Electromed, Inc. Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended December 31, 2011. The condensed consolidated financial statements are unaudited. Electromed develops, manufactures, and markets SmartVest high-frequency chest wall oscillation airway-clearance products for home care, institutional, government, and international markets.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Three Months Ended Dec. 31, 2010 | Six Months Ended Dec. 31, 2011 | Six Months Ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net revenues | $4.79 million | $4.69 million | $10.17 million | $8.85 million |
| Gross profit | $3.48 million | $3.54 million | $7.54 million | $6.47 million |
| Gross margin | 72.6% | 75.6% | 74.1% | 73.1% |
| Operating income | $0.10 million | $0.54 million | $0.55 million | $0.79 million |
| Net income | $24,554 | $291,872 | $270,093 | $403,943 |
| Net margin | 0.5% | 6.2% | 2.7% | 4.6% |
| Diluted EPS | $0.00 | $0.04 | $0.03 | $0.05 |
- Six-month revenue increased 14.9%, led by home care revenue growth of 17.2%. Government and institutional revenue increased 14.9%, while international revenue declined 36.0%.
- Six-month operating expenses increased 22.9% to $6.98 million, including SG&A growth of 23.9% and R&D growth of 9.8%.
- Six-month net cash used in operating activities was $1.53 million, compared with $0.24 million in the prior-year period.
- Six-month investing cash use was $0.64 million, including $0.62 million of property and equipment purchases. Approximately $414,000 related to converting leased space for additional offices.
- Six-month financing cash use was $0.17 million, primarily reflecting $0.19 million of long-term debt principal payments.
- Cash and cash equivalents declined to $1.75 million at December 31, 2011 from $4.09 million at June 30, 2011.
- Accounts receivable increased to $10.70 million from $9.59 million at June 30, 2011, and inventories increased to $2.40 million from $1.86 million.
- Total liabilities were $5.66 million and shareholders’ equity was $15.07 million at December 31, 2011.
Debt and Liquidity
- The amended credit facility provides a $6.0 million revolving line of credit and $2.52 million of term debt. The revolving facility expires December 31, 2013, unless renewed earlier.
- At December 31, 2011, outstanding borrowings totaled approximately $3.55 million, consisting of $1.77 million under the revolving line and approximately $1.78 million of term debt.
- Net unused availability under the revolving line was approximately $3.25 million, subject to borrowing-base limitations based on eligible accounts receivable and outstanding Term Loan B debt.
- Interest on the revolving line was LIBOR plus 3.08%, or 3.39% at December 31, 2011. Term Loan A bears interest at 5.79% and Term Loan B at 4.28%.
- Term Loan B, with approximately $1.0 million of original principal, matures December 9, 2012. Term Loan A matures December 9, 2014.
- Management stated that cash and available borrowings are expected to provide adequate liquidity for the next year, but additional financing may be required if operating cash flow is insufficient or capital needs increase.
- The company reported compliance with all credit facility covenants at December 31, 2011.
Material Changes Versus Prior Comparable Period
- Quarterly revenue grew only 2.2%, while six-month revenue grew 14.9%, reflecting stronger earlier-period growth and quarterly sales-force turnover.
- Quarterly gross margin declined to 72.6% from 75.6% because of a less favorable reimbursement and referral mix. Management did not view the quarterly decline as indicative of a long-term margin trend.
- Six-month gross margin improved to 74.1% from 73.1%, primarily because of higher-than-average reimbursement mix; management likewise cautioned that this improvement may not be sustained.
- Quarterly net income fell 91.6%, and six-month net income fell 33.1%, as personnel, sales, marketing, patient services, and other infrastructure investments outpaced revenue growth.
- SG&A staffing increased materially, with SG&A-related FTEs rising from approximately 45 to 60-61. The sales staff increased from 21 to 25 FTEs, but approximately 16% of Clinical Area Managers turned over during the quarter.
- Operating cash use increased substantially because of higher accounts receivable, inventory, and prepaid expenses, together with lower accounts payable and accrued liabilities.
- Unlike the prior-year period, which benefited from approximately $6.36 million of IPO proceeds, the current six-month period had no equity offering proceeds and used cash for debt repayment and capital expenditures.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to spend at least 5.0% of sales on research and development for the foreseeable future.
- Management expects the expanded sales force, reimbursement and production personnel, marketing activities, and R&D efforts to support continued sales growth, but the filing provides no formal revenue or earnings guidance.
- Key risks include reimbursement changes affecting Medicare, Medicaid, and private insurers; referral mix and reimbursement uncertainty; competition; international economic conditions; regulatory compliance and approvals; sales-force recruitment and retention; intellectual-property protection and litigation; credit-market conditions; and general economic conditions.
- The company attributes the decline in international revenue partly to the European sovereign debt situation and related austerity measures.
- The company has lifetime product warranties for prescribed U.S. and Canadian patients, five-year warranties in Greece, and three-year warranties for institutional and other international sales. The warranty reserve was approximately $470,000 at December 31, 2011.
- The prior SmartVest trademark litigation with Hill-Rom was settled in September 2010 without a material impact, and the company retains the right to continue using the SmartVest marks. Settlement terms are confidential.
- The former CFO retired effective October 18, 2011. The separation agreement provides approximately $27,600 for accrued vacation and approximately $147,000 of separation and bonus payments.
- The company uses related-party providers for research and development and component sourcing. R&D payments to the related service provider totaled approximately $180,000 for the six months ended December 31, 2011; payments to the related parts supplier totaled approximately $324,000.
- The company reported no off-balance-sheet arrangements, no defaults upon senior securities, and no known undisclosed litigation expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether accounts receivable collections and reimbursement trends improve sufficiently to reverse the $1.53 million six-month operating cash outflow.
- Whether the company can manage the December 2012 maturity of Term Loan B while maintaining covenant compliance and adequate liquidity.
- Whether expanded staffing and infrastructure produce sustained revenue growth without further compression of operating and net margins.
- Whether reimbursement mix, Medicaid exposure, and referral qualification affect future gross margins.
- Whether international revenue stabilizes after the six-month decline and whether domestic home-care growth remains durable.
- The terms and ongoing costs of related-party arrangements, executive severance obligations, warranty claims, and any future intellectual-property disputes.