Retractable Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The unaudited company designs, manufactures and markets safety syringes and other safety medical products. Safety syringes represented 95.5% of first-half sales.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $7.98 million | $7.45 million | $17.72 million | $15.91 million |
| Gross profit | $3.14 million | $2.83 million | $6.43 million | $6.28 million |
| Operating income (loss) | $(0.99) million | $(3.03) million | $(1.09) million | $(5.21) million |
| Net income (loss) | $0.85 million | $(2.77) million | $2.57 million | $(5.04) million |
| Basic EPS | $0.02 | $(0.13) | $0.08 | $(0.24) |
Gross margin was approximately 39.3% in Q2 2011 versus 37.9% a year earlier, and approximately 36.3% for the first half versus 39.4%. Management attributed improved gross profit to higher volume and lower manufacturing costs; average manufactured-product cost per unit fell 25.2% in Q2 and 13.0% for the first half.
Net income included net litigation-settlement income of $1.9 million in Q2 and $3.8 million for the first half, reflecting Hospira payments less associated royalty expense. Excluding this item, the company remained loss-making at the operating level.
Cash, debt and liquidity
- Cash and equivalents were $26.79 million at June 30, 2011, up from $23.27 million at December 31, 2010. Working capital was $32.3 million, up $2.1 million.
- First-half operating cash flow was $4.24 million, compared with a $4.28 million use in the prior-year period. Investing used $0.46 million; financing used $0.25 million, mainly for debt repayments.
- Total debt was approximately $4.88 million, including $0.64 million current and $4.24 million long-term, versus approximately $4.82 million at year-end.
- Three molding machines were financed in Q2 with a $327,725, 36-month loan at 5.6%; management expected a fourth machine purchase in Q4 2011.
Changes, outlook and key risks
- Sales grew 7.1% in Q2 and 11.4% in the first half. Domestic sales declined while North and South American sales outside the U.S.—principally South America—increased sharply. First-half U.S. sales were $13.16 million versus $14.71 million.
- Operating expenses fell 29.6% in Q2 and 34.6% for the first half, mainly from lower litigation and stock-option costs. Domestic unit sales declined 15.3% in Q2 and 3.5% for the first half, despite overall unit growth.
- Hospira’s one-year option to negotiate a Patient Safe syringe license expired unexercised in July 2011. The company reported receiving the final $2 million option payment in Q3, bringing total option payments to $8 million.
- Management gave no specific earnings or revenue guidance. It said limited hospital-market access continues to constrain performance; if operating cash generation and settlement proceeds prove insufficient, possible responses include production and workforce reductions, salary cuts, or deferred royalty payments. Management also cited cost-reduction efforts through moving molding work in-house.
- Supplier concentration is material: Double Dove in China supplied approximately 71.9% of first-half finished products. A disruption could require alternate sourcing and increased domestic production; certain products representing about 13.7% of first-half revenue could be affected. Three customers accounted for about 41.2% of first-half sales.
- In July, a Federal Circuit panel reversed the finding that BD’s 3mL Integra infringed two company patents, while affirming infringement findings concerning the 1mL Integra. Retractable sought rehearing on the 3mL ruling. Separate antitrust litigation against BD was set for January 2012; BD’s patent suit against the company was set for February 2012. Outcomes and financial effects are uncertain.
- Preferred dividends declared for Series I and II totaled $291,700 and were paid in July. Dividend arrearages remained for Series III, IV and V, totaling $3.44 million, $6.26 million and $4.29 million, respectively.
Important facts for investors to verify
- Whether sales growth in South America and overall unit growth can offset continuing declines in U.S. revenue and support sustainable operating profitability.
- How much reported earnings and liquidity depend on litigation-related proceeds, including the timing and receipt of settlement payments.
- The status and potential effects of the BD patent and antitrust cases, including the requested rehearing and scheduled trials.
- Whether the company can maintain supply from Double Dove, diversify sourcing, and realize savings from domestic molding investments.
- The implications of preferred-dividend arrearages and the company’s ongoing ability to fund operations from cash, operating flows and debt financing.