Retractable Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company designs, manufactures, and markets safety syringes and other medical products. Financial statements are unaudited.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $9.44 million | $8.27 million | $25.60 million | $25.99 million |
| Gross profit | $3.35 million | $3.39 million | $9.52 million | $9.82 million |
| Gross margin | 35.5% | 41.0% | 37.2% | 37.8% |
| Operating income (loss) | ($211,000) | ($26,000) | ($1.39 million) | ($1.11 million) |
| Net income (loss) | ($273,000) | $1.83 million | ($1.59 million) | $4.40 million |
| Loss applicable to common shareholders | ($502,000) | Income of $1.49 million | ($2.28 million) | Income of $3.37 million |
| Basic EPS | ($0.02) | $0.06 | ($0.09) | $0.14 |
Q3 sales rose about 14%, while nine-month sales declined about 1.5%. Q3 overall unit sales increased 54.7%; nine-month unit sales increased 4.0%. For the quarter, international sales rose to $2.3 million from $314,000, while domestic revenue declined 10%, principally reflecting lower average selling prices. Nine-month domestic revenue fell 5.6%; international revenue increased to $5.7 million from $4.9 million.
Gross margin declined in both comparisons, primarily because of lower average selling prices. Nine-month average manufacturing cost per unit fell 4.3%, partly offsetting the price pressure. Operating expenses were nearly flat year over year for the nine-month period. Prior-year net income included litigation-settlement proceeds: $1.9 million net in Q3 2011 and $5.7 million net for the first nine months of 2011, from Hospira. The Hospira option expired unexercised in July 2011; no comparable settlement income was reported in 2012.
Cash, debt, and liquidity
- Cash and cash equivalents were $25.0 million at September 30, 2012, down $665,000 from December 31, 2011. Cash represented 51.8% of total assets.
- Operating cash flow was negative $1.20 million for the first nine months, compared with positive $5.00 million in 2011. Investing cash outflow was $283,000; financing cash flow was positive $820,000, including $1.62 million from a CEO stock-option exercise.
- Working capital was $30.0 million, up $188,000 from year-end. Current assets were $35.9 million and current liabilities $6.0 million.
- Total debt was approximately $4.22 million, including $311,000 current and $3.91 million long-term, down from approximately $4.76 million at year-end.
- Accounts receivable increased to $5.22 million from $3.58 million; inventory declined to $4.95 million from $6.24 million, including a 28.8% decrease in finished goods.
Outlook, risks, and unusual items
- Management provided no specific financial guidance. It cited seasonally stronger unit sales later in the year, partly due to flu-season demand, and said it would continue efforts to expand market access, introduce products, and improve manufacturing efficiency.
- Management said limited access to hospital markets has constrained volumes and identified ongoing litigation against Becton, Dickinson and Company (BD) as part of its effort to address alleged exclusionary practices. The company’s patent case was subject to a pending petition for U.S. Supreme Court review, expected to be accepted or rejected by December 2012; a separate antitrust trial was then expected in spring 2013. Other patent litigation remained stayed. Outcomes and potential financial effects are not quantified in the filing.
- A 2.3% medical-device excise tax was scheduled to begin in 2013. The company estimated an impact exceeding $500,000 and said it could not assure that it could pass the cost to customers.
- Double Dove, a Chinese supplier, manufactured approximately 69.6% of units produced in the first nine months. Management warned that disruption could require alternate sourcing or increased domestic production, potentially raising costs; certain products representing about 8.2% of nine-month revenue were specifically identified as requiring alternative supply or capacity.
- The company reported a $3 million common-stock repurchase plan and bought 38,315 shares during the quarter for approximately $84,000. It stated that continued repurchases depended in part on paying dividends on Series I and II preferred stock. At September 30, preferred dividend arrears totaled approximately $11.2 million across all series, including $13,000 and $45,000 for Series I and II.
- The CEO exercised options for 2.0 million common shares at $0.81 per share, providing $1.62 million to the company. A license agreement with the CEO concerning retraction technology was amended to clarify royalty calculations; the stated royalty is generally 5% of gross sales.
- Management identified possible further cost reductions—including reduced production, workforce or salaries, and deferred royalties—if market access and operating cash generation remain inadequate. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth, particularly international sales, is sustained and improves profitability despite lower selling prices and declining gross margins.
- Whether operating cash flow recovers and cash reserves remain sufficient to fund operations, debt service, dividends, and planned repurchases.
- Updates and possible financial consequences of the BD litigation and patent proceedings.
- The actual effect of the 2013 medical-device excise tax and the company’s ability to pass it through to customers.
- Supplier concentration, alternative production capacity, and any resulting cost or supply disruption.
- Preferred dividend arrears and the conditions governing common-stock repurchases.