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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 000-06516
DATASCOPE CORP.
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(Exact name of registrant as specified in its charter)
Delaware 13-2529596
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(State of other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
14 Philips Parkway, Montvale, New Jersey 07645-9998
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(Address of principal executive offices) (Zip Code)
(201) 391-8100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
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 Exchange Act). YES x NO
--- ---
Number of Shares of Company's Common Stock outstanding as of October 29, 2004:
14,794,469.
Datascope Corp.
Form 10-Q Index
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2004 and June 30, 2004 1
Condensed Consolidated Statements of Earnings 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 31.1. Certification of Principal Executive Officer Regarding Facts
and Circumstances Relating to Quarterly Reports 17
Exhibit 31.2. Certification of Principal Financial Officer Regarding Facts
and Circumstances Relating to Quarterly Reports 18
Exhibit 32.1. Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
SEPT 30, JUNE 30,
2004 2004
--------------------- ---------------------
(a)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,988 $ 8,123
Short-term investments 19,421 16,013
Accounts receivable less allowance for
doubtful accounts of $2,487 and $2,414 66,284 70,603
Inventories, net 55,165 52,858
Prepaid income taxes -- 10,042
Prepaid expenses and other current assets 9,536 8,529
Current deferred taxes 7,055 6,500
--------- ---------
Total Current Assets 168,449 172,668
Property, Plant and Equipment, net of accumulated
depreciation of $77,237 and $74,608 89,788 88,915
Long-term Investments 57,884 52,223
Intangible Assets 23,950 23,748
Other Assets 31,007 30,781
--------- ---------
$ 371,078 $ 368,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 17,704 $ 16,982
Dividends payable 30,625 740
Accrued expenses 13,600 15,050
Accrued compensation 12,395 15,840
Deferred revenue 3,946 4,188
Income taxes payable 1,261 --
--------- ---------
Total Current Liabilities 79,531 52,800
Other Liabilities 24,231 22,965
Stockholders' Equity:
Preferred stock, par value $1.00 per share:
Authorized 5 million shares; Issued, none -- --
Common stock, par value $.01 per share:
Authorized, 45 million shares;
Issued, 18,104 and 18,044 shares 181 180
Additional paid-in capital 83,327 81,571
Treasury stock at cost, 3,310 and 3,254 shares (99,262) (97,177)
Retained earnings 285,708 311,643
Accumulated other comprehensive loss:
Cumulative translation adjustments (2,095) (2,502)
Minimum pension liability adjustments (619) (619)
Unrealized gain (loss) on available-for-sale securities 76 (526)
--------- ---------
Total Stockholders' Equity 267,316 292,570
--------- ---------
$ 371,078 $ 368,335
========= =========
(a) Derived from consolidated audited financial statements
See notes to condensed consolidated financial statements
1
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2004 2003
------------------ ------------------
NET SALES $ 80,300 $ 77,100
-------- --------
Costs and Expenses:
Cost of sales 31,952 31,878
Research and development
expenses 8,636 7,223
Selling, general and
administrative expenses 33,383 32,093
-------- --------
73,971 71,194
-------- --------
OPERATING EARNINGS 6,329 5,906
Other (Income) Expense:
Interest income (533) (392)
Interest expense 8 6
Other, net 14 116
-------- --------
(511) (270)
-------- --------
EARNINGS BEFORE INCOME TAXES 6,840 6,176
Income Tax Expense 2,120 1,976
-------- --------
NET EARNINGS $ 4,720 $ 4,200
======== ========
Earnings Per Share, Basic $ 0.32 $ 0.28
======== ========
Weighted average common
shares outstanding, Basic 14,792 14,770
======== ========
Earnings Per Share, Diluted $ 0.31 $ 0.28
======== ========
Weighted average common
shares outstanding, Diluted 15,213 15,004
======== ========
See notes to condensed consolidated financial statements
2
DATASCOPE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
2004 2003
-------------- -------------------
OPERATING ACTIVITIES:
Net Earnings $ 4,720 $ 4,200
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 3,532 3,822
Amortization 1,128 630
Provision for supplemental pension 339 279
Provision for losses on accounts receivable 142 168
Deferred income taxes 268 --
Tax benefit relating to stock options exercised 241 133
Changes in assets and liabilities:
Accounts receivable 4,420 8,363
Inventories (4,574) (6,160)
Other assets 9,158 3,936
Accounts payable 690 1,149
Income taxes payable 1,261 612
Accrued and other liabilities (5,467) (1,181)
-------- --------
Net cash provided by operating activities 15,858 15,951
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (1,695) (775)
Purchases of investments (10,122) (19,367)
Maturities of investments 1,851 10,804
Capitalized software (1,215) (1,834)
Purchased technology and licenses (293) --
-------- --------
Net cash used in investing activities (11,474) (11,172)
-------- --------
FINANCING ACTIVITIES:
Treasury shares acquired under repurchase programs (2,085) (1,054)
Exercise of stock options and other 1,516 721
Cash dividends paid (740) (739)
-------- --------
Net cash used in financing activities (1,309) (1,072)
-------- --------
Effect of exchange rates on cash (210) (86)
-------- --------
Increase in cash and cash equivalents 2,865 3,621
Cash and cash equivalents, beginning of period 8,123 10,572
-------- --------
Cash and cash equivalents, end of period $ 10,988 $ 14,193
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash refunded during the period for:
Income taxes ($ 9,911) ($ 2,874)
-------- --------
Non-cash investing and financing activities:
Net transfers of inventory to fixed assets
for use as demonstration equipment $ 2,771 $ 2,231
-------- --------
Dividends declared, not paid $ 30,625 $ 740
-------- --------
See notes to condensed consolidated financial statements
3
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Datascope Corp. and its subsidiaries (the "Company" - which may
be referred to as "our", "us" or "we"). These statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim 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 accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for interim periods are not necessarily indicative of results that may
be expected for the full year. The presentation of certain prior year
information has been reclassified to conform with the current year presentation.
Preparation of the Company's financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. Actual results could differ
from those estimates. For further information, refer to the consolidated
financial statements and Notes included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2004.
STOCK-BASED COMPENSATION
We continue to account for our employee stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees." Under this opinion, because the exercise price of our
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
As required by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended, the fair value of option
grants is estimated on the date of grant using an option-pricing model. The
following table illustrates the effect on net earnings and earnings per share if
we had applied the fair value recognition provisions of SFAS No. 123 to our
stock-based compensation. These pro forma amounts may not be representative of
the effects on net earnings in future years since options generally vest over
several years and additional awards may be made each year.
Three Months Ended
September 30,
--------------------------------
2004 2003
-------------- ---------------
Net earnings - as reported $4,720 $ 4,200
Add: Total stock-based employee compensation expense
included in determination of net income as reported -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (890) (854)
------ ---------
Net earnings - pro forma $3,830 $ 3,346
====== =========
Earnings per share:
Basic - as reported $ 0.32 $ 0.28
====== =========
Basic - pro forma $ 0.26 $ 0.23
====== =========
Diluted - as reported $ 0.31 $ 0.28
====== =========
Diluted - pro forma $ 0.25 $ 0.22
====== =========
4
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
For purposes of the pro forma disclosures, the weighted average fair values of
options granted for the three months ended September 30, 2004 and 2003 were
$12.35 and $11.37, respectively.
The fair values of options granted were determined using the Black-Scholes
option-pricing model with the following assumptions:
Three Months Ended
September 30,
------------------------------------------
2004 2003
----------------- ------------------
Dividend yield 0.75% 0.61%
Volatility 31% 34%
Risk-free interest rate 3.46% 2.95%
Expected life 5.2 Years 5.2 Years
2. INVENTORIES, NET
Inventories, net are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.
----------------- ------------------
Sept 30, June 30,
2004 2004
----------------- ------------------
Materials $23,649 $21,480
Work in Process 11,103 10,650
Finished Goods 20,413 20,728
----------------- ------------------
$55,165 $52,858
================= ==================
3. STOCKHOLDERS' EQUITY
Changes in the components of stockholders' equity for the three months ended
September 30, 2004 were as follows:
Net earnings $4,720
Foreign currency translation adjustments 407
Common stock and additional paid-in
capital effects of stock option activity 1,757
Cash dividends declared on common stock (30,655)
Purchases under stock repurchase plans (2,085)
Unrealized gain on available-for-sale securities 602
------------------
Total decrease in stockholders' equity ($25,254)
==================
5
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
4. EARNINGS PER SHARE
The reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share for
the three months ended September 30, 2004 and 2003 is as follows:
- --------------------------------- -------------------------------------------- ------------------------------------------
For Three Months Ended September 30, 2004 September 30, 2003
- --------------------------------- -------------------------------------------- ------------------------------------------
Net Per Share Net Per Share
Basic EPS Earnings Shares Amount Earnings Shares Amount
- --------- ------------- ------------- ------------- ------------- ------------- -----------
Earnings available to
common shareholders $4,720 14,792 $0.32 $4,200 14,770 $0.28
Diluted EPS
- -----------
Effect of dilutive employee
stock options -- 421 0.01 -- 234 --
------------- ------------- ------------- ------------- ------------- -----------
Earnings available to
common shareholders $4,720 15,213 $0.31 $4,200 15,004 $0.28
============= ============= ============= ============= ============= ===========
At September 30, 2004 and 2003, common shares related to options outstanding
under the Company's stock option plans amounting to 548 thousand and 864
thousand shares, respectively, were excluded from the computation of diluted
earnings per share, as the effect would have been antidilutive.
5. COMPREHENSIVE INCOME
Our comprehensive income for the three months ended September 30, 2004 and 2003
was as follows:
Three Months Ended
-----------------------------
9/30/04 9/30/03
------------- -------------
Net earnings $4,720 $4,200
Foreign currency translation gain 407 309
Unrealized gain on available-for-sale
securities 602 --
------------- -------------
Total comprehensive income $5,729 $4,509
============= =============
6
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
6. SEGMENT INFORMATION
Our business is the development, manufacture and sale of medical devices. We
have two reportable segments, Cardiac Assist / Monitoring Products and
Interventional Products / Vascular Grafts.
The Cardiac Assist / Monitoring Products segment includes electronic
intra-aortic balloon pumps and catheters that are used in the treatment of
cardiovascular disease and electronic physiological monitors that provide for
patient safety and management of patient care.
The Interventional Products / Vascular Grafts segment includes vascular sealing
devices, which are used to seal arterial puncture wounds to stop bleeding after
cardiovascular catheterization procedures, interventional radiology products
used in dialysis access and a proprietary line of knitted and woven polyester
vascular grafts and patches for reconstructive vascular and cardiovascular
surgery.
We have aggregated our product lines into two segments based on similar
manufacturing processes, distribution channels, regulatory environments and
customers. Management evaluates the revenue and profitability performance of
each of our product lines to make operating and strategic decisions. We have no
intersegment revenue. Net sales and operating earnings are shown below.
Cardiac Interventional
Assist / Products / Corporate
Monitoring Vascular and
Products Grafts Other (a) Consolidated
--------------- -------------- --------------- -----------------
- ----------------------------------------
Three months ended September 30, 2004
- ----------------------------------------
Net sales to external customers $64,588 $15,381 $331 $80,300
--------------- -------------- --------------- -----------------
Operating earnings (loss) $8,831 ($1,772) ($730) $6,329
--------------- -------------- --------------- -----------------
- ----------------------------------------
Three months ended September 30, 2003
- ----------------------------------------
Net sales to external customers $59,756 $17,049 $295 $77,100
--------------- -------------- --------------- -----------------
Operating earnings (loss) $6,403 $28 ($525) $5,906
--------------- -------------- --------------- -----------------
- ---------------------------------------- ----------------------------------
Reconciliation to consolidated earnings Three Months Ended
before income taxes : 9/30/2004 9/30/2003
- ---------------------------------------- --------------- --------------
Consolidated operating earnings $6,329 $5,906
Interest income, net 525 386
Other (expense) income (14) (116)
--------------- --------------
Consolidated earnings before taxes $6,840 $6,176
=============== ==============
(a) Net sales of life science products by Genisphere are included within
Corporate and Other. Segment SG&A expenses include fixed corporate G&A
charges.
7. RETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS - U.S. AND INTERNATIONAL
We have a defined benefit pension plan designed to provide retirement benefits
to substantially all U.S. employees. U.S. pension benefits are based on years of
service, compensation and the primary social security benefits. Funding for the
U.S. plan is within the range prescribed under the Employee Retirement Income
Security Act of 1974. Retirement benefits under the international plan are based
on years of service, final average earnings and social security benefits.
Funding policies for the international plan are based on local statutes and
the assets are invested in guaranteed insurance contracts.
7
DATASCOPE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except per share data)
7. RETIREMENT BENEFIT PLANS (CONTINUED)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
We have noncontributory, unfunded supplemental defined benefit retirement plans
(SERPs) for the Chairman and Chief Executive Officer, Mr. Lawrence Saper, and
certain current and former key officers. Life insurance has been purchased to
recover a portion of the net after tax cost for these SERPs. The assumptions
used to develop the supplemental pension cost and the actuarial present value of
the projected benefit obligation are reviewed annually.
The components of net pension expense of our U.S. and international defined
benefit pension plans and the SERPs include the following:
Three Months Ended September 30,
--------------------------------------------------------------------
2004 2003 2004 2003
-------------- --------------- --------------- --------------
U.S. and International SERPs
-------------------------------- --------------------------------
Service Cost $719 $670 $99 $93
Interest Cost 862 708 218 177
Expected return on assets (694) (717) -- --
Amortization of:
net loss (gain) 54 113 (26) 3
unrecognized prior service cost 3 2 48 6
remaining unrecognized net obligation -- 10 -- --
-------------- --------------- --------------- --------------
Net pension expense $944 $786 $339 $279
============== =============== =============== ==============
Employer contributions $2,111 $6
============== ===============
8. ACQUIRED INTANGIBLE ASSETS
The following is a summary of our intangible assets.
Sept 30, June 30,
2004 2004
-------------- ---------------
Purchased technology and licenses, gross $20,183 $19,889
Accumulated amortization (298) (206)
-------------- ---------------
Purchased technology and licenses, net $19,885 $19,683
============== ===============
The balances in purchased technology and licenses primarily represent the
acquisition of assets and technology from X-Site Medical, LLC related to a
suture-based vascular closure device and the ProLumen thrombectomy device,
purchased from Rex Medical, LP. Amortization expense for the three months ended
September 30, 2004 and 2003 was $92 thousand and $12 thousand, respectively.
At September 30, 2004, estimated future amortization expense of intangible
assets subject to amortization is as follows: $0.8 million for the remaining
nine months of fiscal 2005, and $1.4 million, $1.5 million, $1.6 million and
$1.9 million for fiscal years 2006, 2007, 2008 and 2009, respectively.
Goodwill
Goodwill as of September 30, 2004 and 2003 was $4.1 million. There was no
acquired goodwill and no change in the carrying value of existing goodwill
during the three months ended September 30, 2004. Of the $4.1 million in
goodwill, $1.8 million is in the Interventional Products / Vascular Grafts
segment and $2.3 million is in Corporate and Other.
9. SPECIAL DIVIDEND AND INCREASE IN REGULAR DIVIDEND
On September 20, 2004, the Board of Directors declared a special dividend of
$2.00 per share and an increase in our regular quarterly dividend to 7 cents a
share from 5 cents a share. Both dividends were paid on October 8, 2004 to
shareholders of record on September 30, 2004. The special dividend amounted to
$29.6 million.
8
DATASCOPE CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Datascope Corp. is a diversified medical device company that develops,
manufactures and markets proprietary products for clinical health care
markets in interventional cardiology and radiology, cardiovascular and
vascular surgery, anesthesiology, emergency medicine and critical care. We
have four product lines that are aggregated into two reportable segments,
Cardiac Assist / Monitoring Products and Interventional Products / Vascular
Grafts. Our products are sold principally by direct sales representatives
in the United States and a combination of direct sales representatives and
independent distributors in international markets. Our largest geographic
markets are the United States, Europe and Japan.
We believe that customers, primarily hospitals and other medical
institutions, choose among competing products on the basis of product
performance, features, price and service. In general, we believe price has
become an important factor in hospital purchasing decisions because of
pressure to cut costs. These pressures on hospitals result from federal and
state regulations that limit reimbursement for services provided to
Medicare and Medicaid patients. There are also cost containment pressures
on healthcare systems outside the U.S., particularly in certain European
countries. Many companies, some of which are substantially larger than us,
are engaged in manufacturing competing products. Our products are generally
not affected by economic cycles.
Our sales growth depends upon the successful development and marketing of
new products. We have continued to increase our investment in research and
development (R&D). In the first quarter of fiscal 2005 we spent $8.6
million on R&D, an increase of $1.4 million or 20% from last year. We
expect to increase R&D spending in fiscal 2005 as compared to 2004. We also
plan to increase sales through selective acquisitions of products and
technologies from other companies. During the past two years we have made
investments in new technologies, including the ProLumen(TM) thrombectomy
device and the X-Site vascular closure device. We have also improved our
operating margins through the sale of newer higher priced products,
increasing the efficiency of our manufacturing operations and cost
containment programs.
Datascope's financial position continued strong at the end of September
2004. Cash and short- and long-term marketable investments were $81.3
million compared to $69.4 million at June 30, 2004. During the first
quarter, the Company declared a special dividend of $2.00 per share and
increased the regular dividend to 7 cents per share from 5 cents per share.
RESULTS OF OPERATIONS
NET SALES
Net sales of $80.3 million in the first quarter of fiscal 2005 increased 4%
compared to $77.1 million last year.
Sales of the Cardiac Assist / Monitoring Products segment were $64.6
million compared to $59.8 million in the first quarter last year.
9
Sales of patient monitoring products increased 3% to $32.1 million, due
to higher sales of the recently introduced Spectrum(TM) and Trio(TM)
monitors, increased sales of Masimo SET(R)(1) pulse oximetry sensors
and favorable foreign exchange translation of $0.4 million. Patient
monitoring sales increased despite lower sales of central systems
resulting from the transition to Datascope's new Panorama(TM) central
monitoring system. Panorama was developed by Datascope and replaces a
system that was purchased from an OEM supplier. First quarter shipments
of Panorama increased substantially over the prior quarter and
shipments are expected to continue to increase throughout the current
fiscal year as new features are released.
Cardiac Assist product sales in the first quarter increased 14% to
$32.5 million, as a result of higher shipments of balloon pumps and
favorable foreign exchange translation of $0.4 million. Higher pump
sales reflect continued strong worldwide demand for the new CS100(TM),
Datascope's first fully automatic pump, and an easier comparison to
last year because the CS100 was introduced in August 2003. Increased
international shipments of balloon catheters also contributed to the
sales increase.
Sales of the Interventional Products / Vascular Grafts segment were $15.4
million compared to $17.0 million in the first quarter of last year.
First quarter sales of Interventional Products were $7.8 million, 24%
below a year ago, as sales of vascular closure devices continued to
decrease. Combined sales of two new products introduced last year,
Safeguard(TM) and ProLumen(TM), made a significant contribution to
sales in the first quarter. Safeguard is a manual compression assist
device and ProLumen is a new thrombectomy device to effectively clear
blood clots from blocked dialysis access sites. In addition to new
products being developed for the dialysis market, the company expects
to introduce two new vascular closure products in fiscal 2005 with the
objective of reversing the decline of its vascular closure sales. In
the third quarter of fiscal 2005, the company plans to introduce
X-Site(R), an innovative suture-based closure device, and during the
second quarter, the company expects to submit a PMA supplement to the
FDA for a new innovative collagen-based vascular closure device.
Sales of InterVascular Inc.'s products were $7.6 million, 12% above
last year, reflecting increased shipments to international
distributors, shipments to a new OEM distributor and favorable foreign
exchange of $0.3 million. At the European Society for Vascular Surgery
meeting in September 2004, InterVascular introduced a newly approved
method for applying the antibiotic rifampicin to InterVascular's grafts
and patches, a development that is expected to strengthen
InterVascular's competitive position in Europe. Labeling incorporating
the new method using rifampicin received the CE Mark in Europe in March
2004.
Sales of Genisphere products were $0.3 million in the first quarter of
fiscal 2005, unchanged from last year, as Genisphere continued to pursue
its marketing strategy to target major academic institutions and the
research and development department of pharmaceutical and biotechnology
companies.
- ---------------------
(1) Masimo SET is a registered trademark of Masimo Corporation.
10
GROSS PROFIT (NET SALES LESS COST OF SALES)
The gross profit percentage was 60.2% for the first quarter of fiscal
2005 compared to 58.7% for the corresponding period last year. The
increase in the gross margin percentage was primarily due to an
improved gross margin percentage in the Cardiac Assist / Monitoring
Products segment, as a result of sales of new products including the
Fidelity balloon catheter, the CS100 balloon pump and the Panorama
central monitoring system, a Datascope developed product that has a
higher gross margin than the previous system that was purchased from an
OEM supplier. Also contributing to the improved gross margin percentage
was cost reduction programs in the Cardiac Assist / Monitoring Products
segment.
RESEARCH AND DEVELOPMENT (R&D)
We continued to increase our investment in new product development and
improvements of existing products. R&D also reflects expenses for
regulatory compliance and clinical evaluations. R&D expenses increased
20% to $8.6 million in the first quarter of fiscal 2005, equivalent to
10.8% of sales compared to $7.2 million or 9.4% of sales in the first
quarter last year.
R&D expenses for the Cardiac Assist / Monitoring Products segment
increased $0.4 million or 8% to $5.0 million in the first quarter of
fiscal 2005, with the increase primarily due to expenses for additional
manpower and increased consulting expenses in Cardiac Assist.
R&D expenses for the Interventional Products / Vascular Grafts segment
increased $0.8 million or 36% to $2.8 million in the first quarter of
fiscal 2005, with the increase primarily due to new product development
projects and regulatory costs.
The balance of consolidated R&D is in Corporate and Other and amounted
to $0.8 million in the first quarter of fiscal 2005.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SG&A)
SG&A expenses increased 4% to $33.4 million in the first quarter of
fiscal 2005, compared to $32.1 million in the first quarter last year,
representing 41.6% of sales in each period.
SG&A expenses for the Cardiac Assist / Monitoring Products segment
increased $1.9 million or 9% to $22.8 million in the first quarter of
fiscal 2005, with the increase primarily attributable to higher selling
and clinical expenses in Cardiac Assist as a result of filling open
positions, higher commission expense on higher sales and unfavorable
foreign exchange translation ($0.3 million).
SG&A expenses for the Interventional Products / Vascular Grafts segment
decreased $0.3 million or 3% to $10.7 million in the first quarter of
fiscal 2005 due to reduction in the U.S. sales organizations, partially
offset by unfavorable foreign exchange translation ($0.4 million).
Segment SG&A expenses include fixed corporate G&A charges that are
offset in Corporate and Other.
OTHER INCOME AND EXPENSE
Interest income was $0.5 million in the first quarter compared to $0.4
million last year, with the increase primarily resulting from a higher
average portfolio balance ($67.1 million vs. $61.9 million) and an
increase in the average yield to 3.2% from 2.7% as a higher percentage
of the portfolio was held in long-term marketable securities (72% vs.
51%).
11
INCOME TAXES
In the first quarter of fiscal 2005, the consolidated effective tax
rate was 31.0%, compared to 32.0% in the first quarter last year with
the decrease primarily attributable to an increase in the
Extraterritorial Income Exclusion (EIE). The increase in the EIE was
attributable to increased profits from higher U.S. export sales.
On October 4, 2004, the Working Families Tax Relief Act of 2004
("WFTRA") was enacted. The WFTRA includes a July 1, 2004 retroactive
reinstatement of the Federal Research Credit, which is now scheduled to
expire on December 31, 2005. Our effective tax rate for the first
quarter of fiscal 2005 does not include the tax benefit of the Research
Credit since the WFTRA was enacted subsequent to the end of the
quarter.
On October 22, 2004, the American Jobs Creation Act of 2004 ("AJCA")
was enacted. Effective for transactions after December 31, 2004, the
Extraterritorial Income Exclusion (EIE) is being phased out over a two
year period. The AJCA also provides a temporary 85% dividends-received
deduction for certain cash dividends repatriated from our international
operations. Our effective tax rate for the first quarter of 2005
excludes the reduction in benefits from the EIE and the impact of any
repatriations, since the AJCA was enacted subsequent to the end of the
quarter.
We estimate that our consolidated effective tax rate for the first
quarter of fiscal 2005 would have been reduced by 1 point to 30.0% for
the net benefit of the retroactive reinstatement of the Research Credit
and the reduced benefit of the EIE. The impact of the above new tax
provisions will be reflected in our effective tax rate in the second
quarter of fiscal 2005. We are currently unable to determine the tax
rate impact of the temporary dividends-received deduction, since we are
awaiting clarifying regulatory guidance from the Internal Revenue
Service.
NET EARNINGS
Net earnings were $4.7 million or $0.31 per diluted share in the first
quarter of fiscal 2005 compared to $4.2 million or $0.28 per diluted
share last year. The increased earnings and earnings per share
primarily reflect the increased gross margin on higher sales and an
improved gross margin percentage in the Cardiac Assist / Monitoring
Products segment, partially offset by increased R&D and SG&A expenses,
as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $88.9 million at September 30, 2004, compared to
$119.9 million at June 30, 2004. The current ratio was 2.1:1 compared
to 3.3:1. The decrease in working capital and the current ratio was
primarily the result of an increase in current liabilities attributable
to the accrual for payment of the special dividend of $2.00 per share
($29.6 million).
In the first quarter of fiscal 2005, cash provided by operations was
$15.9 million compared to $16.0 million last year.
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Net cash used in investing activities was $11.5 million, primarily
attributable to purchases of investments of $10.1 million, offset by
$1.9 million for maturities of investments, $1.2 million for
capitalized software, the purchase of $1.7 million of property, plant
and equipment and $0.3 million for purchased technology and licenses.
Net cash used in financing activities was $1.3 million, due to $0.7
million dividends paid and stock repurchases of $2.1 million, offset by
stock option activity of $1.5 million.
On September 20, 2004, the Board of Directors declared a special
dividend of $2.00 per share and an increase in our regular quarterly
dividend to 7 cents a share from 5 cents a share. Both dividends were
paid on October 8, 2004 to shareholders of record on September 30,
2004. The special dividend amounted to $29.6 million.
We have available lines of credit totaling $99.0 million, with interest
payable at each lender's prime rate. Of the total available, $25
million expires in March 2005, $25 million expires in October 2005 and
$23.5 million expires in November 2005. These lines are renewable
annually at the option of the banks, and we plan to renew them. We also
have $25.5 million in lines of credit with no expiration date.
To pay the special and regular dividend totaling $30.6 million, we
borrowed $10 million on October 8, 2004 for periods up to nine months
with interest rates averaging 2.4%. The borrowing was done because the
majority of our marketable securities are earning interest at rates
greater than our short-term borrowing rate. We expect to reduce our
borrowings as funds are generated during fiscal 2005.
On May 16, 2001, the Board of Directors authorized $40 million to buy
shares of our common stock from time to time, subject to market
conditions and other relevant factors affecting the company. We
purchased about 55,000 shares of our common shares for approximately
$2.1 million during the first quarter of fiscal 2005. To date we have
repurchased approximately 708 thousand shares at a cost of $29.3
million. The remaining balance under the existing share repurchase
program is $10.7 million.
We believe that our existing cash balances, future cash generated from
operations and existing credit facilities will be sufficient to meet
our projected working capital, capital and investment needs. The
moderate rate of current U.S. inflation has not significantly affected
the Company.
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve
risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements as a
result of many important factors. Many of these important factors
cannot be predicted or quantified and are outside our control,
including the risk that new features will not be timely released and
Panorama sales will not increase in fiscal 2005, the possibility that
new product introductions in the Interventional Products division will
not reverse the decline of vascular closure sales, that the newly
approved method for applying the antibiotic rifampicin to
InterVascular's grafts and patches will not strengthen InterVascular's
competitive position in Europe, that market conditions may change,
particularly as the result of competitive activity in the markets
served by the company, the company's dependence on certain unaffiliated
suppliers (including single source manufacturers) for Patient
Monitoring, Cardiac Assist and Interventional Products and the
company's ability to gain market acceptance for new products.
Additional risks are the ability of the company to successfully
introduce new products, continued demand for the company's products
generally, rapid and significant changes that characterize the medical
device industry and the ability to continue to respond to such changes,
the uncertain timing of regulatory approvals, as well as other risks
detailed in documents filed by Datascope with the Securities and
Exchange Commission.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the global nature of our operations, we are subject to the exposures
that arise from foreign exchange rate fluctuations. Our objective in
managing our exposure to foreign currency fluctuations is to minimize net
earnings volatility associated with foreign exchange rate changes. We enter
into foreign currency forward exchange contracts to hedge foreign currency
transactions which are primarily related to certain intercompany
receivables denominated in foreign currencies. Our hedging activities do
not subject us to exchange rate risk because gains and losses on these
contracts offset losses and gains on the intercompany receivables hedged.
The net gains or losses on these foreign currency forward exchange
contracts are included within Other, net, in our condensed consolidated
statements of earnings. We do not use derivative financial instruments for
trading purposes.
None of our foreign currency forward exchange contracts are designated as
economic hedges of our net investment in foreign subsidiaries. As a result,
no foreign currency transaction gains or losses were recorded in
accumulated other comprehensive loss for the three month period ended
September 30, 2004 and 2003.
As of September 30, 2004, we had a notional amount of $6.1 million of
foreign exchange forward contracts outstanding, which were in Euros. The
foreign exchange forward contracts generally have maturities that do not
exceed 12 months and require us to exchange foreign currencies for United
States dollars at maturity, at rates agreed to when the contract is signed.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this report. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
over financial reporting or in other factors that would significantly
affect the internal controls over financial reporting during the
Registrant's most recent fiscal quarter.
14
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
We are subject, in the ordinary course of our business, to product
liability litigation. We believe we have meritorious defenses in all
material pending lawsuits. We also believe that we maintain adequate
insurance against any potential liability. We receive comments and
recommendations with respect to our products from the staff of the FDA
and from other agencies on an on-going basis. We may or may not agree
with these comments and recommendations. However, we are not a party to
any formal regulatory administrative proceedings.
The Shaev litigation is described in our annual report on Form 10-K for
the fiscal year ended June 30, 2004. The parties are now discussing
settlement of the litigation.
The Gugnani litigation is described in our annual report on Form 10-K
for the fiscal year ended June 30, 2004. The Company filed a motion to
dismiss on October 19, 2004 in lieu of filing an answer denying the
allegations of the complaint. This motion is pending as of the date of
this filing.
Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
The following table sets forth information on repurchases by the
Company of its common stock during the first quarter of fiscal year
2005.
Total Value of
Total Total Number of Shares Shares that May
Number of Average Purchased Yet Be Purchased
Shares Price as a Part of Publicly Under the Programs
Fiscal Period Purchased Per Share Announced Programs ($ 000's)
------------------------ --------------- --------------- --------------------------- -----------------------------
7/01/04 - 7/31/04 188 $ 34.61 188 $ 12,816
8/01/04 - 8/31/04 21,246 36.81 21,246 12,034
9/01/04 - 9/30/04 34,075 38.03 34,075 10,738
--------------- --------------- --------------------------- -----------------------------
Total First Quarter 55,509 $ 37.55 55,509 $ 10,738
=============== =============== =========================== =============================
The current stock repurchase program was announced on May 16, 2001.
Approval was granted for up to $40 million in repurchases and there is
no expiration date on the current program.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Principal Executive Officer
Regarding Facts and Circumstances Relating to
Quarterly Reports
31.2 Certification of Principal Financial Officer
Regarding Facts and Circumstances Relating to
Quarterly Reports
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K. During the quarter for which this report on
Form 10-Q is filed, the Registrant filed a Form 8-K dated July 29,
2004, pertaining to the Earnings Release of Datascope Corp. dated
July 28, 2004 and a Form 8-K dated September 27, 2004, pertaining
to the appointment of James J. Loughlin to the Board of Directors
and to an amendment of the By-Laws of the Corporation.
15
Form 10-Q
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 thereunto duly authorized.
DATASCOPE CORP.
Registrant
By: /s/ Lawrence Saper
-------------------------------------------------
Lawrence Saper
Chairman of the Board and Chief Executive Officer
By: /s/ Murray Pitkowsky
--------------------------------------------------
Murray Pitkowsky
Senior V.P., Chief Financial Officer and Treasurer
Dated: November 9, 2004
16