Retractable Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The company designs, manufactures, and markets safety syringes and other safety medical products. Safety syringes represented 99.2% of first-half sales.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $8.73 million | $7.98 million | $16.16 million | $17.72 million |
| Gross profit | $3.33 million | $3.14 million | $6.17 million | $6.43 million |
| Gross margin | 38.2% | 39.3% | 38.2% | 36.3% |
| Operating loss | $(0.53) million | $(0.99) million | $(1.18) million | $(1.09) million |
| Net income (loss) | $(0.60) million | $0.85 million | $(1.32) million | $2.57 million |
| Loss per common share | $(0.03) | — | $(0.07) | — |
Q2 sales rose 9.4% year over year, while first-half sales fell 8.8%. First-half overall unit sales declined 15.4%; management cited lower domestic and South American volumes. Q2 domestic revenue increased 16.0%, but international revenue decreased 8.8%. First-half domestic and international revenue declined 2.9% and 26.0%, respectively.
Q2 gross profit increased 6.2%, though margin narrowed as manufacturing costs rose, including from lower production volumes and expired-product write-offs. First-half gross profit declined 4.0%; higher average selling prices lifted margin despite lower volume and higher unit costs. Operating expenses declined 6.3% in Q2 and 2.2% in the first half, mainly on lower bad-debt accruals and, for the half, lower franchise tax expense. Increased sales and marketing spending partly offset those savings.
Prior-year earnings included net litigation settlement income of $1.9 million in Q2 and $3.8 million in the first half, related to Hospira option payments. No such settlement income was recorded in 2012, a key reason the comparable periods shifted to net losses.
Cash, liquidity, and capital
- Cash and equivalents were $22.90 million at June 30, down $2.77 million from year-end. Operating activities used $2.25 million in the first half; investing used $0.16 million, primarily for equipment, and financing used $0.36 million for debt repayments.
- Working capital was $28.8 million, down approximately $0.96 million from December 31, 2011. Current assets were $34.92 million and current liabilities $6.10 million.
- Total debt was approximately $4.41 million, including $0.42 million current and $3.99 million long-term, versus approximately $4.76 million at year-end.
- Accounts receivable rose to $6.74 million from $3.58 million at year-end; inventory declined to $5.02 million from $6.24 million, primarily as seasonal finished goods were sold.
Outlook, risks, and notable matters
The filing provides no quantified revenue or earnings guidance. Management said it had sufficient cash reserves and expected to rely on operations, cash reserves, and debt financing, while noting additional borrowing was uncertain. It warned that sustained limited market access or inadequate operating cash could prompt further cost reductions, including workforce or production cuts, compensation reductions, or deferred royalty payments. Historically, sales have tended to increase later in the year around flu season.
- Management said limited access to hospital and other markets, which it attributes principally to BD’s marketing practices, constrains sales. Litigation with BD remains ongoing. A Supreme Court petition concerning patent litigation was awaiting a decision expected by October 2012; management believed a separate antitrust trial could proceed in fall 2012. Another BD/MDC patent case had no trial date, and a company summary-judgment motion was pending.
- Double Dove, a Chinese supplier, manufactured approximately 67.6% of first-half units. A disruption could affect supply; certain products representing about 9.6% of first-half revenue would require an alternative source or expanded domestic production. The company also relies on some single-source component suppliers.
- Two significant customers accounted for 30.0% of first-half sales; three accounted for 45.2% of Q2 sales. The company had reserved for certain distributors’ non-contractual rebate claims.
- A 2.3% U.S. medical-device excise tax was scheduled to begin in 2013. The company said applicability to its products could materially affect results and that added costs might not be recoverable through price increases.
- After quarter-end, the CEO exercised options for 2.0 million shares at $0.81 per share, providing $1.62 million to the company. The company also declared and paid $172,838 in preferred dividends. A common-stock repurchase plan was authorized, but purchases had not commenced by August 1, 2012 because of trading-rule limitations.
- Preferred-stock dividend arrearages remained substantial at June 30, including $6.61 million for Series IV and $3.43 million for Series III. The filing identifies restrictions associated with dividends in arrears.
Management stated that disclosure controls were effective as of June 30, 2012 and reported no material change in internal control over financial reporting. The interim statements are unaudited; management cautioned that results to date are not necessarily indicative of full-year results.
Important facts for investors to verify
- Subsequent rulings and trial timing in the BD patent and antitrust litigation, and any resulting cash proceeds or liabilities.
- Whether hospital-market access and unit volumes improve, particularly in the second half and during flu season.
- Continuity of Double Dove supply, domestic capacity, and manufacturing costs, including petroleum and transportation costs.
- Applicability and financial impact of the medical-device excise tax, and the status of the planned share repurchases.
- Collection of receivables and rebate claims, customer concentration, and the ongoing preferred-dividend arrearages.