Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Overview
We
develop and manufacture products primarily for medical
applications. We market components to other equipment manufacturers
for incorporation in their products and sell finished devices to
physicians, hospitals, clinics and other treatment centers. Our
medical products primarily serve the fluid delivery,
cardiovascular, and ophthalmology markets. Our other medical and
non-medical products include instrumentation and disposables used
in dialysis and valves and inflation devices used in marine and
aviation safety products.
Our
products are used in a wide variety of applications by numerous
customers. We encounter competition in all of our markets and
compete primarily on the basis of product quality, price,
engineering, customer service and delivery time.
Our
strategy is to provide a broad selection of products in the areas
of our expertise. Research and development efforts are focused on
improving current products and developing highly-engineered
products that meet customer needs and have the potential for broad
market applications and significant sales. Proposed new products
may be subject to regulatory clearance or approval prior to
commercialization and the time period for introducing a new product
to the marketplace can be unpredictable. We also focus on
controlling costs by investing in modern manufacturing technologies
and controlling purchasing processes. We have been successful in
consistently generating cash from operations and have used that
cash to reduce indebtedness, to fund capital expenditures, to
repurchase stock and to pay dividends.
Our
strategic objective is to further enhance our position in our
served markets by:
●
Focusing on
customer needs;
●
Expanding existing
product lines and developing new products;
●
Manufacturing
products to exacting quality standards; and
●
Preserving and fostering a collaborative and entrepreneurial
culture.
For the
three months ended June 30, 2017, we reported revenues of $36.2
million, operating income of $10.2 million and net income of $10.0
million, up less than 1 percent, up 1 percent and up 35 percent,
respectively, from the three months ended June 30, 2016. For the
six months ended June 30, 2017, we reported revenues of $74.7
million, operating income of $21.5 million and net income of $20.0
million, up 3 percent, up 5 percent and up 39 percent,
respectively, from the six months ended June 30, 2016.
Results
for the three months ended June 30, 2017
Consolidated net
income totaled $10.0 million, or $5.44 per basic and $5.40 per
diluted share, in the second quarter of 2017. This is compared with
consolidated net income of $7.5 million, or $4.09 per basic and
$4.02 per diluted share, in the second quarter of 2016. The income
per basic share computations are based on weighted average basic
shares outstanding of 1,844,000 in the 2017 period and 1,822,000 in
the 2016 period. The income per diluted share computations are
based on weighted average diluted shares outstanding of 1,858,000
in the 2017 period and 1,853,000 in the 2016 period.
Consolidated
revenues of $36.2 million for the second quarter of 2017 were less
than 1 percent higher than revenues of $36.1 million for the second
quarter of 2016.
Revenues
by product line were as follows (in thousands):
|
Three Months ended June 30,
|
|
|
|
|
|
|
Fluid
Delivery
|
$
15,630
|
$
14,921
|
Cardiovascular
|
12,222
|
12,546
|
Ophthalmology
|
3,762
|
4,560
|
Other
|
4,550
|
4,116
|
Total
|
$
36,164
|
$
36,143
|
Cost of
goods sold of $18.5 million for the second quarter of 2017 was 2
percent lower than cost of goods sold of $18.9 million for the
second quarter of 2016 primarily due to improved manufacturing
efficiencies and the impact of continued cost improvement projects.
Our cost of goods sold in the second quarter of 2017 was 51.1
percent of revenues compared with 52.4 percent of revenues in the
second quarter of 2016.
Gross
profit of $17.7 million in the second quarter of 2017 was $479,000,
or 3 percent, higher than in the comparable 2016 period. Our gross
profit percentage in the second quarter of 2017 was 48.9 percent of
revenues compared with 47.6 percent of revenues in the second
quarter of 2016. The increase in gross profit in the 2017 period
compared to the 2016 period was primarily related to the reduced
costs of goods sold mentioned above.
Our
second quarter 2017 operating expenses of $7.5 million were
$378,000 higher than the operating expenses for the second quarter
of 2016. This increase was attributable to a $407,000 increase in
General and Administrative, or G&A, expenses and a $200,000
increase in Selling expenses partially offset by a $229,000
decrease in Research and Development, or R&D, expenses. The
increase in G&A expenses for the second quarter of 2017 was
principally attributable to increased compensation and outside
services. The increase in Selling expenses was principally
attributable to increased commissions, compensation and travel
costs. The decrease in R&D expenses was primarily related to
decreased outside services.
Operating income in
the second quarter of 2017 increased $101,000 to $10.2 million, a 1
percent increase compared to our operating income in the quarter
ended June 30, 2016. Operating income was 28 percent of revenues in
both the second quarter of 2017 and the second quarter of
2016.
Interest income in
the second quarter of 2017 was $370,000, compared with $85,000 for
the same period in the prior year. Increased levels of investment
and increased interest rates were the primary reasons for the
increase.
Income
tax expense for the second quarter of 2017 was $519,000 compared to
income tax expense of $2.7 million for the same period in the prior
year. The effective tax rate for the second quarter of 2017 was 4.9
percent, compared with 26.9 percent for the second quarter of 2016.
The effective tax rate for the second quarter of 2017 was favorably
impacted by a tax benefit of $3.0 million related to excess tax
benefits from stock compensation as a result of the adoption of ASU
2016-09. We expect the effective tax rate for the remainder of 2017
to be approximately 32.0 percent.
Results
for the six months ended June 30, 2017
Consolidated net
income totaled $20.0 million, or $10.86 per basic and $10.76 per
diluted share, in the first six months of 2017. This is compared
with consolidated net income of $14.4 million, or $7.90 per basic
and $7.76 per diluted share, in the first six months of 2016. The
income per basic share computations are based on weighted average
basic shares outstanding of 1,839,000 in the 2017 period and
1,823,000 in the 2016 period. The income per diluted share
computations are based on weighted average diluted shares
outstanding of 1,856,000 in the 2017 period and 1,855,000 in the
2016 period.
Consolidated
revenues of $74.7 million for the first six months of 2017 were 3
percent higher than revenues of $72.4 million for the first six
months of 2016. This increase is primarily attributable to
increased volumes of our fluid delivery products.
Revenues
by product line were as follows (in thousands):
|
Six Months ended June 30,
|
|
|
|
|
|
|
Fluid
Delivery
|
$
33,636
|
$
30,610
|
Cardiovascular
|
23,686
|
24,259
|
Ophthalmology
|
7,435
|
8,031
|
Other
|
9,912
|
9,458
|
Total
|
$
74,669
|
$
72,358
|
Cost of
goods sold of $38.3 million for the first six months of 2017 was
$766,000 higher than in the comparable 2016 period. The primary
contributors to the increase in our cost of goods sold were
increased sales and manufacturing inefficiencies in the first
quarter of 2017. Our cost of goods sold in the first six months of
2017 was 51.4 percent of revenues compared with 51.9 percent of
revenues in the first six months of 2016.
Gross
profit of $36.3 million in the first six months of 2017 was $1.5
million, or 4 percent, higher than in the comparable 2016 period.
Our gross profit percentage in the first six months of 2017 was
48.6 percent of revenues compared with 48.1 percent of revenues in
the first six months of 2016. The increase in gross profit
percentage in the 2017 period compared to the 2016 period was
primarily related to a favorable product sales mix partially offset
by manufacturing inefficiencies in the first quarter of
2017.
Our
first six months 2017 operating expenses of $14.8 million were
$582,000 higher than the operating expenses for the first six
months of 2016. This increase was comprised of a $475,000 increase
in G&A and a $212,000 increase in Selling expenses expenses
partially offset by a $105,000 decrease in R&D expenses. The
increase in G&A expenses for the first six months of 2017 was
principally attributable to increased compensation, and outside
services partially offset by decreased travel and depreciation. The
increase in Selling expenses is primarily related to increased
travel, commissions, outside services and compensation partially
offset by reduced promotion costs. The decrease in R&D costs
was primarily related to decreased outside services and
supplies.
Operating income in
the first six months of 2017 increased $963,000 to $21.5 million, a
5 percent increase from our operating income in the six months
ended June 30, 2016. Operating income was 29 percent of revenues in
the first six months of 2017 and 28 percent of revenues in the
first six months of 2016.
Interest income for
the first six months of 2017 was $519,000, compared with $208,000
for the same period in the prior year. Increased levels of
investment and increased interest rates were the primary reasons
for the increase.
In
2016, our other income (expense) was primarily related to an
additional impairment loss on one of our previously impaired
long-term corporate bonds. In the first quarter of 2016, the market
value of this corporate bond experienced further declines.
Therefore, we recorded an additional impairment loss on this bond
of $345,000 reducing the carrying value of the bond to its market
value at March 31, 2016. This bond was sold in the second quarter
of 2016.
Income
tax expense for the first six months of 2017 was $2.0 million
compared to income tax expense of $6.0 million for the same period
in the prior year. The effective tax rate for the first six months
of 2017 was 9.3 percent, compared with 29.6 percent for the first
six months of 2016. The effective tax rate for the first six months
of 2017 was favorably impacted by a tax benefit of $5.3 million
related to excess tax benefits from stock compensation as a result
of the adoption of ASU 2016-09.
Liquidity
and Capital Resources
At
December 31, 2016, we had a $40.0 million revolving credit facility
with a money center bank that could be utilized for the funding of
operations and for major capital projects or acquisitions, subject
to certain limitations and restrictions. Interest under the credit
facility was to be assessed at 30-day, 60-day or 90-day LIBOR, as
selected by us, plus one percent and was to be payable monthly. We
had no outstanding borrowings under our credit facility at December
31, 2016. The credit facility contained various restrictive
covenants, none of which was expected to impact our liquidity or
capital resources. At December 31, 2016, we were in compliance with
all financial covenants.
On
February 28, 2017, we replaced the revolving credit facility with a
new $75.0 million revolving credit facility with the same bank. The
new credit facility has similar operational, covenant and
collateral characteristics as the prior facility. Interest under
the new credit facility is to be assessed at one, two, three or
six-month LIBOR, as selected by us, plus .875 percent. The new
credit facility allows us to make advances until February 28, 2022.
We had no outstanding borrowings under our new credit facility at
June 30, 2017. The new credit facility contains various restrictive
covenants, none of which is expected to impact our liquidity or
capital resources. At June 30, 2017, we were in compliance with all
financial covenants. We believe the bank providing the credit
facility is highly-rated and that the entire $75.0 million under
the credit facility is currently available to us.
At June
30, 2017, we had a total of $57.3 million in cash and cash
equivalents, short-term investments and long-term investments, an
increase of $3.3 million from December 31, 2016. The principal
contributor to this increase was operating results.
Cash
flows from operating activities of $20.1 million for the six months
ended June 30, 2017 were primarily comprised of net income plus the
net effect of non-cash expenses partially offset by increases to
accounts receivable and prepaid expenses. During the first six
months of 2017, we expended $5.4 million for the addition of
property and equipment, $21.9 million for the purchase of
investments, $7.7 million for shares tendered on stock-based
compensation for tax withholding and $3.9 million for dividends.
During the same period,
maturities of investments generated $19.0
million.
At June
30, 2017, we had working capital of $93.6 million, including $20.2
million in cash and cash equivalents and $27.1 million in
short-term investments. The $8.6 million increase in working
capital during the first six months of 2017 was primarily related
to increases in short-term investments, accounts receivable and
prepaid expenses. This increase was partially offset by increases
in accrued income and other taxes. The net increase in cash and
short-term investments was primarily related to operating results.
The increase in accounts receivable was primarily related to
increased revenues for the second quarter of 2017 as compared to
the fourth quarter of 2016. The increase in prepaid expenses is
primarily related to overpayment of federal income taxes. The
increase in accrued income and other taxes is primarily related to
accrued state income taxes.
We
believe that our $57.3 million in cash, cash equivalents,
short-term investments and long-term investments, along with cash
flows from operations and available borrowings of up to $75.0
million under our new credit facility, will be sufficient to fund
our cash requirements for at least the foreseeable future,
including the costs associated with the planned expansion of one of
our manufacturing facilities. We believe that our strong financial
position would allow us to access equity or debt financing should
that be necessary. Additionally, we believe that our cash and cash
equivalents, short-term investments and long-term investments, as a
whole, will continue to increase during the remainder of
2017.
Forward-Looking Statements
Statements
in this Management’s Discussion and Analysis and elsewhere in
this Quarterly Report on Form 10-Q that are forward looking are
based upon current expectations, and actual results or future
events may differ materially. Therefore, the inclusion of such
forward-looking information should not be regarded as a
representation by us that our objectives or plans will be achieved.
Such statements include, but are not limited to, our effective tax
rate for the remainder of 2017, our ability to fund our cash
requirements for the foreseeable future with our current assets,
long-term investments, cash flow and borrowings under the credit
facility, the impact that the inability of the bank providing the
credit facility to provide funds thereunder would have on our
ability to fund operations, the impact of the restrictive covenants
in our credit facility on our liquidity and capital resources, our
access to equity and debt financing, and the increase in cash, cash
equivalents, and investments during the remainder of 2017. Words
such as “expects,” “believes,”
“anticipates,” “intends,”
“should,” “plans,” and variations of such
words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements contained
herein involve numerous risks and uncertainties, and there are a
number of factors that could cause actual results or future events
to differ materially, including, but not limited to, the following:
changing economic, market and business conditions; acts of war or
terrorism; the effects of governmental regulation; the impact of
competition and new technologies; slower-than-anticipated
introduction of new products or implementation of marketing
strategies; implementation of new manufacturing processes or
implementation of new information systems; our ability to protect
our intellectual property; changes in the prices of raw materials;
changes in product mix; intellectual property and product liability
claims and product recalls; the ability to attract and retain
qualified personnel; and the loss of, or any material reduction in
sales to, any significant customers. In addition, assumptions
relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus
susceptible to interpretations and periodic review which may cause
us to alter our marketing, capital expenditures or other budgets,
which in turn may affect our results of operations and financial
condition.