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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended April 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-13907
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SYNOVIS LIFE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1526554
Principal Executive Offices: 2575 University Ave. W.
St. Paul, Minnesota 55114
Telephone Number: (651) 796-7300
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
On June 5, 2004, there were 11,534,896 shares of the registrant's common stock,
par value $.01 per share, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2004 AND 2003
(in thousands, except per share data)
Three Months Ended Six Months Ended
April 30, April 30,
2004 2003 2004 2003
--------- --------- --------- --------
Net revenue $ 13,743 $ 15,298 $ 25,262 $ 27,767
Cost of revenue 8,098 8,731 13,999 15,758
--------- --------- --------- --------
Gross margin 5,645 6,567 11,263 12,009
Operating expenses:
Selling, general and administrative 4,091 3,610 8,248 6,981
Research and development 910 1,053 1,804 1,914
--------- --------- --------- --------
Operating income 644 1,904 1,211 3,114
Other income, net 58 (2) 125 (1)
--------- --------- --------- --------
Income before provision for income taxes 702 1,902 1,336 3,113
Provision for income taxes 219 655 434 1,073
--------- --------- --------- --------
Net income $ 483 $ 1,247 $ 902 $ 2,040
========= ========= ========= ========
Earnings per share:
Basic $ 0.04 $ 0.13 $ 0.08 $ 0.21
========= ========= ========= ========
Diluted $ 0.04 $ 0.12 $ 0.08 $ 0.20
========= ========= ========= ========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed statements.
2
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF APRIL 30, 2004 AND OCTOBER 31, 2003
(in thousands, except share and per share data)
April 30, October 31,
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 20,070 $ 44,102
Short-term investments 20,958 -
Accounts receivable, net 6,765 6,541
Inventories 11,710 10,849
Deferred income taxes 738 738
Other 1,258 1,153
---------- ----------
Total current assets 61,499 63,383
Property, plant and equipment, net 12,643 10,559
Goodwill 4,878 4,843
Other intangible assets, net 1,990 2,049
Other assets 11 11
---------- ----------
Total assets $ 81,021 $ 80,845
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,885 $ 2,051
Accrued expenses 2,604 3,852
Current maturities of long-term obligations 128 281
---------- ----------
Total current liabilities 4,617 6,184
Deferred income taxes 554 554
Long-term obligations 14 45
---------- ----------
Total liabilities 5,185 6,783
---------- ----------
Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
none issued or outstanding at April 30, 2004 and
October 31, 2003 - -
Common stock: authorized 20,000,000 shares of $.01 par value;
issued and outstanding, 11,518,861 at April 30, 2004 and
11,435,638 at October 31, 2003 115 114
Additional paid-in capital 70,827 69,956
Retained earnings 4,894 3,992
---------- ----------
Total shareholders' equity 75,836 74,062
---------- ----------
Total liabilities and shareholders' equity $ 81,021 $ 80,845
========== ==========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed statements.
3
SYNOVIS LIFE TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 2004 AND 2003
(in thousands)
Six Months Ended
April 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 902 $ 2,040
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation of property, plant and equipment 1,035 911
Amortization of intangible assets 148 142
Tax benefit from exercise of stock options 283 -
Other - 25
Changes in operating assets and liabilities:
Accounts receivable (224) (1,891)
Inventories (861) (2,749)
Other current assets (105) (18)
Accounts payable (166) 1,796
Accrued expenses (1,248) 293
-------- --------
Net cash (used in) provided by operating activities (236) 549
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of property, plant and equipment 43 -
Purchase of property, plant and equipment (3,162) (2,359)
Investments in patents and trademarks (89) (82)
Purchases of short-term investments (20,958) -
Other (35) (17)
-------- --------
Net cash used in investing activities (24,201) (2,458)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans 589 683
Repayment of capital lease obligations (133) (79)
Repayments of other long-term obligations (51) (103)
-------- --------
Net cash provided by financing activities 405 501
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,032) (1,408)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,102 7,866
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,070 $ 6,458
======== ========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed statements.
4
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION:
The accompanying unaudited consolidated condensed financial statements of
Synovis Life Technologies, Inc. (Synovis or the Company) have been prepared by
the Company in accordance with generally accepted accounting principles applied
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report to Shareholders and incorporated by reference in the
Company's Form 10-K for the year ended October 31, 2003.
In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
consolidated financial position, results of operations and cash flows of the
Company as of and for the interim periods presented have been included.
Operating results and cash flows for the three and six months ended April 30,
2004 are not necessarily indicative of the results of operations and cash flows
of the Company that may be expected for the year ending October 31, 2004.
(2) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
April 30, October 31,
2004 2003
------------ ------------
Inventories:
Raw materials....................................... $ 2,308,000 $ 2,596,000
Work in process..................................... 3,871,000 3,365,000
Finished goods...................................... 5,531,000 4,888,000
------------ ------------
$ 11,710,000 $ 10,849,000
============ ============
(3) GOODWILL AND OTHER INTANGIBLE ASSETS:
The following table summarizes the Company's amortized intangible assets:
As of April 30, As of October 31,
2004 2003
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Patents and trademarks $1,157,000 $ 419,000 $1,068,000 $ 381,000
Developed technology 1,102,000 314,000 1,102,000 259,000
Noncompete agreements 1,050,000 586,000 1,050,000 531,000
---------- ---------- ---------- ----------
Total $3,309,000 $1,319,000 $3,220,000 $1,171,000
========== ========== ========== ==========
Amortization expense was $148,000 for the six months ended April 30, 2004 and
$142,000 for the six months ended April 30, 2003. The estimated amortization
expense for each of the next five years is approximately $296,000 per year,
based on the Company's present intangible assets.
5
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(UNAUDITED)-(CONTINUED)
The following is a summary of goodwill by business segment:
Interventional business Surgical business Total
----------------------- ----------------- ------------
Goodwill as of:
April 30, 2004 $ 4,093,000 $ 785,000 $ 4,878,000
October 31, 2003 $ 4,093,000 $ 750,000 $ 4,843,000
No impairment losses were incurred during the six months ended April 30, 2004.
(4) STOCK BASED COMPENSATION:
The following table demonstrates the effect on net income and earnings per
share, net of taxes, as if the fair value based method of accounting had been
applied to all outstanding and unvested stock compensation awards in each
period:
Three Months Ended Six Months Ended
April 30, April 30,
2004 2003 2004 2003
----------- ------------- ----------- -------------
Net income
As reported $ 483,000 $ 1,247,000 $ 902,000 $ 2,040,000
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 186,000 111,000 315,000 215,000
----------- ------------- ----------- -------------
Pro forma $ 297,000 $ 1,136,000 $ 587,000 $ 1,825,000
=========== ============= =========== =============
Basic earnings per share:
As reported 0.04 0.13 0.08 0.21
Pro forma 0.03 0.12 0.05 0.19
Diluted earnings per share:
As reported 0.04 0.12 0.08 0.20
Pro forma 0.02 0.11 0.05 0.18
As of April 30,
2004 2003
-------------- --------------
Options outstanding............................. 982,376 1,217,286
Range of exercise prices........................ $2.00 - $25.07 $2.00 - $12.21
Range of expiration dates....................... 2004 - 2014 2003 - 2010
Non-vested stock awards......................... - 2,233
6
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(5) EARNINGS PER SHARE:
The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended Six Months Ended
April 30, April 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Denominator for basic earnings per share -
weighted-average common shares 11,496,762 9,688,964 11,459,261 9,647,100
Effect of dilutive securities:
Shares associated with deferred compensation - 2,233 - 2,233
Shares associated with option plans 495,566 519,672 558,129 485,459
---------- ---------- ---------- ----------
Potential dilutive common shares 495,566 521,905 558,129 487,692
---------- ---------- ---------- ----------
Denominator for diluted earnings per share-
weighted-average common shares and dilutive
potential common shares 11,992,328 10,210,869 12,017,390 10,134,792
========== ========== ========== ==========
Options excluded from EPS calculation because
exercise prices are greater than the average
market price of the Company's common stock 32,214 - 31,964 -
========== ========== ========== ==========
(6) SEGMENT INFORMATION:
The following table presents certain financial information by business segment
for the three and six months ended April 30, 2004 and 2003:
Three Months Ended Six Months Ended
April 30, April 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenue:
Surgical business $ 6,614,000 $ 6,326,000 $ 13,300,000 $ 12,396,000
Interventional business 7,129,000 8,972,000 11,962,000 15,371,000
------------ ------------ ------------ ------------
Total $ 13,743,000 $ 15,298,000 $ 25,262,000 $ 27,767,000
============ ============ ============ ============
Operating income (loss):
Surgical business $ 967,000 $ 1,090,000 $ 2,069,000 $ 2,202,000
Interventional business (323,000) 814,000 (858,000) 912,000
------------ ------------ ------------ ------------
Total $ 644,000 $ 1,904,000 $ 1,211,000 $ 3,114,000
============ ============ ============ ============
7
SYNOVIS LIFE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS( UNAUDITED) - (CONTINUED)
(7) SHAREHOLDERS' EQUITY:
During the six months ended April 30, 2004, stock options for the purchase of
65,021 shares of the Company's common stock were exercised at prices between
$3.85 and $12.20 per share. During the six months ended April 30, 2003, stock
options for the purchase of 134,000 shares of the Company's common stock were
exercised at prices between $2.69 and $5.96 per share.
(8) SHORT-TERM INVESTMENTS:
During the six months ended April 30, 2004, the Company purchased $20,958,000 of
highly liquid debt securities with maturities greater than three months. The
investments are classified and accounted for as being held-to-maturity, and are
carried at amortized cost.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements:
The disclosures in this Form 10-Q may include "forward-looking statements" made
under the Private Securities Litigation Reform Act of 1995. Without limiting the
foregoing, words such as "should", "could", "may", "will", "expect", "believe",
"anticipate", "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. All forward-looking statements in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any forward-looking statements. You are advised,
however, to consult any future disclosures we make on related subjects in future
filings with the SEC. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors may include, among
others, the "important factors" listed from time to time in the Company's
filings with the Securities and Exchange Commission, such as the year-end Annual
Report on Form 10-K for the year ended October 31, 2003.
OVERVIEW
Synovis Life Technologies, Inc. is a diversified medical device company engaged
in developing, manufacturing and marketing products for the surgical and
interventional treatment of disease. Our business is conducted in two reportable
segments, the surgical business and the interventional business, with
segmentation based upon the similarities of the underlying business operations,
products and markets of each.
Our surgical business develops, manufactures and markets implantable biomaterial
products, devices for microsurgery and surgical tools, all designed to reduce
risk and/or facilitate critical surgeries, leading to better patient outcomes
and/or lower costs.
Our interventional business manufactures components and devices used primarily
in cardiac rhythm management, neurostimulation, and interventional vascular
procedures, including micro-wire components such as fixation helices, conducting
coils, stylets, guidewires, injection molded and machined components.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2004 WITH
THE THREE MONTHS ENDED APRIL 30, 2003
The following table summarizes our condensed consolidated operating results:
For the quarter ended For the quarter ended
April 30, 2003 April 30, 2004
Summary of Operating Results (in thousands) $$$ % $$$ %
-------- ----- -------- -----
Net revenue $ 13,743 100.0% $ 15,298 100.0%
Cost of revenue 8,098 58.9 8,731 57.1
-------- ----- -------- -----
Gross margin 5,645 41.1 6,567 42.9
Selling, general and administrative 4,091 29.8 3,610 23.6
Research and development 910 6.6 1,053 6.9
-------- ----- -------- -----
Operating expenses 5,001 36.4 4,663 30.5
-------- ----- -------- -----
Operating income $ 644 4.7% $ 1,904 12.4%
======== ===== ======== =====
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Net revenue decreased 10% to $13,743,000 in the second quarter of fiscal 2004
compared with $15,298,000 in the second quarter of fiscal 2003. Our consolidated
operating income decreased 66% to $644,000 in the second quarter of fiscal 2004
from $1,904,000 in the prior year quarter. Consolidated net income decreased 61%
in the current quarter to $483,000, or four cents per diluted share, from
$1,247,000, or twelve cents per diluted share, in the same quarter of fiscal
2003.
The following table summarizes our condensed consolidated operating results by
business segment:
For the quarter ended
April 30,
Business Segment Information (in thousands) 2004 2003
-------- --------
Net revenue
Surgical business $ 6,614 $ 6,326
Interventional business 7,129 8,972
-------- --------
Total $ 13,743 $ 15,298
Gross margin
Surgical business $ 4,358 $ 4,007
Interventional business 1,287 2,560
-------- --------
Total $ 5,645 $ 6,567
Gross margin percentage
Surgical business 66% 63%
Interventional business 18% 29%
Total 41% 43%
Operating income (loss)
Surgical business $ 967 $ 1,090
Interventional business (323) 814
-------- --------
Total $ 644 $ 1,904
Our surgical business generated net revenue of $6,614,000 in the second quarter
of fiscal 2004, a 5% increase from $6,326,000 in the year-ago quarter. The
increase in surgical business revenue was primarily due to increased volumes of
product sold.
Worldwide net revenue from the sales of Peri-Strips(R) was $2,785,000 in the
second quarter of fiscal 2004, essentially unchanged compared to the second
quarter of fiscal 2003. Peri-Strips are used to reduce risks and improve patient
outcomes in several procedures, notably gastric bypass surgery. Gastric bypass
is a surgical treatment for morbid obesity, which affects an estimated 23
million Americans. Peri-Strips revenue was flat in the second quarter due to
several evolving factors within the gastric bypass market: many surgical
practices performing gastric bypass surgeries appear to be near full capacity,
the development of centers of excellence driven by the American Society of
Bariatric Surgeons ("ASBS") and insurance providers encouraging patients towards
such centers which specialize in gastric bypass surgery and have an expected
lower rate of complications, certain hospitals electing not to support gastric
bypass programs and some insurance providers making decisions not to cover the
procedure. We believe competition, which entered the market in the first
quarter, was not a significant factor in our second quarter Peri-Strips revenue,
although we expect competition to appear again. We believe that Peri-Strips can
again grow in gastric bypass as the market determines the most effective and
efficacious manner to deliver this surgery to patients. Factors influencing this
determination include the implementation of the centers of excellence concept,
the
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
number of surgeons performing gastric bypass and their related capacity, and
the concerns of some insurers that offer either health care or liability
coverage.
In January 2004, the Centers for Medicare and Medicaid Services ("CMS")
announced that it has continued its coverage of lung volume reduction surgery
("LVRS"), for which Peri-Strips received market clearance in 1994. This coverage
is limited to National Emphysema Treatment Trials ("NETT") centers and lung
transplant centers, which presently total approximately 50 centers. We expect
increased revenue from Peri-Strips resulting from the CMS decision to develop
modestly in the second half of fiscal 2004, depending upon several factors,
including the rate of physician referral, surgeons' experience with the
procedure and the development of hospital programs related to LVRS.
During the second quarter, we received clearance from the FDA regarding two
510(k)'s for new indications for use for Peri-Strips. In March 2004, we received
510(k) marketing clearance for Peri-Strips' use as a buttress to reinforce the
staple line during intestinal, mesentery, colon and colorectal procedures. In
April 2004, we received 510(k) marketing clearance for Peri-Strips' use as a
buttress to reinforce the staple lines during cardiac surgery, including the
surgical removal of the left atrial appendage ("LAA"), a procedure believed to
prevent strokes. Removal of the LAA can be performed as an adjunct procedure
during cardiac bypass surgery, mitral valve repair, atrial fibrillation or other
heart procedures, or as a treatment by itself. An estimated 600,000 to one
million applicable LAA procedures could be performed annually, with
approximately half of those performed in the United States. It is uncertain when
revenue will be generated from these new applications, as timing and volume of
revenue is dependent upon many factors, including, surgeons' acceptance of LAA
removal during cardiac bypass surgery, surgeons' acceptance of Peri-Strips in
such procedures, and the number of Peri-Strips used with each procedure.
Revenue from other surgical business product lines, which include Veritas(R),
Tissue-Guard, Surgical Tools and Microsurgery, was $3,829,000 in the second
quarter of fiscal 2004, an increase of $287,000 or 8% compared to the second
quarter of fiscal 2003. Revenue from our Microsurgery product line increased
$170,000 or 50% to $513,000 in the second quarter of fiscal 2004, from $343,000
in the prior year quarter, driven by an increase in sales of the Microvascular
Anastomotic Coupler System ("Coupler"). The Coupler is a device used by
microsurgeons to connect extremely small arteries or veins, without sutures,
quickly, easily and with consistently excellent results. We believe that the
Coupler is a platform technology, and have filed a patent application for a Flow
Coupler, a device incorporating the technology to detect blood flow and other
critical parameters to confirm post-operative success of the vessel connection.
Our interventional business customers predominantly operate in the cardiac
rhythm management ("CRM") market which includes the following three segments:
pacing, implantable cardioverter defibrillation ("ICD") and congestive heart
failure ("CHF"). For these three segments in the CRM market, we produce
conductor and shocking coils for pacing and defibrillator leads, helices for
active fixation leads, and stylets used to implant all types of leads.
We also serve customers in the neurostimulation market, where we supply
conductor coils for stimulation leads as well as stylets to deliver the leads,
and the interventional vascular market, where we produce core wires, coils and
guidewire assembly components. Other customers of our interventional business
operate in numerous markets and our services to these customers include polymer
injection molding, computer numeric control ("CNC") machining, micro machining
and product development services for interventional devices.
The following table summarizes our interventional business net revenue by
market:
For the quarter ended
April 30,
Interventional Business Net Revenue (in thousands) 2004 2003
------ ------
Cardiac rhythm management $5,107 $7,210
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Other 2,022 1,762
------ ------
Total $7,129 $8,972
The following table summarizes our interventional business net revenue by
product:
For the quarter ended
April 30,
Interventional Business Net Revenue (in thousands) 2004 2003
------ ------
Coils and helices $3,650 $5,503
Stylets and other wireforms 2,174 2,705
Machining, molding and tool making 719 502
Other 586 262
------ ------
Total $7,129 $8,972
Interventional business net revenue decreased 21% to $7,129,000 in the second
quarter of fiscal 2004 from $8,972,000 in the second quarter of fiscal 2003. The
revenue decrease is due to a material slowdown in customer orders of our
components for their CRM devices, including implantable cardioverter
defibrillators. We believe this slowdown in customer orders was due to our
customers' accumulation of inventory as a result of lower than expected demand
for our customers' end devices. Second quarter interventional business revenue
increased 48% over the first quarter of fiscal 2004.
Machining, molding and tool making revenue increased 43% in the second quarter
of fiscal 2004 compared to the second quarter of fiscal 2003. This increase is
due to the addition of new customers as well as added capabilities, such as
swiss-screw machining, which have expanded the scope of services we provide.
In May 2004, our interventional business received clearance from the FDA
regarding 510(k) approval for its Navi-Glide Steerable Stylet ("Navi-Glide"), a
proprietary single-use device intended to enable the physician to define and
vary the curvature of a cardiac lead during implantation of the cardiac lead,
thereby avoiding the need to remove and recurve the stylet during introduction
of the lead. Our interventional business is moving the Navi-Glide and the
technology embodying Navi-Glide towards commercialization, with the timing of
related revenue dependant upon customer and market acceptance of the product,
the timing to adapt the technology to other products, as well as the timing and
volume of related orders.
Our interventional business has customarily experienced variations in revenue
from period to period primarily due to variability in the timing of customer
draws against annual purchase orders. Such variations are difficult to precisely
predict and are expected to continue in the future.
The consolidated gross margin percentage decreased two percentage points, from
43% to 41% during the second quarter of fiscal 2004 from the comparable quarter
of fiscal 2003. Factors which affect the consolidated gross margin include the
relative revenue of each business unit, product mix, volume and other production
activities. The decreased gross margin is attributable to a decline in gross
margin within the interventional business, which decreased to 18% in the second
quarter of fiscal 2004 from 29% in the prior year. The 11 percentage point
decrease in interventional gross margins primarily reflect two factors. First,
six points of the margin decrease is the result of an adjustment of overhead
rates attributable to lower production volumes and reduced labor hours, directly
related to lower than planned revenue. Second, manufacturing variances resulted
in four points of the margin decrease. Factors which can result in manufacturing
variances include: standard costs that are not reflective of current
manufacturing costs, labor efficiencies, quality of raw materials and the
training costs of new manufacturing staff and processes. We are currently
addressing the variance issues within the interventional business. Partially
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
offsetting the interventional business gross margin decrease was gross margin
increases within the surgical business, which increased three percentage points
in the second quarter of fiscal 2004, from 63% to 66%. Manufacturing
efficiencies is the primary driver of the gross margin increase in the surgical
business. Another factor which positively affected the consolidated gross margin
in the quarter was the relative revenue mix being weighted more towards the
surgical business in fiscal 2004 (48%) compared to fiscal 2003 (41%). Going
forward, we expect a lower consolidated gross margin than what was recorded in
the second quarter, primarily as revenue mix is expected to be weighted more
heavily to the interventional business.
Selling, general and administrative ("SG&A") expense during the second quarter
of fiscal 2004 increased $481,000, or 13%, to $4,091,000 from $3,610,000 in the
comparable fiscal 2003 quarter. As a percentage of net revenue, SG&A expense was
30% in the second quarter of fiscal 2004 as compared to 24% in the prior year
quarter. Planned increases in regulatory and clinical expenses, facility
expansion costs, and marketing efforts to increase revenue, combined with lower
revenue levels are the primary reasons for this percentage increase.
Research and development ("R&D") expense decreased 14% during the second quarter
of fiscal 2004 to $910,000 from $1,053,000 during the prior year quarter. As a
percentage of revenue, R&D expense was 7% for both the second quarters of fiscal
2004 and fiscal 2003. In both business units, R&D expense fluctuates from
quarter to quarter based on the timing and progress through external parties of
the projects, and the timing of such expense will continue to be influenced
primarily by the number of projects and the related R&D personnel requirements,
development and regulatory approval path, expected costs, timing and nature of
those costs for each project.
Operating income decreased 66% in the second quarter of fiscal 2004, to $644,000
from $1,904,000 in the second quarter of fiscal 2003. Second quarter operating
income for our surgical business decreased to $967,000 in fiscal 2004 compared
with $1,090,000 in fiscal 2003. Operating income for our interventional business
decreased from operating income of $814,000 in the second quarter of 2003 to an
operating loss of $323,000 in the second quarter of 2004.
We recorded a provision for income taxes of $219,000 in the second quarter of
fiscal 2004, at an effective tax rate of 31.2%, as compared to $655,000 at an
effective tax rate of 34.4% in the second quarter of fiscal 2003. The Company
currently expects an effective tax rate of 32.5% for fiscal 2004.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2004 WITH THE SIX MONTHS ENDED
APRIL 30, 2003
The following table summarizes our condensed consolidated operating results:
For the six months ended For the six months ended
April 30, 2004 April 30, 2003
Summary of Operating Results (in thousands) $$$ % $$$ %
------- ----- ------- -----
Net revenue $25,262 100.0% $27,767 100.0%
Cost of revenue 13,999 55.4 15,758 56.8
------- ----- ------- -----
Gross margin 11,263 44.6 12,009 43.2
Selling, general and administrative 8,248 32.6 6,981 25.1
Research and development 1,804 7.2 1,914 6.9
------- ----- ------- -----
Operating expenses 10,052 39.8 8,895 32.0
------- ----- ------- -----
Operating income $ 1,211 4.8% $ 3,114 11.2%
======= ===== ======= =====
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Net revenue decreased 9% to $25,262,000 in the first six months of fiscal 2004
compared with $27,767,000 in the first six months of fiscal 2003. Our
consolidated operating income decreased 61% to $1,211,000 in the first half of
fiscal 2004 from $3,114,000 in the prior year period. Consolidated net income
decreased 56% in the first half of fiscal 2004 to $902,000, or eight cents per
diluted share, from $2,040,000, or twenty cents per diluted share, in the same
period of fiscal 2003.
The following table summarizes our condensed consolidated operating results by
business segment:
For the six months ended
April 30,
Business Segment Information (in thousands) 2004 2003
-------- --------
Net revenue
Surgical business $ 13,300 $ 12,396
Interventional business 11,962 15,371
-------- --------
Total $ 25,262 $ 27,767
Gross margin
Surgical business $ 8,703 $ 7,958
Interventional business 2,560 4,051
-------- --------
Total $ 11,263 $ 12,009
Gross margin percentage
Surgical business 65% 64%
Interventional business 21% 26%
Total 45% 43%
Operating income (loss)
Surgical business $ 2,069 $ 2,202
Interventional business (858) 912
-------- --------
Total $ 1,211 $ 3,114
Our surgical business generated net revenue of $13,300,000 in the first six
months of fiscal 2004, a 7% increase from $12,396,000 in the same period of
fiscal 2003. The increase in surgical business revenue was primarily due to
increased volumes of product sold.
Worldwide net revenue from the sales of Peri-Strips(R) increased $383,000 or 7%
to $5,880,000 in the first six months of fiscal 2004, from $5,497,000 in the
first half of fiscal 2003. The growth rate of Peri-Strips revenue in the first
half of fiscal 2004 is lower than in previous periods due to several factors
within the gastric bypass market: many surgical practices performing gastric
bypass surgeries appear to be near full capacity, the development of centers of
excellence driven by the ASBS and insurance providers encouraging patients
towards such centers which specialize in gastric bypass surgery and have an
expected lower rate of complications, certain hospitals electing not to support
gastric bypass programs, some insurance providers making decisions not to cover
the procedure and the impact of a competitor in the first quarter. We believe
that Peri-Strips can increase its growth rate within gastric bypass as the
market determines the most effective and efficacious manner to deliver this
surgery to patients. Factors influencing this determination include the
development of the centers of excellence concept, the number of surgeons
performing gastric bypass and their related capacity, and the concerns of some
insurers that offer either health care or liability coverage.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Revenue from other surgical product lines, which include Veritas(R),
Tissue-Guard, Surgical Tools and Microsurgery, was $7,420,000 in the first half
of fiscal 2004, an increase of $521,000 or 8% compared to the first half of
fiscal 2003. Revenue from our Microsurgery product line increased $229,000 or
35% to $885,000 in the first half of fiscal 2004, from $656,000 in the prior
year.
The following table summarizes our interventional business net revenue by
market:
For the six months ended
April 30,
Interventional Business Net Revenue (in thousands) 2004 2003
------- -------
Cardiac rhythm management $ 8,702 $11,956
Other 3,260 3,415
------- -------
Total $11,962 $15,371
The following table summarizes our interventional business net revenue by
product:
For the six months ended
April 30,
Interventional Business Net Revenue (in thousands) 2004 2003
------- -------
Coils and helices $ 5,855 $ 8,910
Stylets and other wireforms 3,802 4,886
Machining, molding and tool making 1,352 982
Other 953 593
------- -------
Total $11,962 $15,371
Interventional business net revenue decreased 22% to $11,962,000 in the first
half of fiscal 2004 from $15,371,000 in the first six months of fiscal 2003. The
revenue decrease is due to a material slowdown in customer orders of our
components for their CRM devices, including ICD's. We believe this slowdown in
customer orders was due to our customers' accumulation of excess inventory as a
result of lower than expected demand for our customers' end devices.
Machining, molding and tool making revenue increased 38% in the first six months
of fiscal 2004 compared to the first six months of fiscal 2003. This increase is
due to the addition of new customers as well as added capabilities, such as
micro machining, which have expanded the scope of services we provide.
Our interventional business has customarily experienced variations in revenue
from period to period primarily due to variability in the timing of customer
draws against annual purchase orders. Such variations are difficult to precisely
predict and are expected to continue in the future.
The consolidated gross margin percentage increased two percentage points, from
43% to 45% during the first half of fiscal 2004 from the same period of fiscal
2003. Factors which affect the consolidated gross margin include the relative
revenue of each business unit, product mix, volume and other production
activities. The increased gross margin is primarily attributable to revenue mix
between the business units being weighted more heavily towards the surgical
business in fiscal 2004 (53%) compared with 2003 (45%), partially offset by a
decline in gross margin within the interventional business, which decreased to
21% in the first half of fiscal 2004 from 26% in the prior year. The five
percentage point decrease in interventional gross margins were impacted
primarily by two factors. Three percentage points of the margin decrease is the
result of an adjustment of overhead rates attributable to lower production
volumes and reduced labor hours, directly related to lower than planned revenue.
Second, manufacturing variances resulted in approximately two points of the
margin decrease. Factors which can result in manufacturing
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
variances include: standard costs that are not reflective of current
manufacturing costs, labor efficiencies, quality of raw materials and the
training costs of new manufacturing staff and processes. We are currently
addressing the variance issues within the interventional business. Surgical
business gross margins increased one percentage point in the first half of
fiscal 2004 to 65% from 64% in the same period in fiscal 2003. Manufacturing
efficiencies is the primary driver of the gross margin increase in the surgical
business.
SG&A expense during the first six months of fiscal 2004 increased $1,267,000, or
18%, to $8,248,000 from $6,981,000 in the comparable fiscal 2003 period. As a
percentage of net revenue, SG&A expense was 33% in the first half of fiscal 2004
as compared to 25% in the prior year. Planned increases in regulatory and
clinical expenses, facility expansion costs, and marketing efforts to increase
revenue, combined with lower than expected revenue levels are the primary
reasons for this percentage increase.
R&D expense decreased 6% during the first half of fiscal 2004 to $1,804,000 from
$1,914,000 during the prior year period. As a percentage of revenue, R&D expense
was consistent at 7% in the first half of both fiscal 2004 and fiscal 2003. In
both business units, R&D expense fluctuates from period to period based on the
timing and progress through external parties of the projects, and the timing of
such expense will continue to be influenced primarily by the number of projects
and the related R&D personnel requirements, development and regulatory approval
path, expected costs, timing and nature of those costs for each project.
Operating income decreased 61% in the first six months of fiscal 2004, to
$1,211,000 from $3,114,000 in the first six months of fiscal 2003. Operating
income for our surgical business decreased to $2,069,000 in the first half of
fiscal 2004 compared with $2,202,000 in fiscal 2003. Operating income from our
interventional business decreased from operating income of $912,000 in the first
six months of 2003 to an operating loss of $858,000 in the first six months of
2004.
We recorded a provision for income taxes of $434,000 in the first half of fiscal
2004, at our expected annual effective tax rate of 32.5%, as compared to
$1,073,000 at an effective tax rate of 34.5% in the first half of fiscal 2003.
The two percentage point decrease in our expected effective tax rate in fiscal
2004 is primarily due to lower levels of pre-tax income combined with expected
comparable levels of R&D tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents (cash and highly liquid investments with maturities of
three months or less) were $20,070,000 at April 30, 2004 as compared to
$44,102,000 at October 31, 2003, a decrease of $24,032,000. The decrease in cash
is primarily related to our purchase of $20,958,000 of short-term investments
during the first six months of fiscal 2004. These investments represent highly
liquid, low-risk commercial paper with maturities greater than three months.
Additional cash used was primarily for working capital requirements and
investments in capital equipment and facilities necessary to support our
expected future growth. As of April 30, 2004, the Company had long-term
obligations (including current portions) of $142,000, requiring payments through
2005.
Operating activities used cash of $236,000 in the first six months of fiscal
2004, as compared to generating cash of $549,000 during the first six months of
fiscal 2003. Cash was used by operations for working capital necessary to
support expected growth in both business units. Cash was used primarily for
accrued expenses (net decrease of $1,248,000) and inventories (net increase of
$861,000).
Investing activities used $24,201,000 of cash during the first six months of
fiscal 2004, primarily due to the purchase of $20,958,000 of short-term
investments, as previously referenced. Additionally, $3,162,000 in purchases of
property, plant and equipment and leasehold improvements were made during the
first six months of fiscal 2004. During fiscal 2004, we currently expect to
invest up to $7,000,000 in capital assets for various manufacturing, research
and development, information technology and facility projects necessary to
support our expected future growth.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Financing activities provided $405,000 of cash during the first six months of
fiscal 2004, which consisted of proceeds of $589,000 received upon the exercise
of stock options under our stock option plan, offset by $184,000 in cash
repayments of capital equipment lease and other long-term obligations.
We primarily utilize internally generated cash flow and existing cash balances
to fund the operations of our businesses. We believe existing cash, cash
equivalents and short-term investments, coupled with anticipated cash flows from
operations will be sufficient to satisfy our operating cash requirements for the
next twelve months. This forward-looking statement regarding sufficiency of cash
and cash flows, as well as our long-term cash requirements, will be a function
of a number of variables, including research and development priorities,
acquisition opportunities and the growth and profitability of the business.
CRITICAL ACCOUNTING POLICIES
Cash and Cash Equivalents: Our cash and cash equivalents consist of cash as well
as highly liquid investments with maturities of three months or less. These
investments are carried at cost, which approximates fair value.
Short-term Investments: Our short-term investments consist of highly liquid debt
securities with maturities greater than three months, and are classified and
accounted for as being held-to-maturity. These investments are carried at
amortized cost.
Goodwill: In accordance with the Statement of Financial Accounting Standards
("SFAS") No. 142, goodwill is no longer amortized, but is reviewed annually for
impairment as of the end of each fiscal year. Please see Note 3 to the unaudited
consolidated condensed financial statements for additional goodwill information.
Other Intangible Assets: Our other intangible assets, primarily developed
technology, patents, trademarks, and non-compete agreements pertaining to
previous business acquisitions, are recorded at cost and are amortized using the
straight-line method over their estimated useful lives, generally seven to 17
years. These assets are reviewed annually for impairment as of the end of each
fiscal year. Please see Note 3 to the unaudited consolidated condensed financial
statements for additional intangible asset information.
Revenue Recognition: Our policy is to ship products to customers on FOB shipping
point terms. We recognize revenue when the product has been shipped to the
customer if there is evidence that the customer has agreed to purchase the
products, delivery and performance have occurred, the price and terms of sale
are fixed and collection of the receivable is reasonably assured. Our sales
policy does not allow sales returns.
Inventories: Inventories, which are comprised of component parts, sub-assemblies
and finished goods, are valued at the lower of first-in, first-out ("FIFO") cost
or market. Overhead costs are applied to sub-assemblies and finished goods based
on annual estimates of production volume and such costs. These estimates are
reviewed and assessed for reasonableness on a quarterly basis.
Derivative Instruments and Hedging Activities: We do not enter into any
derivative instruments or hedging activities. Our policy is to only enter into
contracts that can be designated as normal purchases or sales. In addition,
substantially all of our contracts are negotiated, invoiced and paid in U.S.
dollars.
ADDITIONAL INFORMATION ON SYNOVIS
We are currently subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. As a result, we are required to file periodic
reports and other information with the SEC, such as annual, quarterly and
current reports, proxy and information statements. You are advised to read this
Form 10-Q in conjunction with the
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
other reports, proxy statements and other documents we file from time to time
with the SEC. If you would like more information regarding Synovis, you may read
and copy the reports, proxy and information statements and other documents we
file with the SEC, at prescribed rates, at the SEC's public reference room at
450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding
the operation of the SEC's public reference rooms by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public free of charge
at the SEC's website. The address of this website is http://www.sec.gov.
In addition, our website also contains a hyperlink to a third-party SEC Filings
website which makes all of our SEC filings, such as annual, quarterly and
current reports and proxy statements, available to the public. The address of
our website is www.synovislife.com. Neither our website nor the information
contained on any hyperlink provided in our website, is intended to be, and is
not, a part of this Quarterly Report on Form 10-Q. We also provide electronic or
paper copies of our SEC filings (excluding exhibits) to any person free of
charge upon receipt of a written request for such filing. All requests for our
SEC filings should be sent to the attention of the Chief Financial Officer at
Synovis Life Technologies, Inc., 2575 University Ave. W, St. Paul, Minnesota
55114.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal financial instruments we currently maintain are in cash
equivalents, short-term investments and accounts receivable and long-term
obligations. We believe that the interest rate, credit and market risk related
to these accounts is not significant. We manage the risk associated with these
accounts through periodic reviews of the carrying value for non-collectibility
of assets and establishment of appropriate allowances in connection with our
internal controls and policies. We do not utilize any derivative financial
instruments, derivative commodity instruments, other financial instruments or
engage in any other hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation which is ordinary, routine
litigation incidental to its business. Management believes losses, if any, that
might eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is a report of the voting results of the Company's annual
shareholders meeting held on February 24, 2004.
Each of the six nominees named in the Company's proxy statement for its annual
meeting of shareholders held on February 24, 2004, was elected. William G. Kobi,
Karen Gilles Larson, Richard W. Perkins, Anton R. Potami, Timothy M. Scanlan and
Edward E. Strickland were elected until the next annual meeting of shareholders
or until their successors are duly elected and qualified. There were no broker
non-votes, abstentions or votes withheld. The tabulation was as follows:
Director Votes For Votes Against
-------- --------- -------------
William G. Kobi 9,785,889 143,693
Karen Gilles Larson 9,811,014 118,568
Richard W. Perkins 9,181,719 747,863
Anton R. Potami 9,740,738 188,844
Timothy M. Scanlan 9,795,040 134,542
Edward E. Strickland 9,742,661 186,921
In addition, a proposal to approve the Company's 2004 Non-Employee Director
Stock Option Plan, as described in the proxy statement was approved. Broker
non-votes, totaling 5,221,098, were treated as shares not entitled to vote on
this matter. The tabulation was as follows:
Broker Non-Votes
Votes For Votes Against Votes Abstained Not Entitled to Vote
- --------- ------------- --------------- --------------------
3,854,553 748,975 104,956 5,221,098
ITEM 5. OTHER INFORMATION
None.
19
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 2004 Non-Employee Director Option Plan (filed herewith
electronically).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a -
14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a -
14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes - Oxley Act of 2002 (filed herewith
electronically).
b. Reports on Form 8-K
On February 18, 2004, Synovis filed a report on Form 8-K filing
certain financial information under Item 5 and furnishing a press
release under Item 12, all relating to its earnings for the first
quarter ended January 31, 2004.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SYNOVIS LIFE TECHNOLOGIES, INC.
Dated: June 14, 2004 /s/ Connie L. Magnuson
-------------------------------------------
Connie L. Magnuson
Vice President of Finance, Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer)
21
SYNOVIS LIFE TECHNOLOGIES, INC.
INDEX TO EXHIBITS
10.1 2004 Non-Employee Director Option Plan (filed herewith
electronically).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a -
14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a -
14(a) of the Securities Exchange Act of 1934 (filed herewith
electronically).
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes - Oxley Act of 2002 (filed herewith
electronically).
22