Retractable Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company designs, manufactures and markets safety syringes and other medical products. Figures below are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $27.1 million | $11.6 million | $49.9 million | $29.2 million |
| Gross profit | $13.8 million | $3.8 million | $21.0 million | $9.2 million |
| Gross margin | 51.0% | 32.4% | 42.2% | 31.5% |
| Operating income | $10.3 million | $1.0 million | $11.8 million | $1.1 million |
| Net income | $8.6 million | $1.0 million | $12.7 million | $1.3 million |
| Basic and diluted EPS | $0.33 | $0.03 | $0.45 | $0.02 |
| Operating cash flow | Not presented quarterly | $8.8 million | $1.5 million |
Q3 operating margin was 38.2%, versus 8.4% a year earlier; nine-month operating margin was 23.6%, versus 3.9%. Revenue growth reflected higher unit volumes, including sales under the HHS order. Q3 sales to the U.S. government under that order were approximately $12.9 million. Nine-month sales included $14.1 million under the order.
Financial position and cash flows
- At September 30, 2020, cash and cash equivalents were $15.7 million; current assets were $46.8 million and current liabilities $14.8 million. Working capital was $32.0 million.
- Total debt was $3.8 million, including $1.1 million current and $2.7 million long-term. This includes a $1.363 million PPP loan at 1% interest; forgiveness had not been determined and the company had not yet applied.
- Other long-term liabilities included $8.8 million of deferred TIA reimbursements and $1.8 million related to preferred-stock repurchases. The September preferred-stock repurchase also included $952,000 classified as current.
- Nine-month investing cash outflow was $7.7 million, including $9.5 million of property and equipment purchases, largely down payments connected with the capacity expansion. Financing cash inflow was $8.6 million, including $6.9 million of TIA proceeds and the PPP loan. Cash increased $9.8 million from year-end 2019.
- Accounts receivable increased to $15.9 million from $6.6 million at year-end. The company attributed operating cash generation partly to net income, offset by the increase in receivables.
Material changes and unusual items
- Q3 sales rose 133% year over year. Domestic sales excluding the HHS order increased approximately 40%; international revenue declined 39.7%. Nine-month sales rose 71% year over year.
- The HHS delivery order was valued at approximately $83.8 million; in October 2020, its value increased by $10 million for expedited freight costs. Management expected order sales to increase quarterly through May 2021.
- Effective July 1, the company entered a $53.7 million government Technology Investment Agreement (TIA) to expand domestic needle and syringe production. By early November, it had negotiated approximately $38 million of equipment contracts. Planned construction included 27,800 square feet of controlled-environment space and a 55,000-square-foot warehouse, with completion expected in Q2 2021. The company said it would fund the estimated $5.8 million warehouse cost.
- Management released its deferred-tax valuation allowance in Q2, recognizing approximately $1.8 million of tax benefit. The nine-month effective tax rate was negative 1.2%; Q3 tax expense was $1.6 million. EPS applicable to common shareholders also included a $2.5 million deemed contribution related to preferred-stock extinguishment, making it higher than net income alone would imply.
- Preferred-stock exchanges and repurchases reduced preferred shares and included waivers of dividends in arrears. The September exchange included 600,000 common shares and $3.0 million payable over three years; the filing records its net present value as $2.7 million.
Management commentary, risks and contingencies
Management reported increased product demand in 2020 and no significant supply-chain disruption to date, but said it could not predict whether operations would maintain current functionality amid COVID-19. Approximately 82.2% of products were obtained from Chinese manufacturers in the first nine months of 2020. The company noted that replacing Chinese suppliers could require alternate sourcing or expanded domestic production. It also cited risks around construction and production ramp-up, tariffs, costs, competition, and access to markets. The filing provides no formal earnings or sales guidance beyond expectations for HHS order deliveries and the expansion schedule.
The company is a plaintiff in a professional-negligence and malpractice lawsuit against its former legal counsel relating to prior litigation with Becton, Dickinson and Company. The defendants appealed after the trial court denied their motion to dismiss. Management reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective as of September 30, 2020.
Important facts for investors to verify
- Whether the HHS order’s expanded value, delivery cadence, and expected sales through May 2021 are realized.
- Progress, total cost, funding terms, and completion timing for the TIA-backed capacity expansion and company-funded warehouse.
- Collection of the substantially higher accounts receivable balance and the company’s ability to meet operating and capital requirements.
- PPP loan forgiveness outcome and payment obligations if forgiveness is unavailable.
- Reliance on Chinese manufacturers and the potential effect of supply disruption, tariffs, or production transition on margins and deliveries.
- Effects of preferred-stock transactions, dividend arrears and share issuance on common shareholders, and developments in the legal proceeding.