Retractable Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company designs, manufactures, and markets safety syringes and other safety medical products. Financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $8.27 million | $12.24 million | $25.99 million | $28.15 million |
| Gross profit | $3.39 million | $5.20 million | $9.82 million | $11.48 million |
| Gross margin | 41.0% | 42.5% | 37.8% | 40.8% |
| Operating income (loss) | $(26,375) | $1.02 million | $(1.11) million | $(4.20) million |
| Net income | $1.83 million | $8.23 million | $4.40 million | $3.19 million |
| Earnings applicable to common shareholders | $1.49 million | $7.89 million | $3.37 million | $2.17 million |
| Basic / diluted EPS | $0.06 / $0.06 | $0.33 / $0.29 | $0.14 / $0.13 | $0.09 / $0.08 |
Q3 sales fell 32.4% year over year; nine-month sales fell 7.7%. Q3 operating results turned slightly negative, while the nine-month operating loss narrowed substantially. Net income in both 2011 periods included litigation settlement income: $1.9 million net in Q3 and $5.7 million net for nine months. Excluding that item, reported net income does not represent the company’s operating performance.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $5.00 million, versus $5.03 million a year earlier. Capital spending was $654,000; debt repayments were $445,000; preferred dividends paid were $292,000.
- Cash and cash equivalents were $26.92 million at September 30, 2011, up from $23.27 million at December 31, 2010. Working capital was $34.1 million, up $3.8 million from year-end.
- Total assets were $53.48 million and total liabilities $10.50 million. Long-term debt, including current maturities, totaled approximately $4.72 million, compared with $4.82 million at year-end.
- Inventory was $7.65 million, down from $8.68 million at year-end. Accounts receivable was $5.81 million, down from $7.58 million.
Material changes and management commentary
- Q3 domestic revenue declined 18.8%, mainly from lower unit sales and average selling prices; domestic unit sales fell 7.8%. International unit sales and revenue fell 89.5% and 87.1%, respectively. Total unit sales fell 34.7%.
- For the first nine months, domestic revenue declined 13.8%, while international revenue increased 33.9%, mainly due to South American sales. Total unit sales increased 4.2%, but revenue declined, reflecting lower average prices and sales mix.
- Management attributed the year-to-date operating-loss improvement primarily to lower operating expenses, including lower legal, stock-option, and bonus expenses. The average manufactured-product cost per unit fell 6.6% for the nine months, but rose 6.1% in Q3.
- Management cited limited access to hospital and alternate-care markets and said it would continue sales efforts, product development, manufacturing-efficiency improvements, and litigation. It stated that available cash reserves were sufficient for current needs, while noting that additional cost reductions could be necessary if operating cash became insufficient. No quantified earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Hospira’s one-year option to negotiate a license for certain Patient Safe syringe uses expired unexercised in July 2011. The company received the full $8 million option payment; $2 million was received in each of four quarters. The separate 2010 Abbott/Hospira settlement also contributed to prior-year results.
- Patent litigation with Becton, Dickinson and Company (BD) remained consequential. In July 2011, an appeals court reversed the finding that BD’s 3mL Integra infringed two company patents, while affirming infringement findings involving the 1mL Integra and affirming that one patent was not invalid. The company’s rehearing petition was denied; further appeal was under evaluation. A separate antitrust and related claims trial against BD was scheduled for February 14, 2012. Another BD/MDC patent case had no trial date, with the company’s summary-judgment motion pending.
- Four customers accounted for approximately 50.1% of nine-month sales. Double Dove, a Chinese manufacturer, produced approximately 68.6% of units; a disruption could affect supply, particularly for products that the company said represented about 10.3% of nine-month revenue and could not readily be replaced by current domestic capacity.
- On November 4, 2011, a preferred-stock exchange offer closed. Holders tendered 1,246,964 preferred shares, receiving $1,308,275 and 1,246,964 common shares; participating holders waived $3,539,714 of dividend arrears. The filing reported 25,279,900 common shares outstanding on November 14, 2011.
- Management warned of risks including market access, patent protection and litigation outcomes, supplier arrangements, production capacity, manufacturing and transportation costs, and the ability to maintain liquidity. It stated that there were no material changes to the previously reported risk factors.
Important facts for investors to verify
- Whether sales volumes, pricing, and access to hospital markets improve, and whether reported earnings can be sustained without litigation-related income.
- Developments and potential financial effects of the BD patent and antitrust cases, including the scheduled February 2012 trial.
- Continuity of Double Dove supply and the company’s ability and cost to expand domestic production.
- Cash generation, debt service, capital spending, and whether additional cost reductions or external financing become necessary.
- The post-exchange preferred-stock balances, dividend arrears, and updated common-share count.