NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
NOTE 1: BASIS OF PRESENTATION
The accompanying
unaudited Consolidated Financial Statements have been prepared in accordance with U.S. 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 U.S. 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 of the financial position of Respironics, Inc. and Subsidiaries (the Company or Respironics) have been included. Operating results for the three months and six months ended December 31,
2007 are not necessarily indicative of the results that may be expected for the year ended June 30, 2008. The amounts and information as of June 30, 2007 set forth in the Consolidated Balance Sheet and notes to the Consolidated Financial
Statements that follow were derived from the Companys Annual Report on Form 10-K for the year ended June 30, 2007. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended June 30, 2007.
Within these notes to the financial statements we refer to the three and
six months ended December 31, 2007 as the 2007 Quarter and 2007 Period, respectively, and the three and six months ended December 31, 2006 as the 2006 Quarter and 2006 Period, respectively.
On December 20, 2007, the Company entered into a definitive merger agreement pursuant to which Philips Holding USA Inc., a wholly-owned subsidiary of
Koninklijke Philips Electronics N.V. (Royal Philips Electronics or Philips), a global leader in healthcare, lighting and consumer lifestyle, agreed to acquire Respironics. According to the terms of the agreement, on
January 3, 2008 an indirect, wholly-owned subsidiary of Philips (Moonlight Merger Sub, Inc.) commenced an all-cash tender offer for all of the issued and outstanding shares of Respironics to be followed by a merger in which each remaining
un-tendered share of Respironics will be converted into $66 per share. The acquisition will be effected pursuant to a merger agreement and is subject to the terms and conditions of that agreement. Conditions to the completion of the acquisition
include the tender of a majority of the outstanding shares of the Company, as well as customary regulatory clearances in the United States and the European Union. United States regulatory approval for the acquisition was received on January 30,
2008, when the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Philips has extended the period for the tender offer to February 22, 2008
because not all conditions to the offer had been satisfied or waived by Philips, including the approval by the European Commission. The offer is subject to further extension. Subject to the foregoing conditions, the transaction is expected to close
in the Companys third quarter of 2008.
The merger agreement also contains certain termination rights for both Respironics and Philips and further
provides that Respironics will be required to pay Philips a termination fee of $175.0 million, plus expenses to a maximum of $10.0 million, if the merger agreement is terminated under certain specified circumstances. In connection with the
transaction, Respironics recorded merger expenses, consisting primarily of legal fees, investment banking fees and other related costs of approximately $6.9 million in its Consolidated Statement of Operations for the 2007 Quarter and 2007 Period.
The foregoing description of the merger agreement and the merger does not purport to be complete and is qualified in its entirety by reference to the
merger agreement filed as Exhibit 2.1 to our Current Report on Form 8-K dated December 26, 2007, which is incorporated herein by reference.
NOTE 2: SHORT-TERM INVESTMENTS
As of December 31, 2007 and June 30, 2007, the Company invested a portion of its cash into
money management funds at high credit quality financial institutions. Short-term investments consist of U.S. Treasury bills, other government securities, commercial paper, and certificates of deposit, with maturities greater than 90 days. These
investments are designated as available for sale and are stated at fair value.
NOTE 3: EARNINGS PER SHARE
Earnings per common share is computed in accordance with Financial Accounting Standards Board (FASB) Statement No. 128 Earnings per Share. Presented
below is a reconciliation of net income available to common stockholders and the
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
differences between weighted average common shares outstanding, which are used in computing basic earnings per share, and weighted average common and
potential shares outstanding, which are used in computing diluted earnings per share (in thousands except per share information).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
Six months ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,852
|
|
$
|
29,599
|
|
$
|
58,321
|
|
$
|
51,668
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted-average shares
|
|
|
74,036
|
|
|
73,024
|
|
|
73,950
|
|
|
72,930
|
Effect of dilutive securitiesstock options
|
|
|
840
|
|
|
820
|
|
|
1,020
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted-average shares
|
|
|
74,876
|
|
|
73,844
|
|
|
74,970
|
|
|
73,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.42
|
|
$
|
0.41
|
|
$
|
0.79
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.41
|
|
$
|
0.40
|
|
$
|
0.78
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4: INVENTORIES
Inventories consisted of the following, net of allowances for obsolete and excess inventories of $25.9 million, and $21.5 million at December 31, 2007 and June 30, 2007, respectively (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
June 30,
2007
|
Raw materials
|
|
$
|
56,502
|
|
$
|
55,343
|
Work-in-process
|
|
|
10,323
|
|
|
11,385
|
Finished goods
|
|
|
112,811
|
|
|
105,943
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
179,636
|
|
$
|
172,671
|
|
|
|
|
|
|
|
NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Companys reporting currency is the U.S. dollar, and a substantial majority of the Companys sales, expenses, and cash flows are transacted in U.S.
dollars. The Company also does business in various foreign currencies, primarily the Japanese yen, the euro, and the British pound. The Company also transacts business in the Hong Kong dollar, Canadian dollar, Swiss franc, Australian dollar, Chinese
yuan, Swedish krona, Danish krone, Norwegian kroner, Brazilian real, and United Arab Emirates dirham (AED). As part of the Companys risk management strategy, management has put in place a hedging program under which the Company enters into
foreign currency option and forward contracts to hedge a portion of cash flows denominated in certain foreign currencies.
The Company enters into foreign
currency contracts to reduce the risk that the Companys earnings and cash flows, resulting from certain forecasted and recognized currency transactions, will be affected by changes in foreign currency exchange rates. However, the Company may
be impacted by changes in foreign exchange rates related to the portion of the forecasted transactions that are not hedged. The success of the hedging program depends, in part, on forecasts of the Companys transactions in foreign currencies.
Hedges are placed for periods consistent with identified exposures, but not longer than the end of the year for which the Company has substantially completed its annual business plan.
During the fourth quarter of 2007, the Company entered into a 14-month Japanese yen-based cross currency interest rate swap, with aggregate notional principal amounts of ¥1.9 billion Japanese Yen (JPY) and $15.8
million that matures on July 31, 2008. This swap effectively hedges a portion of the Companys net investment in its Japanese Fuji subsidiary. During the term of this transaction, the Company will remit to, and receive from, its
counterparty interest payments based on
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
rates that are reset quarterly equal to three-month JPY LIBOR and three-month U.S. LIBOR rates, respectively. The Company has designated this hedging
instrument as a hedge of a portion of the net investment in its Japanese Fuji subsidiary, and will use the spot rate method of accounting for changes in the fair value of the hedging instrument attributable to currency rate fluctuations. As such, at
December 31, 2007 and June 30, 2007, the fair market value of the hedging instrument attributable to changes in the spot rate of ($1.0) million and $0.4 million, respectively, is recorded as a (debit) credit in other comprehensive income
(with a corresponding amount that is classified with prepaid and other current assets in the Consolidated Balance Sheet as of December 31, 2007 and June 30, 2007). The change in fair market value of the cross currency swap offsets the
change in a portion of the JPY-denominated net investment in the Companys Japanese Fuji subsidiary. Amounts recorded to foreign currency translation within accumulated other comprehensive income will remain there until the net investment is
disposed. The Company recorded $0.2 million and $0.4 million in interest income during the 2007 Quarter and 2007 Period, respectively, in connection with the cross currency interest rate swap.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Invacare Litigation
On March 5, 2004, the Company filed a lawsuit against Invacare Corporation (Invacare) in the United States District Court for the Western District
of Pennsylvania alleging that Invacares manufacture, sale and marketing of a new Continuous Positive Airway Pressure (CPAP) device infringes one or more of 11 U.S. patents of the Company. In its complaint, the Company has sought preliminary
and permanent injunctive relief, damages and an award of three times actual damages. In its answer to the complaint, Invacare has denied the infringement allegations of the complaint and has asserted that the Companys patents are invalid.
Discovery has concluded, and by Order dated August 30, 2006, the Court decided certain issues regarding the interpretation of patent claims involved
in the case. On April 26, 2007, the Court issued a summary judgment decision in which it (1) held the Respironics patent claims asserted to be valid; (2) held that Invacares current CPAP with SoftX product does not infringe
three Respironics patents; and (3) held that it could not decide on summary judgment whether a prior version of the Invacare CPAP with SoftX product infringed a fourth Respironics patent. The trial on the infringement claim concerning the prior
CPAP with SoftX product began on November 5, 2007 and resulted in a jury verdict in Respironics favor. On January 8, 2008, Respironics filed a Notice of Appeal with the United States Court of Appeals for the Federal Circuit as to the
non-infringement aspects of the District Courts prior decisions. On February 4, 2008, Invacare filed a Notice of Cross-Appeal with the United States District Court for the Federal Circuit as to the infringement determination and various
other aspects of the case.
On August 6, 2004, Invacare filed a lawsuit against the Company in the United States District Court in the Northern
District of Ohio alleging that the Company has engaged in monopolization, restraint of trade and unfair competition in the sale and distribution of sleep apnea products. The lawsuits claims include allegations that the Companys actions
and alleged market power have foreclosed competitors from alleged markets and have created markets where there has not been competitive pricing or availability of competitive product offerings. In the lawsuit, Invacare seeks damages in an
unspecified amount and to treble such damages pursuant to the antitrust laws, as well as attorneys fees and punitive damages. Invacare also seeks injunctive relief as to certain marketing practices.
By Order dated October 23, 2006, the Court granted partial summary judgment in the Companys favor, dismissing Invacares monopolization, attempted
monopolization, price discrimination, and unfair competition claims. The Court also limited future discovery in the case to the two remaining claims, parallel restraint of trade claims under both federal and state law. On October 31, 2006,
Invacare filed a motion asking the Court to reconsider portions of its decision granting partial summary judgment. By Order entered on July 19, 2007, the Court denied Invacares motion for reconsideration. The Company continues to
vigorously defend itself against these claims.
Shareholder Litigation
On January 8, 2008, a purported class action lawsuit was filed in the Court of Chancery of the State of Delaware against the Company, the members of its Board of Directors, Koninklijke Philips Electronics N.V.,
Philips Holding USA Inc. and
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
Moonlight Merger Sub, Inc. (collectively, the defendants). The plaintiff alleges breach of fiduciary duties by the Companys Directors in
connection with the merger agreement entered into on December 20, 2007 by Respironics, Philips USA and Moonlight Merger Sub, Inc. and the subsequent tender offer for the Companys shares, commenced on January 3, 2008 by Moonlight
Merger Sub, Inc. In the lawsuit, the plaintiff seeks an injunction against the tender offer and the merger agreement as well as unspecified damages, including attorneys fees and costs. On January 10, 2008, the plaintiff filed motions
seeking expedited proceedings, including the scheduling of a preliminary injunction hearing before the close of the tender offer and expedited discovery. The defendants opposed the plaintiffs motions. The Vice Chancellor of the Court of
Chancery heard arguments on the motions on January 14, 2008, and denied the plaintiffs motions. The Company plans to vigorously defend against any further pursuit of these claims.
Other
The Company is, as a normal part of its business operations, a
party to other legal proceedings in addition to those described above and in previous 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
Companys consolidated results of operations, financial condition or cash flows.
Contingent Obligations Under Recourse Provisions:
In connection with customer leasing programs, the Company uses independent leasing companies for the purpose of providing financing to certain customers for the
purchase of the Companys products. In some cases, the Company is contingently liable, in the event of a customer default, to the leasing companies within certain limits for unpaid installment receivables initiated by or transferred to the
leasing companies. The transfer of certain of these installment receivables meets the criteria of FASB No. 140 and therefore they are not recorded on the Companys financial statements.
As of December 31, 2007, the total exposure for unpaid installment receivables approximates $10.1 million, compared to $12.2 million as of June 30, 2007.
Included in these amounts are unpaid installment receivables totaling $10.1 million and $11.4 million that meet the FASB No. 140 criteria and are not recorded on the Companys consolidated financial statements at December 31, 2007 and
June 30, 2007, respectively. The estimated fair value of the Companys contingent recourse guarantee is $3.0 million and $2.2 million as of December 31, 2007 and June 30, 2007, respectively. Approximately 10% and 11% of the
Companys net sales were made under these financing arrangements during the 2007 Quarter and 2007 Period, respectively, and 10% and 11% of the Companys net sales were made under these financing arrangements during the 2006 Quarter and
2006 Period, respectively. A portion of these sales was made with recourse. The Company is not dependent on these off-balance sheet arrangements.
Third
Party Debt Guarantee
The Company has guaranteed the payment of certain third-party bank debt. The maximum potential amount of future payments that the
Company would be required to make, in the event that the third party defaults on its debt obligations, is $7.0 million. The term of the guarantee is five years from its December 2006 inception date. The estimated fair value of the guarantee at
December 31, 2007 and June 30, 2007 is $1.5 million; this amount is included in the Consolidated Balance Sheet within other noncurrent liabilities and is being amortized into income over five years. The Company does not believe it is
probable that the third party will default on the amount subject to the guarantee.
Product Warranties
Generally, the Companys standard product warranties are for a one- to three-year period (based on the specific product sold and country in which the Company does
business) that covers both parts and labor. The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Companys product warranty liability reflects managements best estimate of probable
liability under its product warranties. Management estimates the liability based on the Companys stated warranty policies, which project the estimated warranty obligation on a product-by-product basis based on the historical frequency of
claims, the cost to replace or repair its products under warranty, and the number of products under warranty based on the warranty terms and historical units shipped. The warranty liability also includes estimated warranty costs that may arise from
specific product issues, including product recalls or related field actions. The Company
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company also engages in the sale of
extended warranties and long-term service contracts for which revenue is deferred and recognized over the warranty terms, which are generally between two and eight years. Changes in the liability for product warranty and deferred service revenues
associated with these service programs for the 2007 Period are as follows (in thousands):
Product Warranties
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
23,954
|
|
Warranty accruals during the period
|
|
|
8,789
|
|
Service costs incurred during the period
|
|
|
(5,132
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
27,611
|
|
|
|
|
|
|
Deferred Service Revenues
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
9,296
|
|
Revenues deferred during the period
|
|
|
3,648
|
|
Obligations transferred with sale of oximetry product line (see Note 10)
|
|
|
(553
|
)
|
Amounts recorded as revenue during the period
|
|
|
(2,266
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
10,125
|
|
|
|
|
|
|
The accruals for product warranties and deferred service revenues are classified with accrued expenses and other
current liabilities in the Consolidated Balance Sheet.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and cash equivalents
The carrying amount of cash and cash equivalents, which include investments readily
convertible to known amounts of cash with original maturities of 90 days or less, approximate fair value because of the short maturity of those investments.
Short-term investments
Short-term investments are recorded in the Consolidated Balance Sheet at fair value. Fair values are based on quoted
market prices, estimates from brokers, and other appropriate valuation techniques. The fair value estimates do not necessarily reflect the values that could be realized in the current market on any one day.
Long-term obligations
The fair values of long-term debt obligations
are established from the market values of similar issues. The carrying amounts of the Companys obligations approximate their fair values at December 31, 2007 and June 30, 2007.
Foreign currency exchange derivative contracts
Foreign currency
exchange derivative contracts are recorded in the Consolidated Balance Sheet at fair value. As of December 31, 2007 and June 30, 2007, foreign currency contracts with a fair value of ($1.0) million and $0.4 million, respectively, are
recorded with prepaid expenses and other current assets.
NOTE 8: STOCK OPTIONS AND PURCHASE PLANS
As of December 31, 2007 the Company maintained two active employee stock option plans: the 2000 Stock Incentive Plan and the 2006 Stock Incentive Plan. The 2007
Employee Stock Purchase Plan was suspended on December 20, 2007, the date of the announced tender offer and merger with Philips discussed in Note 1. These share based compensation plans are described more fully in Note N of the Consolidated
Financial Statements included in the Companys June 30, 2007 Annual Report on Form 10-K.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
The Company adopted FASB Statement No. 123 (Revised 2004)Share-Based Payment (FASB
No. 123(R)) on July 1, 2005 using the modified prospective method. Stock-based compensation expense was $3.9 million ($2.6 million after tax, or $0.03 per share) and $3.1 million ($2.0 million after tax, or $0.03 per share) in the 2007
Quarter and 2006 Quarter, respectively. Stock-based compensation expense was $7.6 million ($5.1 million after tax, or $0.06 per share) and $6.1 million ($4.1 million after tax, or $0.05 per share) in the 2007 Period and 2006 Period, respectively.
Stock based compensation attributable to the stock option and purchase plans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
Six months ended
December 31,
|
|
|
2007
1
|
|
2006
|
|
2007
1
|
|
2006
|
Stock Option Plans
|
|
$
|
3,614
|
|
$
|
2,914
|
|
$
|
7,046
|
|
$
|
5,713
|
Employee Stock Purchase Plan
|
|
|
289
|
|
|
143
|
|
|
526
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock Compensation Expense
|
|
$
|
3,903
|
|
$
|
3,057
|
|
$
|
7,572
|
|
$
|
6,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
The Employee Stock Purchase Plan was suspended on December 20, 2007, the date of the announced tender offer and
merger with Philips discussed in Note 1. The stock options outstanding under the stock option plans will have a modification of the requisite service period to vest 100% immediately before the merger discussed in Note 1 is completed.
|
NOTE 9: COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net Income
|
|
$
|
30,852
|
|
|
$
|
29,599
|
|
|
$
|
58,321
|
|
|
$
|
51,668
|
|
Foreign currency translation gains
|
|
|
1,446
|
|
|
|
2,849
|
|
|
|
8,183
|
|
|
|
4,021
|
|
Unrealized gains on derivatives qualifying as hedges
|
|
|
(388
|
)
|
|
|
|
|
|
|
(950
|
)
|
|
|
|
|
Unrealized gain on short-term investments
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
31,913
|
|
|
$
|
32,422
|
|
|
$
|
65,557
|
|
|
$
|
55,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10: ACQUISITIONS AND DISPOSITIONS
Acquisitions
Mayo
On January 2, 2007, the Company acquired the homecare assets of its Australian
distributor, Mayo Healthcare Pty Ltd (Mayo). The acquisition provides the Company with a direct presence in the Australian sleep therapy, home noninvasive ventilation and oxygen markets. The purchase price totaled approximately $6.2 million, There
are additional accrued payments based on the first year of operation as specified in the stock purchase agreement and there are provisions for additional payments to be made based on operating performance through 2009. The results of operations of
the acquired business are included in the Companys Consolidated Statements of Operations beginning on the acquisition date, January 2, 2007. The acquisition did not materially impact the Companys net sales or net income during the
2007 Quarter or 2007 Period.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
Emerson
On April 3, 2007, the Company
acquired the assets of J. H. Emerson Company (Emerson) for a cash purchase price of $23.7 million (including transaction costs). Emerson, located in Cambridge, Massachusetts, is a manufacturer, supplier, and wholesaler of the CoughAssist
®
which helps patients to clear broncho-pulmonary secretions to reduce the risk of respiratory complications. Prior to the acquisition, Emerson was the Companys supplier of the
CoughAssist
®
. The acquisition of the Emerson assets further expands the Companys portfolio of Home Respiratory Care products and enables the Company to better secure the needs of
respiratory impaired patients. The results of operations of the Emerson business are included in the Companys Consolidated Statement of Operations beginning on the acquisition date, April 3, 2007. The acquisition did not materially impact
the Companys net sales or net income during the 2007 Quarter or 2007 Period.
Apollo
On October 2, 2007, the Company acquired 100%
of the outstanding shares of Apollo Light Systems, Inc. (Apollo), a privately-held company, located in American Fork, Utah, which manufactures light therapy systems for melatonin suppression and circadian rhythm sleep disorders. The cash purchase
price for Apollo was $7.3 million with provisions for additional payments to be made based on its operating performance over the next year. Total potential earn-out payments are less than the base purchase price. The acquisition did not materially
impact the Companys net sales or net income during the 2007 Quarter or 2007 Period.
Pro-Tech
On December 3, 2007, the Company acquired Pro-Tech Systems (Pro-Tech), a manufacturer of sleep diagnostic accessories for the Companys Alice
®
sleep diagnostic products, for $22.9 million. Pro-Tech, located in a suburb of Seattle, Washington, provides the Company with a complementary replaceable sensor business to its capital purchase diagnostic devices. This acquisition did not
materially impact the 2007 Quarter or 2007 Period.
Other
During the year ended June 30, 2007, the Company acquired the majority of the
stock of its distributors in Norway and Denmark, totaling $7.2 million (including transaction costs). These acquisitions did not materially impact the Companys net sales or net income during the 2007 Quarter or 2007 Period.
In addition, in the 2007 Period, the Company invested a total of $12.5 million for a majority equity interest in its distributor in Finland and minority equity interests
in two sleep companies. The international distributors results of operations are included in the Companys Consolidated Statements of Operations beginning on the acquisition date. One of the sleep companies developed and markets a
stress-reducing product to the retail market. The Company is using the cost method of accounting for this investment since its ownership is less than 20% of the outstanding voting stock of the sleep company and the Company determined that it does
not exercise significant influence over the sleep company operations. The other company is a development stage sleep company. The Company is using the equity method of accounting for this investment since its ownership is greater than 20%, but less
than 50%, of the outstanding voting stock of the development stage company and the Company determined it does have significant influence over the development stage company operations. The Company recorded $5.4 million of in-process research and
development expenses related to this investment in the development stage company; this amount is reflected in the Consolidated Statement of Operations for the 2007 Quarter and the 2007 Period.
Dispositions
On October 8, 2007, the Company sold its
Novametrix pulse oximetry business to Dixtal Medical, Inc. after deciding to exit this line of business and refocus on its core technologies. As of June 30, 2007, the Companys assets related to this business, which approximated the sales
price, were classified in the Consolidated Balance Sheet as assets held for sale within prepaid expenses and other current assets and other (long-term) assets. During the 2007 Quarter, the Company received proceeds approximately equal to
the net book value of the assets disposed. The sale transaction did not have a material impact on the Companys Consolidated Statement of Operations during the 2007 Quarter or 2007 Period.
NOTE 11: INCOME TAXES
In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN 48), which became effective for the Company on July 1, 2007. FIN 48 prescribes a
comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on an income tax return. Under FIN 48, tax positions should initially be
recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
tax authorities. Such tax positions should be initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts.
The Company adopted the
provisions of FIN 48 on July 1, 2007. As a result of the implementation of FIN 48, the Company recognized a net $3.9 million increase in the liability for unrecognized tax benefits which was accounted for as a reduction to the July 1, 2007
balance of retained earnings. After recognition of these items in connection with the implementation of FIN 48, the total liability for unrecognized tax benefits at July 1, 2007 was $20.8 million. Of this total, $16.1 million of net tax
benefits would reduce the Companys effective tax rate if the tax benefits were recognized in the financial statements. At December 31, 2007, the Companys total liability for unrecognized net tax benefits was $25.9 million, of which
$21.2 million would reduce the effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income
tax expense. The total amount of accrued interest and penalties included in the FIN 48 liability above as of July 1, 2007 was $3.8 million. The Company recognized $0.4 million of interest and penalties in income tax expense for the 2007 Quarter
and $0.8 million for the 2007 Period and at December 31, 2007 the total amount of accrued interest and penalties included in the FIN 48 liability was $4.5 million.
As of December 31, 2007, the Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next
12 months.
The tax years 2003-2006 remain open to examination by the major taxing authority jurisdictions to which the Company is subject.
The Companys effective income tax rate was approximately 28% for the 2007 Quarter and 37% for the 2006 Quarter. The lower rate in the current Quarter was related
to the establishment of the patient interface manufacturing center of excellence in the Asia Pacific Region. The effective income tax rate for the 2007 and 2006 periods were approximately 27% and 37%, respectively. The lower rate in the 2007 Period
was also related to the establishment of the patient interface manufacturing center of excellence in the Asia Pacific Region and other items.
NOTE
12: RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FASB
No. 157). FASB No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. FASB No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. However, the FASB, at a board meeting late in 2007, granted a one year deferral of this implementation for nonfinancial assets and liabilities. The Company will be required to adopt the provisions of FASB No.
157 on July 1, 2008, for financial assets and liabilities, and is currently evaluating the impact of such adoption on its Consolidated Financial Statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FASB No. 159). This Standard allows companies to elect to follow fair value accounting for
certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. FASB No. 159 is applicable only to certain financial instruments and is effective for fiscal
years beginning after November 15, 2007. The Company may adopt the provisions of FASB No. 159 on July 1, 2008, and is currently evaluating the impact of this optional adoption on its Consolidated Financial Statements.
In December 2007, the FASB issued Statement No. 141 (R), Business Combinations, which requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. This is effective for fiscal years beginning after December 15, 2008 with adoption by the Company
on July 1, 2009. An evaluation of the impact of this adoption on the Companys Consolidated Financial Statements is being undertaken.
Also in
December 2007, the FASB issued Statement No. 160, Non-controlling Interests in Consolidated Financial Statements (FASB No. 160), which is effective for fiscal years beginning after December 15, 2008. This statement
requires all entities to report non-controlling (minority) interests in subsidiaries in the same manner as equity in the consolidated
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007
financial statements. This eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by
requiring that they be treated as equity transactions. The Company will be required to adopt the provisions of FASB No. 160 on July 1, 2009 and is currently evaluating the impact of such adoption on its Consolidated Financial Statements.
****************
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, including those contained in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations, along with statements in reports filed with the Securities and Exchange Commission (SEC),
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 Companys 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 the expected results included in the forward-looking statements. Those factors include, but are not limited to, the following: the impact of the pending merger agreement with Philips, developments in the healthcare
industry; the success of the Companys marketing, sales, and promotion programs; future sales, acceptance, and quality of the Companys products and programs; the results of clinical trials; the timing and success of new product
introductions; new product development; anticipated cost savings; FDA and other regulatory requirements, enforcement actions, product recalls or related field actions; future results from acquisitions and strategic investments; growth rates in
foreign markets; regulations and other factors affecting operations and sales outside the United States; foreign currency fluctuations; the effects of a major natural disaster, cyber-attack or other catastrophic event that results in the destruction
or disruption of any critical business or information technology systems; customer consolidation and concentration; increasing price competition and other competitive factors in the manufacture, distribution, and sale of products; interest rate
fluctuations; expiration of intellectual property rights; intellectual property and related litigation; other litigation; future levels of earnings and revenues; the number of equity awards granted to employees and changes in the Companys
stock price; and third party reimbursement; all of which are subject to change. In addition, completion of the Companys tender offer and merger with Philips is subject to conditions, including satisfaction of a minimum tender condition and the
need for regulatory approval, and there can be no assurance those conditions can be satisfied or that the transactions described in Note 1 to this Quarterly Report on Form 10-Q will be completed.
15
Respironics, Inc. and Subsidiaries
Three and six months ended December 31, 2007