate the material weakness
and our belief as to whether the weakness still exists at the end of the period
covered by the report. For your information, although several of the internal
control observations referred to in Item 4 of our Form 10-Q for the Quarterly
Period Ended November 30, 2004 were deemed to be deficiencies in the Company's
internal controls, relating to its NeoCare(R) product line, none of these
deficiencies resulted in material weaknesses in the Company's internal controls
over its financial reporting.
2
FORM 8-K DATED MARCH 21, 2005
4. We reference the discussion of non-GAAP measures throughout the Form 8-K
and the reconciliation of GAAP to non-GAAP information on page 11,
including non-GAAP measures for adjusted net sales, adjusted gross
profit, adjusted income before taxes, adjusted net income, and adjusted
diluted earnings per share. Please note that Instruction 2 to Item 2.02.
of Form 8-K requires that when furnishing information under this item
you must provide all the disclosures required by paragraph (e)(1)(i) of
Item 10 of Regulation S-K and Question 8 of the FAQ Regarding the Use of
Non-GAAP Financial Measures dated June 13, 2003 for EACH non-GAAP
measure presented. Please revise to include a discussion, in sufficient
detail, of the following for EACH non-GAAP measure:
o The substantive reasons why management believes each non-GAAP
measure provides useful information to investors;
o The specific manner in which management uses each non-GAAP
measure to conduct or evaluate its business;
o The economic substance behind management's decision to use each
measure; and
o The material limitations associated with the use of each
non-GAAP measure as compared to the use of the most directly
comparable GAAP measure and the manner in which management
compensates for these limitations when using the non-GAAP
measure.
Response to Comment No. 4:
We recognize that our discussion of non-GAAP financial measures in the press
release furnished with the Form 8-K did not contain as robust disclosure in
compliance with Regulation S-K Item 10(e)(1)(i) and Question 8 of the FAQ
Regarding the Use of Non-GAAP Financial Measures dated June 13, 2003 as it might
have. Although we did provide a general explanation as to why management
believed the presentation of these non-GAAP measures was useful to investors,
after further consideration of Regulation S-K Item 10(e)(1)(i) and Question 8 of
the FAQ, we agree that with respect to some of the non-GAAP measures that
excluded items that could be viewed as recurring for a finite future period
(e.g., those relating to the Company's manufacturing restructuring program), it
is appropriate to address the additional discussion points cited in the Comment
Letter. Also, while we did include a reconciliation to the most directly
comparable GAAP measures, this reconciliation was attached to the back of the
press release (even though the cross-reference to it was provided on the first
page of the release) and was thus arguably not given equal or greater prominence
as the non-GAAP measures.
3
We assure you that any lack of compliance by the Company with these elements of
Regulation G in this instance was inadvertent. In response to the various
unusual, non-recurring events and circumstances that took place in the Company's
second quarter that impacted its financial results (e.g., the discontinuation of
the Arrow LionHeart(R) Left Ventricular Assist System program and the
modifications to the accounting treatment relating to the Company's U.S.
shipping terms), and the Company's need to adequately evaluate the impact of
these events while not delaying the previously scheduled announcement of its
second quarter financial results, we attempted to deal with the Regulation G
discussion of these special items in a more abbreviated manner than, in
retrospect, we should have.
As mentioned to Ms. Lynn A. Dicker of the Staff during our telephone
conversation of April 28, 2005, because the discussion of the non-GAAP measures
was disclosed in a press release reporting only preliminary financial results,
which results were then updated and superseded by information reported in a
series of subsequent press releases (there were a total of three press releases,
dated March 21, April 7 and April 12, 2005, issued by Arrow with respect to its
second quarter results) and ultimately by the final results reported in our Form
10-Q for the Quarterly Period Ended February 28, 2005 (the "Second Quarter Form
10-Q"), the Company believes it would, at best, be awkward and, at worst,
confusing to investors to revise the Form 8-K (and the underlying press release)
to provide the fuller discussion of the non-GAAP measures and refile it, as
directed by the Staff in the Comment Letter. Essentially, we are of the view
that, in order for the revised report not to be misleading, we would have to
replace the preliminary numbers included in the original March 21 press release
with the final numbers now already reported in the Second Quarter Form 10-Q and
include appropriate prefatory language to the effect that the information
contained in the amended Form 8-K has been superseded by the previously filed
Second Quarter Form 10-Q and is only being filed now to provide additional
disclosure regarding the non-GAAP financial measures contained therein. We would
also want to include a statement referring investors to the Second Quarter Form
10-Q for more complete information, which could then beg the question as to why
the amended Form 8-K is being filed in the first place (since the information it
contains would already have been reported in more complete detail in a
previously filed document).
As discussed with Ms. Dicker, to prevent this potential confusion to investors,
we respectfully request the Staff to reconsider requiring the Company to revise
and refile the Form 8-K, and instead accept an undertaking from the Company that
in any future filing that contains non-GAAP financial measures, we will include
a discussion, in sufficient detail, of the type required by Regulation S-K Item
10(e)(1)(i) and Question 8 of the FAQ for each non-GAAP measure mentioned.
For illustrative purposes only, we have provided you supplementally as Exhibit
A, attached to this letter a revised version of our March 21, 2005 press release
that was incorporated by reference in the Form 8-K that has been updated to
include our final
4
second quarter results, as if such release had been issued on the date that we
filed the Second Quarter Form 10-Q, and additional discussion of the non-GAAP
financial measures along the lines requested by the Staff in the Comment Letter.
We would then use these disclosures, to the extent applicable, as a precedent
for discussion of any non-GAAP measures we may include in a future filing.
5. In addition, Item 10(e)(1)(i) of Regulation S-K requires that whenever
one or more non-GAAP financial measures are included in a filing with
the Commission the registrant must include a presentation, with equal or
greater prominence, of the most directly comparable financial measure or
measures calculated and presented in accordance with Generally Accepted
Accounting Principles (GAAP). The discussion of the preliminary second
quarter and six months fiscal year 2005 results focuses on the non-GAAP
measures and does not include a discussion of GAAP measures with equal
or greater prominence. Please revise.
Response to Comment No. 5:
Please see our response to Comment No. 4 above.
6. Additionally, we note your disclosures of US sales and growth rates
excluding NeoCare(R) and Stepic distributed products on page 6. Please
revise to provide all the disclosures discussed above for this non-GAAP
measure and include the required reconciliation to the most directly
comparable GAAP measure.
Response to Comment No. 6:
Please see our response to Comment No. 4 above. Additionally, we note that our
intent was not to use our disclosures of U.S. sales and growth rates excluding
NeoCare(R) and Stepic distributed products as non-GAAP measures. Our objective
was to identify key components of net sales that we believe are unusual and/or
finite to assist investors in understanding the reasons for the fluctuations in
our net sales and distinguishing between those reasons that truly relate to our
ongoing operations and those that are more anomalous in nature, similar to the
approach used in our discussion of the impact of foreign exchange rate movements
on our sales during the periods presented. Therefore, to address this comment,
we have revised our disclosure in the attached draft press release to report net
sales of NeoCare(R) and Stepic distributed products separately, rather than
excluding these items from the Company's total net sales, as we did previously.
In connection with our above responses to the Staff's comments, the Company
acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
5
o Staff comments or changes to disclosures in response to Staff
comments in the filings reviewed by the Staff do not foreclose
the Commission from taking any action with respect to the
filing; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We appreciate the Staff's comments. Please contact me at (610) 478-3117 if you
or any other member of the Staff has any further comments or questions regarding
the above responses.
Sincerely,
By: /s/ Frederick J. Hirt
--------------------------
Frederick J. Hirt
Chief Financial Officer and
Senior Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
6
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
EXHIBIT A
For Immediate Release Contact: Carl G. Anderson, Jr. Frederick J. Hirt
xx, 2005 610-478-3171 610-478-3117
ARROW INTERNATIONAL, INC. REPORTS SECOND QUARTER AND SIX MONTHS FISCAL YEAR 2005
RESULTS
READING, PA, xx, 2005 - Arrow International, Inc. (Nasdaq: ARRO) today reported
results for its second fiscal quarter and six months ended February 28, 2005 and
updates on a series of actions the Company is taking to enhance its operations
and processes.
Net sales for the second quarter of fiscal year 2005 increased 0.8% to $109.2
million from $108.3 million in the second quarter of fiscal year 2004. Net
income decreased to $5.4 million in the second fiscal quarter from $15.5 million
in the prior fiscal year quarter, a decrease of 65.2%. Diluted earnings per
share in the quarter were $0.12 compared to $0.35 in the second quarter of
fiscal 2004. Adjusting for certain special items, as described below, net sales
were $113.5 million compared to $108.3 million in the prior fiscal year period,
an increase of 4.8%, net income was $15.9 million compared to $15.5 million in
the prior fiscal year period, an increase of 2.6%, and diluted earnings per
share were $0.36 compared to $0.35 in fiscal year 2004, an increase of 2.9%.
Second fiscal quarter earnings benefited from a favorable R&D tax credit of $0.4
million or $0.01 per diluted earnings per share. The Company believes that
adjustment of these results for the special items discussed below may be of
assistance to investors because of the unusual, anticipated non-recurring nature
of those items. However, presentation of the adjusted items is not in accordance
with generally accepted accounting principles (GAAP) and the Company has
attached to this press release a reconciliation to GAAP of such items and has
also provided below further discussion of management's reasons for including
these non-GAAP financial measures.
For the six-month period ended February 28, 2005, net sales were $221.9 million
compared to $211.4 million in the same prior year period, an increase of 5.0%.
Net income decreased 37.8% to $18.6 million for the first six months of fiscal
2005 compared to $29.9 million in the same prior year period and diluted
earnings per share were $0.42 compared to $0.68 in the same prior year period.
Adjusting for the special items described below, net sales were $226.2 million
compared to $211.4 million in the prior fiscal year period, an increase of 7.0%,
net income was $31.1 million compared to $29.9 million in the prior fiscal year
period, an increase of 4.0%, and diluted earnings per share were $0.70 compared
to $0.68 in fiscal year 2004, an increase of 2.9%.
During the course of the quarterly closing process and in conjunction with its
review of its internal controls, the Company determined that it had misapplied
the accounting related to shipping terms to U.S. customers and international
distributors. The Company does not have written agreements with most customers,
and as a result, in most of those cases, there is no documentation that
specifies shipping terms other than the invoice, which states FOB plant. While
the Company does not pay for shipping in most cases or insure the shipments, its
practice has been to credit or replace lost or damaged shipments. During the
past few years, amounts in respect of these credits and replacements have been
less than 0.05% of U.S. sales. Nevertheless, interpretations of Staff Accounting
Bulletin No. 104, Revenue
7
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
Recognition in Financial Statements (SAB 104), issued by the Securities and
Exchange Commission staff, indicate that, because of this shipping practice, the
Company's US sales are the equivalent of FOB destination orders.
The Company has completed an analysis of the accounting treatment related to its
U.S. shipping terms and recorded an adjustment in its second quarter to reflect
in-transit time for its sales to U.S. customers and international distributors.
The Company's analysis indicated that the transit time to U.S. customers was two
business days and the transit time to international distributors was seven days
for air and truck shipments and 55 days for ocean vessel shipments.
Accordingly, the Company has made the following reductions to its second quarter
operating results to reflect the change in its accounting for U.S. shipping
terms:
o sales by $4.3 million;
o gross profit by $2.2 million; and
o diluted earnings per share by $0.03.
Arrow also stated that inventory increased by $2.1 million as a result of the
change in accounting for U.S. shipping terms. The Company did not restate its
financial statements for any prior periods. Additional information was included
in the Company's Quarterly Report on Form 10-Q for its second fiscal quarter
ended February 28, 2005.
The Company's sales reduction of $4.3 million will be recognized in its third
fiscal quarter ending May 31, 2005. While these sales amounts will be recognized
at that time, a similar amount of days' sales would be excluded from the end of
the third quarter, and these sales would then be recognized in the fourth fiscal
quarter. Accordingly, the incremental effect of this change in accounting on any
future quarter would be the difference between the adjustment at the beginning
of the quarter and the corresponding adjustment at the end of the quarter.
Arrow's U.S. sales in the second fiscal quarter decreased 3.4% to $67.9 million
from $70.3 million in the second quarter of fiscal 2004 and represented 62.2% of
total net sales. Included in Arrow's U.S. sales for the second fiscal quarter of
fiscal 2005 and 2004 were sales of non-Arrow products distributed by its Stepic
Medical subsidiary of $1.9 million and $3.0 million, respectively. Arrow's
second quarter fiscal 2005 and 2004 sales of NeoCare(R) products were $0.2
million and $1.8 million, respectively. As discussed below, sales of NeoCare(R)
products were temporarily discontinued during the second quarter of fiscal 2005.
In addition, as discussed above, the Company recorded a one-time non-recurring
shipping terms adjustment of $4.3 million in the second quarter of fiscal 2005.
Excluding the shipping terms adjustment and sales of NeoCare(R) and Stepic
distributed products, the Company's U.S. sales growth rate for the second fiscal
quarter would have been 2.9%. During the first six months of fiscal 2005, U.S.
sales decreased 0.6% to $136.6 million compared to the same prior year period
and represented 61.6% of total net sales. Included in Arrow's U.S. sales in the
first half of the fiscal 2005 and 2004 were sales of non-Arrow products
distributed by its Stepic Medical subsidiary of $3.8 million and $6.1 million,
respectively. Arrow's sales of NeoCare(R) products were $2.1 million and $3.7
million in the six months ended February 28, 2005 and February 29, 2004,
respectively. The Company's shipping terms adjustment of $4.3 million affected
its sales in the first half of fiscal 2005, but there was no such effect in the
comparable period of fiscal 2004.
8
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
U.S. sales during the quarter were impacted by several factors. First, the
Company believes that some customers have delayed purchasing the AutoCAT(R) 2
WAVE(TM) intra-aortic balloon pump until the Company's upgraded software becomes
available this summer. Second, the Company's previously announced decision to
cease manufacturing, shipping and selling of its NeoCare(R) product line until
it completes the integration of its NeoCare(R) manufacturing operations and
fully addresses the inspectional observations of the US Food and Drug
Administration resulted in a temporary loss of NeoCare(R) product sales during
the quarter. Third, increased sales in Arrow's critical care business have put
pressure on the Company's manufacturing capacity, which is currently being
expanded to meet the growing demand.
Arrow's international sales in the second fiscal quarter increased 8.7% to $41.3
million from $38.0 million in the second quarter of fiscal 2004 and represented
37.8% of total net sales. The weakness of the U.S. dollar compared to the same
period last year increased total international sales by $1.6 million, or 1.5%.
International sales in the first six months of fiscal 2005 increased 15.3% to
$85.3 million from $74.0 million in the same prior year period and represented
38.4% of total net sales. The weakness of the U.S. dollar for the six-month
period, compared to the same period of last year, increased total international
sales by $3.5 million, or 1.7%. While total international sales have been
strong, Arrow's sales in Japan have fallen short of the Company's targets due to
unfavorable product mix and government mandated reductions in average selling
price.
The table below shows Arrow's international sales for the second quarter and six
months ended February 28, 2005 with comparisons to the prior period.
Second Quarter Six Months
-------------- ----------
International Sales FY05 FY04 % Growth FY05 FY04 % Growth
(Dollars in millions)
Europe $19.8 $17.6 12.5% $39.8 $32.6 22.1%
Asia and Africa 15.4 14.9 3.4% 33.1 30.5 8.5%
International Americas 6.1 5.5 10.9% 12.4 10.9 13.8%
----- ----- ----- -----
TOTAL $41.3 $38.0 8.7% $85.3 $74.0 15.3%
Carl G. Anderson, Jr., Chairman and CEO, stated, "Our business remains strong
and the steps we are taking to strengthen our Company for the long term,
including improvements to our manufacturing and logistics operations and
processes, will help us balance our capacity and ensure we are prepared to meet
customer demand in the future. The second quarter fiscal year 2005 growth rate
of our base business, adjusted for favorable foreign currency exchange rates,
the change in our accounting for shipping terms and excluding Stepic distributed
products and NeoCare(R) sales, was +5.9%. The core growth rate in the first six
months of fiscal 2005 was +7.5%."
The table below shows sales of Arrow's critical care product platforms and
cardiac care products for the second quarter and six months ended February 28,
2005 with comparisons to the prior periods.
9
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
Second Quarter Six Months
-------------- ----------
Total Company Sales by Product Platforms FY05 FY04 % Growth FY05 FY04 % Growth
(Dollars in millions)
Central Venous Catheters $57.0 $55.8 2.2% $116.3 $109.4 6.3%
Specialty Catheters 34.3 33.2 3.3% 69.1 65.5 5.5%
Stepic Distributed Products 1.9 3.0 (36.7)% 3.8 6.1 (37.7)%
----- ----- ------ ------
Subtotal Critical Care 93.2 92.0 1.3% 189.2 181.0 4.5%
Cardiac Care 16.0 16.3 (1.8)% 32.7 30.4 7.6%
----- ----- ------ ------
TOTAL $109.2 $108.3 0.8% $221.9 $211.4 5.0%
Left Ventricular Assist System (LVAS) programs
In February 2005, two CorAide(TM) LVAS devices were implanted in patients at Bad
Oyenhausen, Germany in conjunction with the Company's clinical trial and both
patients are recovering as expected. As announced on April 7, 2005, the
Company's Board of Directors unanimously voted to discontinue the development,
sales and marketing programs related to its LionHeart LVAS. There were no sales
of the Company's LionHeart(TM) devices during either of the first two quarters
of fiscal year 2005. As a result, the Company made a provision in its second
fiscal quarter of $2.1 million, or $0.03 diluted earnings per share, for
LionHeart(TM) inventory that is in excess of its anticipated requirements. In
addition, the Company wrote off in the second fiscal quarter ended February 28,
2005 its remaining investment in the LionHeart program, which included $2.8
million in equipment and components. The write off of equipment was recorded in
accordance with the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The Company reached its conclusion that its
LionHeart equipment was impaired based on the completion of a study during the
second quarter by an outside consulting firm, which included the use of future
cash flow analyses to estimate the fair value of these assets. This conclusion
was confirmed by the Board of Directors' decision on April 6, 2005. The total
write off in the second quarter related to the LionHeart was $4.9 million, of
which $4.6 million was recorded to cost of sales and $0.3 million to research
and development expenses.
Project Operational Excellence
During the second fiscal quarter, Arrow took additional steps in implementing
its previously announced program designed to help it achieve operational process
excellence in four key areas: product quality, safety, customer service and
cost. This program includes (1) restructuring the Company's manufacturing to
increase production capacity and better align its production facilities with the
geographical markets they serve, (2) improving the effectiveness of Arrow's
production technology, and (3) developing and implementing business systems and
structure to establish process excellence.
In connection with Arrow's efforts to enhance its quality systems and good
manufacturing practice/quality system record (GMP/QSR) compliance, the Company
has engaged Quintiles Consulting, a provider of global consulting services to
the medical device, pharmaceutical and biologics industries, to assist Arrow's
project teams. The Company intends to utilize the results of the Quintiles
Consulting engagement to support its GMP/QSR compliance improvement efforts. The
estimated cost of this work was not included in previously announced targets for
fiscal year 2005 and could reduce those targets by as much as $0.05 diluted
earnings per share.
Summary of Results:
Charges excluded from the results in the following table for analytical purposes
are: the Company's voluntary early retirement program incurred in the second
quarter of fiscal year 2005, provision for LionHeart(TM) inventory in excess of
anticipated requirements incurred in the second
10
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
quarter of fiscal year 2005, expenses for second generation LionHeart(TM)
components incurred in the first and second quarters of fiscal year 2005,
expenses incurred in the second quarter of fiscal 2005 related to the write off
of the Company's remaining investment in the LionHeart(TM) program,
restructuring charges related to the Company's manufacturing consolidation
incurred in the first and second quarters of fiscal year 2005, the Company's
adjustment in the second quarter of fiscal 2005 to rectify the misapplication of
its accounting treatment for its U.S. shipping terms, and the Company's step-up
of inventory acquired in connection with its purchase of AB Medica S.p.A.
incurred in the first quarter of fiscal year 2005.
(Dollars in millions, except per share) Second Quarter Six Months
-------------- ----------
FY05 FY04 % Growth FY05 FY04 %Growth
Net sales $113.5 $108.3 4.8% $226.2 $211.4 7.0%
Income before tax, excluding charges $22.9 $22.9 - $45.5 $44.3 2.7%
Net income, excluding charges $15.9 $15.5 2.6% $31.1 $29.9 4.0%
Diluted earnings per share, excluding $0.36 $0.35 2.9% $0.70 $0.68 2.9%
charges
Charges Excluded from Diluted Earnings Per Share above in cents per share are:
Voluntary Early Retirement Plan $0.11 - - $0.11 - -
LionHeart(TM) Inventory Reserve $0.03 - - $0.03 - -
LionHeart(TM) Second Generation R&D $0.02 - - $0.03 - -
LionHeart(TM) Writeoff $0.04 - - $0.04 - -
Manufacturing Restructuring $0.01 - - $0.02 - -
Shipping Terms $0.03 - $0.03 - -
AB Medica Inventory Step-Up - - - $0.02 - -
Diluted earnings per share $0.12 - - $0.42 - -
Attached to this press release is the Company's reconciliation to GAAP of the
non-GAAP financial measures presented in the above table.
Fiscal Year 2005 Targets
The Company's sales and earnings targets along with some of the key assumptions
underlying these targets for fiscal year 2005 are shown in the table below,
excluding charges for the Company's voluntary early retirement program,
provision for LionHeart(TM) inventory in excess of anticipated requirements,
expenses for second generation LionHeart(TM) components, expenses related to the
Company's write off of its remaining investment in the LionHeart(TM) program,
restructuring charges related to manufacturing consolidation, step-up of
inventory purchased from AB Medica S.p.A. incurred in the first six months of
fiscal year 2005, and the adjustment of its accounting related to its U.S.
shipping terms.
11
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
FISCAL YEAR 2005 TARGETS
As adjusted net Sales $460-$470
As adjusted diluted E.P.S. $1.40-$1.45
Assumptions:
1) Targets for fiscal year 2005 exclude restructuring charges related to
the Company's manufacturing consolidation of $0.04 diluted earnings
per share, voluntary early retirement program of $0.11 diluted
earnings per share, expenses for second generation LionHeart(TM)
components of $0.03 diluted earnings per share, provision for
LionHeart(TM) inventory in excess of anticipated requirements of $0.03
diluted earnings per share, expenses for the write-off of the
remaining LionHeart(TM) investment of $0.04 diluted earnings per
share, and AB Medica inventory step-up of $0.02. Also, excludes $4.3
million sales and $0.03 diluted earnings per share for U.S. Shipping
terms adjustments referred to above.
2) Gross margin of approximately 52% of sales in the 2005 fiscal year.
3) Operating expenses of approximately 32% of sales for 2005 fiscal year.
4) Operating income of approximately 20% of sales for 2005 fiscal year.
5) Effective tax rate of 32%.
6) E.P.S. using 45,000,000 shares of common stock for the full 2005
fiscal year.
Patent Litigation
The Company has commenced a patent infringement lawsuit in the United States
District Court in Baltimore, Maryland against Datascope Corp. of Montvale, New
Jersey. The Company manufactures and sells the Arrow-Trerotola(TM) Percutaneous
Thrombolytic Device (PTD(R)), which is used to mechanically declot native
arterio-venous fistulae and synthetic hemodialysis grafts. The PTD was invented
by Dr. Scott Trerotola while working at Johns Hopkins University. Johns Hopkins
University, the owner of two patents covering the PTD, is also plaintiff and the
Company is the exclusive licensee of the Trerotola patents. Arrow has alleged
that Datascope infringes these two patents.
Balance Sheet
Cash at February 28, 2005 was $102.5 million, up from $75.6 million at February
29, 2004, while short-term debt of $32.0 million remained relatively flat
compared to the prior fiscal year second quarter levels. Days sales outstanding
decreased to 73 days versus 79 days in the prior fiscal year second quarter.
Inventory turns of 2.3 times per year remained relatively consistent compared to
prior year levels. The Company had no long-term debt at February 28, 2005
Stock Repurchase Program
In March 1999, the Company began open market purchases of its common stock
pursuant to its previously announced program to repurchase up to 2 million
shares of its common stock. In April 2000, the Company announced that it would
repurchase up to another 2 million shares of its common stock under this
program. As of February 28, 2005, the Company had purchased a total of 3,603,600
shares under this program, which remains in effect. The Company made no
repurchases of shares of its common stock under this program in the second
quarter of fiscal 2005.
12
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
Non-GAAP Financial Measures
The Company's management believes that in order to properly understand its
short-term and long-term financial trends, it is useful for investors to
consider separately the impact of certain special items. These items result from
facts and circumstances that vary in frequency and/or impact on continuing
operations. In addition, the Company's management uses results of operations
before such special items to evaluate the operational performance of the Company
and as a basis for strategic planning. Investors should consider these non-GAAP
measures in addition to, and not as a substitute for, financial performance
measures prepared in accordance with GAAP.
The Company has determined that these non-GAAP disclosures provide (1) a
meaningful, more consistent comparison of the Company's operating results for
the periods presented, on a basis consistent with management's own means of
evaluating operating performance, and (2) additional information for investors
to assess changes between periods that better reflect the Company's ongoing
operations. The items excluded from these non-GAAP disclosures, and the basis
for excluding them, are set forth below and in the attached reconciliation to
GAAP. Given the unusual and, in most cases, non-recurring nature (i.e., not
likely to recur in the next two years, if at all) of these items relative to the
Company's operating results for the periods presented, and their potential to
distort the Company's ability to provide a meaningful, consistent comparison for
those periods, these items have been excluded from the Adjusted Results of
Operations but included in the Unaudited Reconciliation to GAAP.
Adjustment in Accounting for Shipping Terms - The Company reduced net sales and
gross profit as a result of its misapplication of the accounting treatment
related to its shipping terms to U.S. customers and international distributors.
The Company has concluded that this adjustment is non-recurring in nature
because it was a rectification of the misapplication of the accounting treatment
for its sales terms and, as a result, the Company is now in compliance with this
accounting requirement and does not anticipate having to make any similar such
adjustment in the future. Therefore, the Company believes exclusion of this item
provides a useful financial measure to investors because of the unusual,
non-recurring nature of the adjustment in its accounting treatment for shipping
terms.
Voluntary Early Retirement Plan - The Company incurred certain charges related
to the implementation of this program, as described in further detail in its
Quarterly Report on Form 10-Q for its second fiscal quarter ended February 28,
2005. The Company has concluded that these charges are non-recurring in nature
based on the fact that it has no present intention to offer a similar program in
the future and had never offered such a program in the past. Therefore, the
Company believes exclusion of this item provides a useful financial measure to
investors because of the unusual, non-recurring nature of its voluntary early
retirement plan.
LionHeart Inventory Reserve and Impairment Charges - The Company incurred
charges related to recording a provision for LionHeart inventory in excess of
anticipated requirements and with respect to the discontinuation of the
development, sales and marketing programs related to its LionHeart Left
Ventricle Assist System (LVAS). The Company has concluded that these items are
non-recurring in nature based on the fact that the LionHeart LVAS, which
represented a unique research and development program for the Company, has been
discontinued in its entirety, thereby eliminating the possibility of any such
charges in the future. Therefore, the Company believes exclusion of these items
provides a useful financial measure to investors because of the unusual,
non-recurring nature of the termination of its LionHeart LVAS program.
13
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
LionHeart Second Generation R & D - The Company incurred research and
development expenses related to its development of second generation
LionHeart(TM) components. The Company has concluded that these expenses will not
recur in the future due to the recent termination of this program, although it
had been recording these costs in prior periods. It believes exclusion of this
item provides a useful financial measure to investors because of the unique
nature of the LionHeart program relative to its other product lines. As a
result, before its termination of the LionHeart program, the Company had
evaluated these costs separately for internal purposes and believes its internal
approach is appropriate for external analysis as well.
Manufacturing Restructuring - The Company incurred restructuring charges related
to the consolidation of certain of its manufacturing facilities. The Company has
concluded that its manufacturing restructuring charges are unusual and
infrequent, but that they also are expected to recur in future periods as the
manufacturing restructuring plan is continued. The Company believes it is useful
to present these costs separately because of the unique, one-time nature of the
exit costs related to this program. Once this program is completed, these costs
will permanently cease, as most of these costs will have been incurred in
connection with the closing of certain facilities, which closings will only
occur once. As a result, the Company has evaluated these costs separately for
internal purposes and believes its internal approach is appropriate for external
analysis as well.
AB Medica Inventory Step-Up - The Company incurred charges related to its
step-up of inventory acquired in connection with its purchase of certain assets
of one of its distributors in Italy, AB Medica S.p.A., in September 2004. The
Company has concluded that this item is non-recurring in nature based on the
fact this charge was incurred upon the sale of all of the acquired inventory in
the first quarter of fiscal 2005 and, since there is no further inventory to be
sold, no additional related charges will be incurred. Therefore, the Company
believes exclusion of this item provides a useful financial measure to investors
because of the non-recurring nature of the step-up of inventory in connection
with its acquisition of AB Medica.
Conference Call and Webcast
There will be a conference call and live webcast to discuss Arrow's second
fiscal quarter results today, XX, 2005, at 4:30 pm ET. The call and webcast can
be accessed by dialing US/Canada Dial-In # 800-737-9483, International/Local
Dial-In # 706-679-7371, Conference ID #4670248, or through
HTTP://WWW.ARROWINTL.COM/PRESENTATIONS/.
Company Information
Arrow International, Inc. develops, manufactures and markets a broad range of
clinically advanced, disposable catheters and related products for critical and
cardiac care. The Company's products are used primarily by anesthesiologists,
critical care specialists, surgeons, emergency and trauma physicians,
cardiologists, interventional radiologists, electrophysiologists, and other
health care providers.
Arrow International's news releases and other company information can be found
on its website at http://www.arrowintl.com.
The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol
ARRO.
14
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
Safe Harbor Statement
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: This news release provides historical information and includes
forward-looking statements (including projections). 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 numerical 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.
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. In connection with the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions the reader that, among others, the factors below,
which are discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 2004 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. These factors include: (i)
stringent regulation of the Company's products by the US 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.
15
EXAMPLE FOR SEC REVIEW - NOT FOR RELEASE - MARCH 21, 2005 PRESS RELEASE UPDATED
FOR EVENTS SUBSEQUENT TO THE PRESS RELEASE DISCLOSED IN THE SECOND QUARTER FORM
10-Q AND IN RESPONSE TO SEC COMMENTS
ARROW INTERNATIONAL, INC.
RESULTS OF OPERATIONS
UNAUDITED RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
FEBRUARY 28, 2005
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
QUARTER ENDED 2/28/05
VOLUNTARY LIONHEART
EARLY LIONHEART SECOND
AS SHIPPING RETIREMENT INVENTORY GENERATION LIONHEART MANUFACTURING AS
REPORTED TERMS PLAN RESERVE R&D WRITEOFF RESTRUCTURING ADJUSTED
Net Sales $109,209 $4,279 - - - - - $113,488
Gross Profit $50,703 $2,225 $1,883 $2,079 - $2,483 - $59,373
Income Before Taxes $7,282 $2,225 $6,839 $2,079 $754 $2,824 $930 $22,933
Net Income $5,354 $1,502 $4,616 $1,403 $509 $1,906 $628 $15,918
Diluted Earnings Per
Share $0.12 $0.03 $0.11 $0.03 $0.02 $0.04 $0.01 $0.36
Weighted average shares
used in computing
diluted earnings per
common share 45,010 45,010 45,010 45,010 45,010 45,010 45,010 45,010
ARROW INTERNATIONAL, INC.
RESULTS OF OPERATIONS
UNAUDITED RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
FEBRUARY 28, 2005
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
YEAR TO DATE 2/28/05
VOLUNTARY LIONHEART
EARLY LIONHEART SECOND
AS SHIPPING RETIREMENT INVENTORY GENERATION LIONHEART MANUFACTURING INVENTORY AS
REPORTED TERMS PLAN RESERVE R&D WRITEOFF RESTRUCTURING STEP-UP ADJUSTED
Net Sales $221,934 $4,279 - - - - - - $226,213
Gross Profit $107,123 $2,225 $1,883 $2,079 - $2,483 - $1,467 $117,260
Income Before Taxes $26,961 $2,225 $6,839 $2,079 $1,748 $2,824 $1,321 $1,467 $45,464
Net Income $18,637 $1,502 $4,616 $1,403 $1,180 $1,906 $892 $990 $31,126
Diluted Earnings Per
Share $0.42 $0.03 $0.11 $0.03 $0.03 $0.04 $0.02 $0.02 $0.70
Weighted average shares
used in computing
diluted earnings per
common share 44,767 44,767 44,767 44,767 44,767 44,767 44,767 44,767 44,767
16
ARROW INTERNATIONAL, INC.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
February 28, February 29, February 28, February 29,
CONSOLIDATED STATEMENTS OF INCOME DATA: 2005 2004 2005 2004
-------------- ------------- -------------- ----------------
Net sales $ 109,209 $ 108,294 $ 221,934 $ 211,395
Cost of goods sold 56,623 50,492 112,928 99,395
Early Retirement Plan Charges 1,883 - 1,883 -
-------------- ------------- -------------- ----------------
Gross profit 50,703 57,802 107,123 112,000
Operating expenses:
Research and development and engineering 7,126 6,383 15,045 13,227
Selling, general and administrative 30,589 28,448 59,311 54,186
Early Retirement Plan Charges 4,956 - 4,956 -
Restructuring charges 930 - 1,321 -
-------------- ------------- -------------- ----------------
Total operating expenses 43,601 34,831 80,633 67,413
Operating income 7,102 22,971 26,490 44,587
Interest, net (72) 195 (197) 304
Other (income) expenses, net (108) (125) (274) 14
-------------- ------------- -------------- ----------------
Income before income taxes 7,282 22,901 26,961 44,269
Provision for income taxes 1,928 7,443 8,324 14,387
-------------- ------------- -------------- ----------------
Net income $ 5,354 $ 15,458 $ 18,637 $ 29,882
============== ============= ============== ================
Basic earnings per common share $0.12 $0.36 $0.42 $0.69
===== ===== ===== =====
Diluted earnings per common share $0.12 $0.35 $0.42 $0.68
===== ===== ===== =====
Weighted average shares used in computing
basic earnings per common share 44,214 43,504 44,024 43,424
Weighted average shares used in computing
diluted earnings per common share 45,010 44,203 44,767 44,093
February 28, August 31,
Consolidated Balance Sheet: 2005 2004
-------------- -------------
ASSETS
Cash $ 102,482 94,176
Receivables (net) 90,078 83,918
Inventories 102,616 96,084
Prepaid expenses and other 26,954 15,898
-------------- -------------
Total current assets 322,130 290,076
Property, plant and equipment (net) 147,120 136,978
Other assets 126,289 122,154
-------------- -------------
Total assets $ 595,539 549,208
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 29,032 26,020
Other current liabilities 56,553 51,418
Current maturities of long-term debt 2,998 3,036
Other liabilities 28,906 22,403
-------------- -------------
Total liabilities 117,489 102,877
Total shareholders' equity 478,050 446,331
-------------- -------------
Total liabilities and shareholders' equity $ 595,539 549,208
============== =============
17