SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to section 13 or 15(d) of the Securities
---
Exchange Act of 1934 for the quarterly period ended March 31, 2002
--------------
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 No. 000-16723
RESPIRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1304989
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1010 Murry Ridge Lane
Murrysville, Pennsylvania 15668-8525
(Address of principal executive offices) (Zip Code)
(Registrant's Telephone Number, including area code) 724-387-5200
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 .
--- ---
As of April 30, 2002, there were 34,224,290 shares of Common Stock of the
registrant outstanding, of which 3,592,942 were held in treasury.
INDEX
RESPIRONICS, INC.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited).
Independent Accountants' Review Report
Consolidated balance sheets -- March 31, 2002 and June 30, 2001.
Consolidated statements of operations -- Three months and nine months
ended March 31, 2002 and 2001.
Consolidated statements of cash flows -- Nine months ended March 31,
2002 and 2001.
Notes to consolidated financial statements - March 31, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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Independent Accountants' Review Report
Board of Directors
Respironics, Inc. and Subsidiaries
We have reviewed the accompanying condensed consolidated balance sheet of
Respironics, Inc. and Subsidiaries as of March 31, 2002, and the related
condensed consolidated statements of operations for the three-month and nine-
month periods ended March 31, 2002 and 2001, and the condensed consolidated
statements of cash flows for the nine-month periods ended March 31, 2002 and
2001. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Respironics,
Inc. and Subsidiaries as of June 30, 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended not presented herein and in our report dated July 24, 2001, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of June 30, 2001, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
April 24, 2002
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
March 31 June 30
2002 2001
------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 48,826,544 $ 27,320,910
Trade accounts receivable, less allowance for
doubtful accounts of $17,635,000 and $16,457,000 105,731,285 98,078,344
Inventories 66,916,080 73,417,896
Prepaid expenses and other 10,741,252 10,937,110
Deferred income tax benefits 14,855,307 14,855,307
------------- -------------
TOTAL CURRENT ASSETS 247,070,468 224,609,567
PROPERTY, PLANT AND EQUIPMENT
Land 2,506,052 2,506,052
Building 8,574,421 8,509,596
Machinery and equipment 96,575,852 84,559,172
Furniture, office and computer equipment 65,797,728 56,011,341
Leasehold improvements 5,759,615 5,286,891
------------- -------------
179,213,668 156,873,052
Less allowances for depreciation
and amortization 107,002,956 87,725,808
------------- -------------
72,210,712 69,147,244
OTHER ASSETS 16,337,589 14,334,938
GOODWILL 57,696,234 59,856,714
------------- -------------
$ 393,315,003 $ 367,948,463
============= =============
See notes to consolidated financial statements.
March 31 June 30
2002 2001
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 31,291,385 $ 28,964,129
Accrued expenses and other 23,973,030 19,662,491
Current portion of long-term obligations 661,923 3,998,317
------------- -------------
TOTAL CURRENT LIABILITIES 55,926,338 52,624,937
LONG-TERM OBLIGATIONS 69,376,520 80,055,378
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized
100,000,000 shares; issued and outstanding
34,189,125 shares at March 31, 2002 and
34,013,785 shares at June 30, 2001 341,891 340,138
Additional capital 124,577,819 121,720,289
Accumulated other comprehensive loss (4,096,741) (4,237,433)
Retained earnings 189,408,996 160,033,521
Treasury stock (42,219,820) (42,588,367)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 268,012,145 235,268,148
------------- -------------
$ 393,315,003 $ 367,948,463
============= =============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Three months ended Nine months ended
March 31 March 31 March 31 March 31
2002 2001 2002 2001
-------------------------------- ------------------------------
Net sales $ 126,708,403 $ 110,207,939 $ 351,500,713 $ 306,820,046
Cost of goods sold 67,144,406 58,695,623 186,337,954 162,469,761
Cost of goods sold - restructuring charges 0 724,990 0 724,990
------------- ------------- ------------- -------------
GROSS MARGIN 59,563,997 50,787,326 165,162,759 143,625,295
General and administrative expenses 15,397,699 13,221,926 42,452,059 37,051,639
Sales, marketing and commission expenses 21,118,867 18,639,614 60,175,095 53,058,747
Research and development expenses 3,904,476 3,744,747 12,206,180 10,842,890
Restructuring credit 0 (1,908,581) 0 (1,908,581)
Interest expense 676,246 1,839,631 2,543,246 6,002,593
Other income (238,828) (272,030) (848,713) (778,358)
------------- ------------- ------------- -------------
40,858,460 35,265,307 116,527,867 104,268,930
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 18,705,537 15,522,019 48,634,892 39,356,365
Income taxes 7,389,435 6,208,807 19,259,417 15,742,546
------------- ------------- ------------- -------------
NET INCOME $ 11,316,102 $ 9,313,212 $ 29,375,475 $ 23,613,819
============= ============= ============= =============
Basic earnings per share $ 0.37 $ 0.31 $ 0.96 $ 0.79
============= ============= ============= =============
Basic shares outstanding 30,582,388 30,228,829 30,494,796 29,839,633
Diluted earnings per share $ 0.36 $ 0.30 $ 0.94 $ 0.77
============= ============= ============= =============
Diluted shares outstanding 31,441,712 31,169,860 31,415,630 30,743,906
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
Nine Months Ended March 31
2002 2001
-----------------------------
OPERATING ACTIVITIES
Net income $ 29,375,475 $ 23,613,819
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,818,539 21,386,453
Asset sales and write-offs 0 (877,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (7,652,941) (5,519,518)
Decrease (increase) in inventories 6,501,816 (8,449,468)
Change in other operating assets and liabilities 2,797,652 (4,013,339)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,840,541 26,140,947
INVESTING ACTIVITIES
Purchase of property, plant and equipment (22,940,974) (22,650,374)
Additional purchase price for acquired business (606,511) (787,580)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (23,547,485) (23,437,954)
FINANCING ACTIVITIES
Net decrease in borrowings (14,015,252) (15,217,724)
Issuance of common stock 2,859,283 6,573,497
Use of treasury stock, net 368,547 761,556
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (10,787,422) (7,882,671)
------------ ------------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 21,505,634 (5,179,678)
Cash and short-term investments at beginning of period 27,320,910 19,594,484
------------ ------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 48,826,544 $ 14,414,806
============ ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
RESPIRONICS, INC. AND SUBSIDIARIES
March 31, 2002
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2002. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 2001.
NOTE B -- INVENTORIES
The composition of inventory is as follows:
March 31 June 30
2002 2001
----------- -----------
Raw materials $15,198,000 $20,738,000
Work-in-process 4,026,000 5,961,000
Finished goods 47,692,000 46,719,000
----------- -----------
$66,916,000 $73,418,000
=========== ===========
NOTE C -- CONTINGENCIES
As previously disclosed, the Company is party to actions filed in a Federal
District Court in January 1995 and June 1996 in which a competitor alleges that
the Company's manufacture and sale in the United States of certain products
infringes four of the competitor's patents. In its response to these actions,
the Company has denied the allegations and has separately sought judgment that
the claims under the patents are invalid or unenforceable and that the Company
does not infringe upon the patents. The January 1995 and June 1996 actions have
been
consolidated. The Court has granted the Company's various motions for summary
judgment and held that the Company does not infringe any of the competitor's
four patents at issue. The competitor may seek an appeal of those decisions. In
any event, the Company intends to continue to pursue its claims that the
competitor's patents are invalid or unenforceable.
The Company is, as a normal part of its business operations, a party to other
legal proceedings in addition to those previously described by filings of the
Company. Legal counsel has been retained for each proceeding and none of these
proceedings is expected to have a material adverse impact on the Company's
results of operations or financial condition.
NOTE D -- RESTRUCTURING CHARGES
In July 1999, the Company announced a major restructuring of its U.S. operations
that included facility closings and downsizings, a management realignment, and a
workforce reduction associated with those changes. The workforce reduction
involved approximately 200 employees in areas of executive management,
manufacturing, engineering, sales and marketing, administration, and service.
The following table summarizes these restructuring charges and corresponding
expenditures.
RECONCILIATION OF RESTRUCTURING RESERVES
Employee Lease Buyouts
Severance Asset & Other Direct Total
Costs Write-Downs Expenses Restructuring
------------- ------------- ---------------- ---------------
Balance at July 1, 1999 $ - $ - $ - $ -
Restructuring charges (net) 6,300,000 8,900,000 14,000,000 29,200,000
Cash expenditures (3,100,000) - (12,900,000) (16,000,000)
Noncash expenditures - (1,700,000) - (1,700,000)
------------- ------------- ------------- -------------
Balance at June 30, 2000 3,200,000 7,200,000 1,100,000 11,500,000
------------- ------------- ------------- -------------
Restructuring charges (net) (200,000) 1,000,000 - 800,000
Cash expenditures (1,500,000) - (900,000) (2,400,000)
Noncash expenditures - (2,500,000) - (2,500,000)
------------- ------------- ------------- -------------
Balance at June 30, 2001 1,500,000 5,700,000 200,000 7,400,000
------------- ------------- ------------- -------------
Restructuring charges (net) - - - -
Cash expenditures (400,000) - - (400,000)
Noncash expenditures - (400,000) - (400,000)
------------- ------------- ------------- -------------
Balance at September 30, 2001 1,100,000 5,300,000 200,000 6,600,000
------------- ------------- ------------- -------------
Restructuring charges (net) - - - -
Cash expenditures (400,000) - - (400,000)
Noncash expenditures - - - -
------------- ------------- ------------- -------------
Balance at December 31, 2001 700,000 5,300,000 200,000 6,200,000
------------- ------------- ------------- -------------
Restructuring charges (net) - - - -
Cash expenditures (300,000) - (100,000) (400,000)
Noncash expenditures - (100,000) - (100,000)
------------- ------------- ------------- -------------
Balance at March 31, 2002 $ 400,000 $ 5,200,000 $ 100,000 $ 5,700,000
============= ============= ============= =============
The non-cash expenditures presented as reductions of the asset write-down
restructuring charge represent disposals of fully written-down assets, including
rationalized inventories and impairments to long-lived assets held for disposal
consisting of machinery, equipment and computer software.
Restructuring costs incurred but not yet paid have been credited to accrued
expense and asset write-downs have been credited against the applicable asset
accounts. Substantially all of the remaining restructuring accruals as of March
31, 2002 are expected to be paid out during fiscal year 2002.
NOTE E - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows:
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ----------- ------------ ------------
Net income $ 11,316,000 $ 9,313,000 $ 29,375,000 $ 23,614,000
Foreign currency translation (losses) gains (135,000) (599,000) 141,000 (1,289,000)
------------ ----------- ------------ ------------
Comprehensive income $ 11,181,000 $ 8,714,000 $ 29,516,000 $ 22,325,000
============ =========== ============ ============
NOTE F - ACQUISITION
On April 12, 2002, the Company completed its previously announced acquisition of
Novametrix Medical Systems Inc. ("Novametrix"), a leading cardiorespiratory
monitoring company that develops, manufactures, and markets proprietary state-
of-the-art noninvasive monitors, sensors, and disposable accessories. The
acquisition of Novametrix was consummated pursuant to an Agreement and Plan of
Merger dated as of December 17, 2001, pursuant to which Respironics Holdings,
Inc., a wholly owned subsidiary of the Company, was merged with and into
Novametrix (the "Merger"). The Company made this acquisition because the
Novametrix monitoring products complement the Company's therapeutic products
used in the hospital environment, the Novametrix developmental care products
complement the Company's infant management products and programs, the Novametrix
cardiac output monitoring technologies support the Company's initiatives in the
congestive heart failure area, and with the acquisition, the Company's "critical
mass" of products, revenues, profits, and assets in these markets increased.
The results of operations of Novametrix are not included in the Company's
consolidated income statements for the period ended March 31, 2002 because the
acquisition was completed after that date.
Upon consummation of the Merger, approximately 2,400,000 shares of the Company's
common stock were issued to the former stockholders of Novametrix, reflecting an
exchange ratio of .2541 shares of the Company's common stock for each share of
Novametrix common stock. The exchange ratio was determined based on the
weighted average selling price of $31.48 for the Company's common stock for the
20 day trading period from March 11 through April 8, 2002. Novametrix
stockholders received the Company's stock in an amount equal to $8.00 per
Novametrix share based upon the weighted average selling price. In addition,
approximately 509,000 shares of the Company's common stock were reserved for
issuance upon exercise of options and warrants issued in replacement of
Novametrix options and warrants that were not exercised prior to the
consummation of the Merger. As of the close of trading on April 12, 2002,
Novametrix common stock ceased to be traded on the Nasdaq National Market.
The total value of the Company's shares issued and reserved for issuance in the
transaction was approximately $81 million based on the market price of
the Company's common stock issued and reserved for issuance.
The following table summarizes the preliminary estimated fair value of the
assets acquired and liabilities assumed at the date of acquisition. Because the
acquisition closed subsequent to the end of the most recent quarter, the Company
is in the very early stages of the purchase price allocation and is in the
process of obtaining third party valuations of certain intangible assets;
therefore the allocation of the purchase price is subject to refinement.
At April 12, 2002
Current assets, primarily
consisting of accounts
receivable and inventories $28,400,000
Property, plant and equipment 3,000,000
Other assets, including
intangible assets 31,300,000
Goodwill 33,700,000
-----------
Total assets acquired $96,400,000
Current liabilities, primarily
consisting of accounts
payable, accrued expenses,
and current portion of
debt $ 14,000,000
Long term debt 1,400,000
------------
Total liabilities assumed $ 15,400,000
Net Assets Acquired $ 81,000,000
The amounts assigned to major classes of intangible assets, related amortization
periods, and determinations regarding the tax deductibility of such amortization
have not been completed.
The pro forma summary below presents the Company's results of operations as if
the acquisition had occurred at the beginning of the periods presented and does
not purport to be indicative of what would have occurred had the acquisitions
been made as of those dates or of results which may occur in the future. These
results do not include the positive impact of cost reductions and other
synergies that are expected to be realized as a result of the acquisition.
Nine months ended March 31
2002 2001
------------ ------------
Pro Forma Sales $388,793,000 $347,048,000
Pro Forma Net Income 31,237,000 24,887,000
Pro Forma Earnings
Per Share 0.93 0.75
Novametrix had an April fiscal year end, which differed from the Company's June
year end, and accordingly the companies' fiscal quarters also end on different
dates. In order to develop the pro forma information above, the Company's
unaudited income statements for the nine-month periods ended March 31, 2002 and
2001 were combined with Novametrix's unaudited income statements for the nine-
month periods ended January 31, 2002 and 2001. Earnings per share data are based
on the Company's weighted average number of common shares outstanding plus the
total number of the Company's common shares and equivalents delivered to
Novametrix stockholders as part of the acquisition.
NOTE G - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets," ("FAS 142") effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the provisions of FAS 141 to account for
any business combination that is consummated after July 1, 2001, including the
acquisition of Novametrix described in Note F.
The Company will apply the new rules under FAS 142 on accounting for goodwill
and other intangible assets beginning in the first quarter of fiscal year 2003.
Application of the nonamortization provisions of the Statement is expected to
result in an increase in annual net income of approximately $3,000,000 or $0.08
per diluted share. During fiscal year 2003, the Company will perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets as of July 1, 2002.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES REFORM ACT OF 1995.
The statements contained in this Quarterly Report on Form 10-Q,
specifically those contained in Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations", along with statements in other
sections of this document and other reports filed with the Securities and
Exchange Commission, external documents and oral presentations which are not
historical are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21B of the Securities and
Exchange Act of 1934, as amended. These forward-looking statements represent
the Company's present expectations or beliefs concerning future events. The
Company cautions that such statements are qualified by important factors that
could cause actual results to differ materially from those in the forward-
looking statements. Results actually achieved may differ materially from
expected results included in these statements. Those factors include, but are
not limited to, the following: foreign currency fluctuations, regulations and
other factors affecting operations and sales outside the United States including
potential future effects of the change in sovereignty of Hong Kong, customer
consolidation and concentration, increasing price competition and other
competitive factors in the sale of products, the success of programs, interest
rate fluctuations, intellectual property and related litigation, other
litigation, successful integration of acquisitions, FDA and other government
regulation, anticipated levels of earnings and revenues, and third party
reimbursement.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 2002 were $126,708,000
representing a 15% increase over the sales of $110,208,000 recorded for the
three months ended March 31, 2001. Increases in unit and dollar sales for the
Company's sleep apnea therapy devices (the Company's largest product line) and
oxygen concentrator devices, as well as increases in the sales of masks and
accessories, helped to drive the increase in sales for the quarter. Sales of the
Company's non-invasive ventilation devices (units used to assist patients
suffering from breathing disorders via airflow delivered through a mask) also
increased during the quarter, particularly sales of the Company's BiPAP(R)
Synchrony(TM) Ventilatory Support System, which was introduced during fiscal
year 2001. These product lines comprise the major part of the Company's homecare
product offerings. Sales of the Company's hospital products also increased
during the current quarter, particularly sales of the Company's BiPAP(R)
Vision(TM) ventilator.
Net sales for the nine months ended March 31, 2002 were $351,501,000
representing a 15% increase over the sales of $306,820,000 recorded for the nine
months ended March 31, 2001. Increases in the Company's sleep apnea therapy
devices, oxygen concentrators, and masks and accessories as discussed above
accounted for the majority of the increase in sales, along with increased sales
of the Company's BiPAP(R) Synchrony(TM) non-invasive ventilation device and the
Company's hospital BiPAP(R) Vision(TM) ventilator.
The Company's gross profit was 47% of net sales for the quarters and nine
months ended March 31, 2002 and 2001, excluding the impact of restructuring
charges in the prior year. This static gross profit percentage reflects the
impact of higher revenue levels, offset by the impact of sales mix and selling
price decreases consistent with those decreases seen in prior years.
General and administrative expenses were $15,398,000 (12% of net sales) for
the quarter ended March 31, 2002 as compared to $13,222,000 (12% of net sales)
for the quarter ended March 31, 2001. For the nine-month period ended March 31,
2002, general and administrative expenses were $42,452,000 (12% of net sales) as
compared to $37,052,000 (12% of net sales) for the prior year nine-month period.
The increases in absolute dollars of general and administrative expenses for the
current quarter and nine-month periods were due primarily to increases in
spending consistent with the growth of the Company's business. The prior-year
periods also included an addition to the allowance for doubtful accounts of
$1,200,000 related to one of the Company's significant hospital distribution
customers ceasing operations.
Sales, marketing and commission expenses were $21,119,000 (17% of net
sales) for the quarter ended March 31, 2002 as compared to
$18,640,000 (17% of net sales) for the quarter ended March 31, 2001. For the
nine-month period ended March 31, 2002, sales, marketing and commission expenses
were $60,175,000 (17% of net sales) as compared to $53,059,000 (17% of net
sales) for the prior year nine-month period. The increases in absolute dollars
of expense for the current quarter and nine-month periods were due primarily to
increased sales (resulting in higher commission and sales bonus expenses) and
increased sales, marketing, product support, and service activity levels across
the Company's product lines during the current year.
Research and development expenses were $3,904,000 (3% of net sales) for the
quarter ended March 31, 2002 as compared to $3,745,000 (3% of net sales) for the
quarter ended March 31, 2001. For the nine-month period ended March 31, 2002,
research and development expenses were $12,206,000 (3% of net sales) as compared
to $10,843,000 (4% of net sales) for the prior year nine-month period. The
increases in absolute dollars of expense for the current quarter and nine-month
periods were due to the Company's continuing commitment to research, development
and new product introductions. During the current quarter the Company introduced
several new products including a continuous positive airway pressure ("CPAP")
sleep therapy unit called the REMstar(R) Auto, the H2 Heated Humidifier, the
latest addition to the Company's line of heated humidifiers for CPAP and bi-
level devices, and the new ComfortSelect(TM) Nasal Mask. Significant product
development efforts are ongoing and new product launches in many of the
Company's major product lines are scheduled for the next twelve to eighteen
months. Additional development work and clinical trials are being conducted in
certain product areas outside the Company's current core products, including
congestive heart failure.
During the three months ended March 31, 2001, the Company incurred
restructuring charges of $800,000, related to a previously disclosed
restructuring. These costs were primarily for asset write-downs to reflect
decisions made regarding product, facility, and systems rationalization and
other direct expenses of the restructuring. Approximately $700,000 of these
charges related to inventory write-offs of discontinued products and have been
reported as a separate component of cost of goods sold. Also as part of the
restructuring, during the three months ended March 31, 2001, the Company's
Westminster, Colorado facility was sold and a gain of approximately $2,000,000
was recorded on the sale. There were no restructuring costs during the
three-month and nine-month periods ended March 31, 2002.
The Company's effective income tax rate was approximately 40% for all
periods presented.
As a result of the factors described above, the Company's net income was
$11,316,000 (9% of net sales) or $0.36 per diluted share for the quarter ended
March 31, 2002 as compared to net income of $9,313,000 (8% of net sales) or
$0.30 per diluted share for the quarter ended March 31, 2001. For the nine-month
period ended March 31, 2002, the Company's net income was $29,375,000 (8% of net
sales) or $0.94 per diluted share as compared to net income of
$23,614,000 (8% of net sales) or $0.77 per diluted share for the prior year
nine-month period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $191,144,000 at March 31, 2002 and
$171,985,000 at June 30, 2001. Net cash provided by operating activities was
$55,841,000 for the nine months ended March 31, 2002 as compared to $26,141,000
for the nine months ended March 31, 2001. The increase in cash provided by
operating activities for the current nine-month period was primarily due to
higher earnings, reductions in inventory, and the positive impact of changes in
other operating assets and liabilities.
Net cash used by investing activities was $23,547,000 for the nine months
ended March 31, 2002 as compared to $23,438,000 for the nine months ended March
31, 2001. Cash used by investing activities for both periods include capital
expenditures, including the purchase of leasehold improvements, production
equipment, computer hardware and software, and telecommunications and office
equipment. In addition, cash used by investing activities in the periods
described includes additional purchase price paid for a previously acquired
business pursuant to the terms of that acquisition agreement. The funding for
investment activities in both periods was provided by positive cash flow from
operating activities and accumulated cash and short-term investments.
Net cash used or provided by financing activities consists primarily of
repayments under the Company's various long-term obligations and proceeds from
the issuance of common stock under the Company's stock option plans. Net cash
used by financing activities was $10,787,000 for the nine months ended March 31,
2002 as compared to $7,883,000 for the nine months ended March 31, 2001.
Included in net cash used by financing activities were net debt paydowns of
$14,015,000 and $15,218,000 for the nine-month periods ended March 31, 2002 and
2001, respectively. The increase in cash used by financing activities was due
primarily to a reduction in proceeds from the issuance of stock under the
Company's stock option plans compared to prior year amounts.
The Company has contractual financial obligations and commercial financial
commitments consisting primarily of long-term debt, capital lease obligations,
and non-cancelable operating leases. The composition and nature of these
obligations and commitments have not changed materially since June 30, 2001. See
the Notes to the Company's Consolidated Financial Statements in its Annual
Report on Form 10-K for the year ended June 30, 2001 for information about these
obligations and commitments.
The following table summarizes significant contractual obligations
and commercial commitments of the Company as of March 31, 2002:
Contractual Obligations and Commercial Commitments
Payments Due by Period
--------------------------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 69,854,973 $ 478,453 $69,095,353 $ 175,124 $ 106,043
Capital Lease Obligations 183,470 183,470 -- -- --
Operating Leases 24,915,998 4,714,321 10,749,994 4,788,833 4,662,850
--------------------------------------------------------------------------------------
Total Contractual Obligations $ 94,954,441 $ 5,376,244 $79,845,347 $ 4,963,957 $ 4,768,893
======================================================================================
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------
Total Amounts Less Than 1-3 4-5 Over 5
Other Commercial Commitments Committed 1 Year Years Years Years
----------------------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 2,024,000 $ 2,024,000 $ -- $ -- $ --
======================================================================================
In connection with customer leasing programs with independent leasing
companies, the Company is contingently liable, in the event of a customer
default, to the leasing companies for certain unpaid installment receivables
transferred to the leasing companies. The total exposure for unpaid installment
receivables was approximately $18,953,000 at March 31, 2002 as compared to
$22,670,000 at June 30, 2001. The transfer of these installment receivables
meets the criteria of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," (and Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which was effective for such transfers that occurred after
March 31, 2001) and therefore, these receivables are not recorded on the
Company's financial statements.
The Company's revolving credit agreement expires April 30, 2003. The
Company has begun discussions with several commercial banks including certain of
the banks participating in the Company's current credit facility regarding
renewing or replacing the Company's existing revolving credit agreement. The
Company expects to have a new credit agreement in place prior to the expiration
of the existing credit agreement. The amount that would be available for
borrowing under the new credit agreement has not yet been determined, but is
currently expected to be at least $125,000,000, the amount of the current
revolver.
The Company believes that its sources of funding (consisting of projected
positive cash flow from operating activities, the availability of additional
funds under its revolving credit facility (totaling approximately $55,076,000 at
March 31, 2002), and its accumulated cash and short-term investments) will be
sufficient to meet its current and presently anticipated short-term and long-
term future needs for operating activities (including payments against
restructuring accruals), investing activities, and financing activities
(primarily consisting of scheduled payments on long-term debt).
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
Interest Rates: The Company's primary interest rate risk relates to its
long-term debt obligations. At March 31, 2002, the Company had total long-term
debt obligations, including the current portion of those obligations, of
$70,039,000. Of that amount, $1,539,000 was in fixed rate obligations and
$68,500,000 was in variable rate obligations. Assuming a 10% increase in
interest rates on the Company's variable rate obligations (i.e. an increase from
the March 31, 2002 weighted average interest rate of 2.44% to a weighted average
interest rate of 2.68%), annual interest expense
would be approximately $167,000 higher based on the March 31, 2002 outstanding
balance of variable rate obligations. The Company has no interest rate swap or
exchange agreements.
Foreign Exchange Rates: Information relating to the sensitivity to foreign
currency exchange rate changes is omitted because foreign exchange exposure risk
has not materially changed from that disclosed in the Company's Annual Report on
Form 10-K for the year ended June 30, 2001.
Inflation
Inflation has not had a significant effect on the Company's business during
the periods discussed.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets," ("FAS 142") effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the provisions of FAS 141 to account for
any business combination that is consummated after July 1, 2001, including the
acquisition of Novametrix described in Note F.
The Company will apply the new rules under FAS 142 on accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
year 2003. Application of the nonamortization provisions of the Statement is
expected to result in an increase in annual net income of approximately
$3,000,000 or $0.08 per diluted share. During fiscal year 2003, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of July 1, 2002.
In August 2001, Statement of Financial Accounting Standards No. 143 ("FAS
143"), "Accounting for Asset Retirement Obligations," was issued. This Statement
requires recording the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and a corresponding increase
in the carrying value of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, it is either settled for its recorded amount or a gain or loss upon
settlement is recorded. FAS 143 is effective for the Company's fiscal year ended
June 30, 2003. The
Company is currently assessing, but has not yet determined, the impact of FAS
143 on its financial position and results of operations.
In August 2001, Statement of Financial Accounting Standards No. 144 ("FAS
144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," was
issued. This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supercedes FAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). FAS 144 is effective for the Company's fiscal year
ended June 30, 2003. The Company is currently assessing, but has not yet
determined, the impact of FAS 144 on its financial position and results of
operations.
PART 2 OTHER INFORMATION
Item 1: Legal Proceedings
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The Company is, as a normal part of its business operations, a party to other
legal proceedings in addition to those previously described by filings of the
Company. Legal counsel has been retained for each proceeding and none of these
proceedings is expected to have a material adverse impact on the Company's
results of operations or financial condition.
Item 2: Changes in Securities
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(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3: Defaults Upon Senior Securities
------- -------------------------------
(a) Not applicable
(b) Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
Not applicable.
Item 5: Other Information
------- -----------------
Effective May 13, 2002, the address of the Company's principal executive
offices has changed to 1010 Murry Ridge Lane, Murrysville, Pennsylvania
15668-8525, and the Company's telephone number is now 724-387-5200.
Item 6: Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits
Exhibit 15 Acknowledgement of Ernst & Young LLP.
(b) Reports on Form 8-K
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESPIRONICS, INC.
Date: May 15, 2002 /s/ Daniel J. Bevevino
------------------- ------------------------------
Daniel J. Bevevino
Vice President, and Chief
Financial and Principal
Accounting Officer
Signing on behalf of the
registrant and as Chief
Financial and Principal
Accounting Officer